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, 2015.
o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the
transition period from
to
.
Commission file number: 000-52784
ABAKAN INC.
(Exact name of registrant as specified in its charter)
Nevada
98-0507522
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
2665 S. Bayshore Drive, Suite 450, Miami, Florida 33133
(Address of principal executive offices) (Zip Code)
(786) 206-5368
(Registrant’s telephone number, including area code)
N/A
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-
accelerated filer, or a smaller reporting company as defined by Rule 12b-2 of the Exchange Act:
Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act): Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest
practicable date. The number of shares outstanding of the issuer’s common stock, $0.0001 par value (the
only class of voting stock), at May 4, 2015 was 79,501,088.
1
TABLE OF CONTENTS
PART 1- FINANCIAL INFORMATION
Item1.
3
Condensed Consolidated Balance Sheets for the period ended
4
February 28, 2015 (unaudited) and May 31, 2014
Unaudited Condensed Consolidated Statements of Operations for the
5
Three and nine months ended February 28, 2015 and 2014
Unaudited Condensed Consolidate Statements of Comprehensive Income for the
three and nine months ended February 28, 2015 and 2014
Unaudited Condensed Consolidated Statements of Cash Flows for the
7
nine months ended February 28, 2015 and 2014
Condensed Notes to Consolidated Financial Statements (Unaudited)
8
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
21
Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
38
Item 4.
Controls and Procedures
39
PART II-OTHER INFORMATION
Item 1.
Legal Proceedings
40
Item 1A.
Risk Factors
41
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
45
Item 3.
Defaults Upon Senior Securities
45
Item 4.
Mine Safety Disclosures
45
Item 5.
Other Information
46
Item 6.
46
47
Index to Exhibits
48
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.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
February 28,
May 31,
2015
2014
(unaudited)
ASSETS
Current assets
Cash and cash equivalents
$
271,377 $
31,111
Accounts receivable
139,797
119,122
Inventory
34,560
-
Prepaid expenses
57,723
185,770
Total current assets
503,457
336,003
Non-current assets
Deferred finance fees, net
11,638
14,070
Property, plant and equipment, net
5,271,465
5,539,549
Patents and licenses, net
6,114,378
6,106,686
Assignment agreement - MesoCoat
141,450
171,055
Investment - Powdermet (Note 3)
2,267,392
2,151,817
Goodwill
364,384
364,384
Total Assets
$
14,674,164 $
14,683,564
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable
$
1,035,376 $
1,552,402
Accounts payable - related parties
231,383
675,041
Capital leases - current portion
31,825
31,465
Loans payable
5,148,515
4,820,816
Accrued interest - loans payable
642,519
306,160
Loan payable- related parties
359,468
224,799
Accrued interest – related parties
20,961
480
Deferred rental revenue
150,038
-
Accrued liabilities
929,625
652,212
Total current liabilities
8,549,710
8,263,375
Non-current liabilities
Loans payable (Note 4)
921,103
1,056,106
Capital leases - non-current portion (Note 4)
48,625
54,040
Total liabilities
9,519,438
9,373,521
Commitments and contingencies
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
79,501,088 issued and outstanding – February 28, 2015,
68,374,815 issued and outstanding - May 31, 2014
7,952
6,840
Subscription receivable
-
(28,000)
Paid-in capital
29,096,649
24,530,074
Contributed capital
5,050
5,050
Accumulated deficit
(24,046,944)
(19,502,097)
Accumulated other comprehensive income
766
-
5,063,473
5,011,867
Non-controlling interest
91,253
298,176
Total stockholders' equity
5,154,726
5,310,043
Total liabilities and stockholders' equity
$
14,674,164 $
14,683,564
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
4
ABAKAN INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended
For the nine months ended
February 28,
February 28,
Revenues
2015
2014
2015
2014
Commercial
$
55,090 $
69,120 $
210,329 $
206,507
Contract and grants
189,022
94,400
511,949
229,428
Rental Revenue and other income
51,169
-
51,169
10,094
295,281
163,520
773,447
446,029
Cost of revenues
211,282
77,824
423,390
264,996
Gross profit
83,999
85,696
350,057
181,033
Expenses
General and administrative
General and administrative
202,341
210,582
724,501
589,692
Professional fees
432,801
99,275
788,649
558,810
Professional fees - related parties
10,910
15,000
40,910
48,028
Consulting
208,438
280,008
611,472
799,475
Consulting - related parties
72,185
61,500
200,185
180,500
Payroll and benefits expense
195,456
230,890
473,841
1,070,926
Depreciation and amortization
237,976
191,859
641,637
583,924
Research and development
115,424
203,623
456,589
1,033,571
Stock expense on debt conversion
-
-
76,500
-
Stock options expense
262,341
352,816
786,717
972,481
Total expenses
1,737,872
1,645,553
4,801,001
5,837,407
Loss from operations
(1,653,873)
(1,559,857)
(4,450,944)
(5,656,374)
Other (expense) income
Interest expense:
Interest – loans
(138,709)
(79,359)
(400,063)
(178,639)
Interest - related parties
(15,504)
-
(21,980)
(1,113)
Amortization of discount on debt
-
-
-
(137,364)
Total interest expense
(154,213)
(79,359)
(422,043)
(317,116)
Interest income
2
7
6
14
Loss on debt settlement
-
(510)
(2,651)
(510)
Loss on sale of assets
(34,139)
-
(34,139)
-
Equity in Powdermet gain (loss)
110,561
(73,047)
115,575
(295,617)
Total other (expense) income
(77,789)
(152,909)
(343,252)
(613,229)
Net loss before non-controlling interest
(1,731,662)
(1,712,766)
(4,794,196)
(6,269,603)
Non-controlling interest in MesoCoat loss
84,030
341,231
249,349
1,335,624
Net loss attributable to Abakan Inc.
(1,647,632)
(1,371,535)
(4,544,847)
(4,933,979)
Provision for income taxes
-
-
-
-
Net loss
$ (1,647,632) $ (1,371,535)
(4,544,847)
(4,933,979)
Net loss per share - basic
$
(.02)
(.02)
(.06)
(.08)
Net loss per share – diluted
$
(.02) $
(.02)
(.06)
(.08)
Weighted average number of common
79,501,088
64,481,144
73,212,202
64,365,475
shares outstanding – basic
Weighted average number of common
79,501,088
64,481,144
73,212,202
64,365,475
shares outstanding – diluted
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5
ABAKAN INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the three months ended
For the nine months ended
February 28,
February 28,
2015
2014
2015
2014
Net loss
$ (1,647,632) $ (1,371,535) $ (4,544,847) $
(4,933,979)
Other comprehensive income (loss)
Change in foreign currency translation,
766
-
766
-
net of tax effects of $0, $0, $0 and $0
respectively
Total comprehensive loss
$ (1,646,866) $ (1,371,535) $ (4,545,613) $
(4,933,979)
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
6
ABAKAN INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended
February 28,
2015
2014
NET CASH USED IN OPERATING ACTIVITIES
$
(3,196,522) $
(1,656,379)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant, equipment and website
(380,260)
(517,519)
Proceeds from sale of capital asset
18,000
-
Capitalized patents and licenses
(22,458)
(31,581)
NET CASH USED IN INVESTING ACTIVITIES
(384,718)
(549,100)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock
3,535,798
76,244
Proceeds from loans payable
978,184
1,970,000
Payments on loans payable
(652,688)
(29,435)
Proceeds from loans payable - related parties
1,501
-
Payments on loans payable – related parties
(65,000)
-
Repayments of capital leases
(5,055)
(4,717)
Stock issuable
28,000
20,000
NET CASH PROVIDED BY FINANCING ACTIVITIES
3,820,740
2,032,092
EFFECT OF EXCHANGE RATE CHANGES ON CASH
766
-
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
240,266
(173,387)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
31,111
233,040
CASH AND CASH EQUIVALENTS, END OF PERIOD
$
271,377 $
59,653
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
ABAKAN INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28, 2015 and 2014
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, 2015, and
the results of its operations and cash flows for the nine months ended February 28, 2015, have been made.
Operating results for the nine months ended February 28, 2015, 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, 2014, contained in Abakan’s Form 10-K.
Consolidation Policy
The accompanying February 28, 2015, financial statements include Abakan’s accounts and the accounts of
its subsidiaries. All significant intercompany transactions and balances have been eliminated in
consolidation. Abakan’s ownership of its subsidiaries as of February 28, 2015, is as follows:
Name of Subsidiary
Percentage of Ownership
AMP SEZC (Cayman)
100.00%
AMP Distributors (Florida)
100.00%
MesoCoat, Inc.
88.08%
MesoCoat’s ownership of its subsidiaries as of February 28, 2015, is as follows:
Name of Subsidiary
Percentage of Ownership
MesoCoat Technologies (Canada)
100.00%
MesoCoat Coating Services, Inc. (Nevada) 100.00%
PT MesoCoat Indonesia
100.00%
Non-Controlling Interest
Non-controlling interest represents the minority members’ proportionate share of the equity of MesoCoat,
Inc. Abakan’s controlling interest in MesoCoat requires that its operations be included in the
consolidated financial statements. The equity interest of MesoCoat that is not owned by Abakan is shown
as non-controlling interest in the consolidated financial statements.
8
ABAKAN INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28, 2015 and 2014
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, 2015, management has determined that no allowance for doubtful
accounts is required.
Revenue Recognition – Rental Revenue
Operating leases arise from leasing of the Company’s equipment to a customer in Canada. The initial
lease term is 24 months. The Company recognizes revenue ratably over the lease term. Amounts
received in excess of the leasing revenue recognized are reported as a deferred rental revenue liability on
the balance sheet. Depreciation expense for assets subject to operating leases is provided on a straight-
line method. Depreciation expense relating to equipment was $77,747 and none for the nine months
ended February 28, 2015 and 2014, respectively.
Operating Leases - Lessor
The cost of equipment leased is included in property, plant and equipment on the balance sheet.
Depreciation expense for assets subject to operating leases is provided on the straight-line method.
Depreciation expense relating to the equipment was $77,747 and none for the nine months ended
February 28, 2015 and 2014, respectively.
Investment in operating leases is as follows at February 28, 2015 and May 31, 2014:
February 28, 2015
May 31, 2014
Equipment, at cost
1,681,200
-
Accumulated depreciation
(77,747)
-
Net book value
1,603,453
-
Foreign Currency Translation
Assets and liabilities of non-U.S. subsidiaries that operate in a local currency environment are translated
to U.S. dollars at exchange rates in effect at the balance sheet date with the resulting translation
adjustments recorded directly to a separate component of shareholders' equity. Income and expense
accounts are translated at average exchange rates during the year. Where the U.S. dollar is the functional
currency, translation adjustments are recorded in income.
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 11).
9
ABAKAN INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28, 2015 and 2014
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 of June 27, 2006 (inception) to the period ended
February 28, 2015, of $24,046,944 and a working capital deficit of $8,046,253. 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. Management’s plan is to aggressively pursue its present
business plan. Since inception we have funded our operations through the issuance of common stock,
debt financing, and related party loans and advances, and we will seek additional debt or equity
financing as required. The accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
3. INVESTMENT IN NON-CONTROLLING INTEREST
Powdermet, Inc.
Abakan owns a 24.1% interest in Powdermet. Powdermet owns 11.92% of MesoCoat as of February 28,
2015. Abakan’s 24.1% ownership of Powdermet, results in indirect ownership of the shares of MesoCoat
that Powdermet owns. Abakan’s ownership in Powdermet decreased at the beginning of June 2014 from
24.99% to 24.1% as result of Powdermet’s management exercising certain stock options resulting in a
higher number of shares outstanding. On May 31, 2014, Powdermet’s ownership of MesoCoat changed
from 48.00% to 11.92% and therefore Powdermet has begun to account for its investment using the cost
method.
On June 13, 2013, Powdermet formed a wholly owned subsidiary, Terves Inc. On June 10, 2014,
Powdermet distributed shares to Terves management which reduced ownership to 84.54%. Powdermet’s
controlling interest in Terves requires that its operations be included in their consolidated financial
statements. The equity interest of Terves that is not owned by Powdermet is shown as non-controlling
interest in their consolidated financial statements.
We have analyzed our investment in Powdermet accordance of “Investments – Equity Method and Joint
Ventures” (ASC 323), and concluded that the 24.1% 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, 2014
$
2,151,817
Equity in gain for nine months ended February 28, 2015
115,575
Investment balance, February 28, 2015
$
2,267,392
10
ABAKAN INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28, 2015 and 2014
3. INVESTMENT IN NON-CONTROLLING INTEREST - CONTINUED
Below is a table with summary consolidated financial results of operations and financial position of
Powdermet.
Powdermet Inc. & Subsidiary
For the nine months
For the nine months
ended
ended
February 28, 2015
February 28, 2014
Equity Percentage
24.1%
41%
Condensed consolidated income statement
information:
Total revenues
$
2,842,112 $
1,593,405
Total cost of revenues
1,074,922
482,462
Gross margin
1,767,190
1,110,943
Total expenses
(995,989)
(1,401,889)
Other income/ (expense)
28,862
(853,525)
Non-controlling interest in Terves
(48,476)
-
Provision for income tax benefit
(272,022)
423,455
Net profit/ (loss) attributed to Powdermet Inc.
$
479,565 $
(721,016)
Abakan’s equity in net profit/(loss):
$
115,575 $
(295,617)
Condensed consolidated balance sheet
February 28, 2015
May 31, 2014
information:
Total current assets
$
2,310,907 $
624,299
Total non-current assets
3,178,227
2,884,479
Total assets
$
5,489,134 $
3,508,778
Total current liabilities
$
1,028,772 $
422,849
Total non-current liabilities
1,824,389
925,521
Total equity
2,635,973
2,156,408
Total liabilities and equity
$
5,489,134 $
3,504,778
11
ABAKAN INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28, 2015 and 2014
4. LOANS PAYABLE
As of February 28, 2015 and May 31, 2014, the loans payable balance comprised of:
Description
February 28, 2015
May 31, 2014
Convertible demand note to an unrelated entity bearing 5% interest per annum which matured
1,500,000 $
1,500,000
on September 15, 2014.
Convertible demand note to an unrelated entity bearing 5% interest per annum which matured
200,000
200,000
on September 15, 2014.
Convertible demand note to an unrelated entity bearing 5% interest per annum which matured
500,000
500,000
on July 14, 2014.
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
50,000
50,000
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 a related entity bearing 8% interest per annum
-
65,000
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum
15,000
15,000
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum
43,600
43,600
Uncollateralized demand note to a related entity bearing 8% interest per annum
26,685
26,685
Uncollateralized demand note to a related entity bearing 8% interest per annum
80,994
79,494
Uncollateralized demand note to an unrelated entity bearing 5% interest per annum
-
50,000
Uncollateralized demand note to an unrelated entity bearing 6% interest per annum
20,000
20,000
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum
30,867
30,867
Uncollateralized demand note to an unrelated entity bearing 5% interest per annum
250,000
250,000
Uncollateralized demand note to an unrelated entity bearing 5% interest per annum
406,766
130,000
Secured convertible promissory note to an unrelated entity bearing 5% imputed interest per
1,341,963
1,341,963
annum which matures on April 27, 2015
Collateralized term note to an unrelated entity bearing 5.15% interest per annum which
111,401
132,157
matures on September 7, 2018.
Uncollateralized demand note to a related entity bearing 8% interest per annum
21,308
21,308
Uncollateralized demand note to a related entity bearing 7% interest per annum
32,313
32,313
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum
33,201
35,000
Uncollateralized demand note to an unrelated entity bearing 7% interest per annum
-
20,000
Uncollateralized term note to a related entity bearing 5% interest per annum which matures on
198,168
-
February 28, 2015
Collateralized note to an unrelated entity bearing 1% interest for the first year and then 7%
954,743
1,000,000
per annum for years two – seven.
Uncollateralized demand note to a related entity bearing 6% interest per annum
60,000
-
Convertible demand note to an unrelated entity bearing 7.5% imputed interest per annum
33,877
40,134
which matures on July 10, 2018.
Uncollateralized demand notes to an unrelated entity bearing 5% interest per annum
405,000
405,000
Capital leases payable to various vendors expiring in various years through September 2016;
80,450
85,505
collateralized by certain equipment with a cost of $205,157.
6,509,536
6,187,226
Less current liabilities
5,539,808
5,077,080
Total long term liabilities
$
969,728 $
1,110,146
12
ABAKAN INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28, 2015 and 2014
4. LOANS PAYABLE - CONTINUED
On August 28, 2014, Joe Eberhard filed a complaint in the United States District Southern District of
Florida alleging that Abakan defaulted on a convertible note and promissory note in the principal
aggregate amount of $550,000. The complaint seeks $720,699 plus interest, penalties and legal fees.
Abakan believes that it has mitigating defenses to the lawsuit. Court proceedings are in the discovery
stage and Abakan has been in settlement discussions with Sonoro through a mediator.
On October 2, 2014, Sonoro Invest, S.A. (“Sonoro”) initiated legal proceedings against Abakan alleging
that Abakan defaulted on two convertible debt obligations and a promissory note due to Sonoro in the
principal aggregate amount of $2,105,000. The complaint seeks $3,187,057 which amount includes
interest, penalties and legal fees. The Court granted a Temporary Restraining Order in favor of Sonoro on
November 6, 2014 and on February 11, 2015, the Company and Sonoro’s attorneys agreed to terms of a
Preliminary Injunction enjoining Abakan from undertaking certain actions “outside of its normal business
without Sonoro’s consent, which will not be unreasonably withheld” pending the outcome of the legal
proceedings. The actions that Abakan is enjoined from undertaking, include paying dividends, acquiring
its own shares, becoming liable for significant new debt outside its normal course business, disposing of
significant amounts of its assets, lending amounts in excess of $100,000, and effecting any distribution of
its capital stock outside of a previously approved equity placement. Court proceedings are in the
discovery stage. Abakan believes that it has mitigating defenses to the lawsuit. A trial date has been set
for October 5, 2015.
13
ABAKAN INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28, 2015 and 2014
5. STOCKHOLDERS' EQUITY
Common Stock Issuances
For the nine months ended February 28, 2015, Abakan issued the following shares in private placements
and the conversion of debt to shares:
On July 31, 2014, we issued 43,800 shares of our common stock for services to be performed valued at
$31,098. In connection with this placement we had no offering costs.
On October 7, 2014, we issued 557,000 shares of our common stock in a private placement valued at
$222,800. Abakan also issued 512,500 shares of its common stock for a subscription payable valued at
$205,000. In connection with this placement we had no offering costs.
On October 7, 2014, we issued 1,792,973 restricted shares due to a downside protection provision and
obtained the agreement of the placees to relinquish the right to additional warrants to purchase 832,487
restricted shares. Abakan offered downside stock price protection in two private placements that totaled
1,664,973 shares that closed in April 2014 and May 2014. The down-side protection offered additional
shares if new private placements were offered within one year at a lower price. After receipt of these
additional shares, the placees would hold the same quantity of shares as if they would have had
participated in any subsequent lower priced private placement. As of the date of the issuance of this
report, all private placements with downside protection are past the one year anniversary except 60,000
shares.
On November 11, 2014, we issued 7,500,000 shares of our common stock in a private placement valued
at $3,000,000. In connection with this placement we had no offering costs.
On November 26, 2014, we issued 270,000 shares of our common stock in a private placement valued at
$108,000. In connection with this placement we had no offering costs.
On November 26, 2014, we satisfied a debt obligation of $140,000, for 350,000 shares of our restricted
common stock. In connection with this placement we incurred stock expense on satisfaction of $59,500.
On November 26, 2014, we satisfied accounts payable obligations of $40,000, for 100,000 shares of our
restricted common stock. In connection with this placement we incurred stock expense on conversion of
$17,000.
14
ABAKAN INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28, 2015 and 2014
5. STOCKHOLDERS' EQUITY - CONTINUED
Common Stock Warrants
A summary of the common stock warrants granted, forfeited or expired during the nine months ended
February 28, 2015 and the year ended May 31, 2014, is presented below:
Weighted
Weighted
Average
Average
Remaining
Number of
Exercise
Contractual
Warrants
Price
Terms (In Years)
Balance at June 1, 2013
2,842,992
$
1.80
1.00 years
Granted
877,634
1.41
Exercised
-
-
Forfeited or expired
(1,681,058)
1.89
Balance at May 31, 2014
2,039,568
$
1.89
1.15 years
Granted
-
-
Exercised
-
-
Forfeited or expired
(1,429,645)
1.72
Balance at February 28, 2015
609,923
$
2.27
0.13 years
Exercisable at February 28, 2015
609,923
$
2.27
0.13 years
Weighted average fair value of
warranted granted during the three
months ended February 28, 2015
$
NA
The following table summarizes information about the common stock warrants outstanding at February
28, 2015:
Warrants Exercisable
Weighted
Weighted
Weighted
Range of
Average
Average
Average
Exercise
Number
Remaining
Exercise
Number
Exercise
Price
Outstanding
Contractual Life
Price
Exercisable
Price
$
1.50
250,000
.13 Years
$
1.50
$
250,000 $
1.50
$
2.70
224,261
.09 Years
$
2.70
$
224,261 $
2.70
$
3.00
135,662
.17 Years
$
3.00
$
135,662 $
3.00
609,923
.13 Years
$
2.27
$
609,923 $
2.27
15
ABAKAN INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28, 2015 and 2014
6. EARNINGS-PER-SHARE CALCULATION
Basic earnings per common share for the three and nine months ended February 28, 2015 and 2014 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 February 28, 2015 and 2014 are
calculated by dividing net income by weighted-average common shares outstanding during the period
plus dilutive potential common shares, which are determined as follows:
For the three months
For the three months
ended February 28, 2015 ended February 28, 2014
Net earnings (loss) from operations
(1,647,632)
(1,371,535)
Weighted-average common shares
79,501,088
64,481,144
Effect of dilutive securities:
Warrants
-
-
Options to purchase common stock
-
-
Dilutive potential common shares
79,501,088
64,481,144
Net earnings per share from operations:
Basic
$
(0.02)
$
(0.02)
Diluted
$
(0.02)
$
(0.02)
For the nine months
For the nine months
ended February 28, 2015 ended February 28, 2014
Net earnings (loss) from operations
(4,544,847)
(4,933,979)
Weighted-average common shares
73,212,202
64,365,475
Effect of dilutive securities:
Warrants
-
-
Options to purchase common stock
-
-
Dilutive potential common shares
73,212,202
64,365,475
Net earnings per share from operations:
Basic
$
(0.06)
$
(0.08)
Diluted
$
(0.06)
$
(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. The increasing number of warrants used in the calculation is a
result of the increasing market value of Abakan’s common stock.
In periods where losses are reported the weighted-average number of common shares outstanding
excludes common stock equivalents because their inclusion would be anti-dilutive.
16
ABAKAN INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28, 2015 and 2014
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
For the three months
ended February 28,
ended February 28,
2015
2014
Common Stock Equivalents:
Warrants
609,923
2,136,397
Options to purchase common stock
3,928,327
4,166,667
Total of Common Stock Equivalents:
4,538,250
6,303,064
For the nine months
For the nine months
ended February 28,
ended February 28,
2015
2014
Common Stock Equivalents:
Warrants
609,923
2,136,397
Options to purchase common stock
3,928,327
4,166,667
Total of Common Stock Equivalents:
4,538,250
6,303,064
7. COMPREHENSIVE INCOME
Comprehensive income consist of two components, net income and OCI. OCI refers to revenue,
expenses, and gains and losses that under GAAP are recorded as an element of shareholders’ equity but
are excluded from net income. Abakan’s OCI consists of foreign currency translation adjustments from
its Canadian subsidiary not using the U.S. dollar as their functional currency.
The following table shows the changes in OCI by component for the three months ended February 28,
2015. There was no OCI prior to November 30, 2014.
Cumulative
Foreign
Currency
Translation
Total
Balance at November 30, 2014
$
- $
-
Other comprehensive income
766
766
Tax effect
-
-
Balance at February 28, 2015
766
766
17
ABAKAN INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28, 2015 and 2014
8. 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, 2015 and 2014, was $424,623 and $234,271, respectively.
We granted 100,000 stock options to a consultant on December 11, 2014, at an exercise price of $0.65 per
share that expire in ten years from the grant date, and vest one third parts commencing on the date of the
grant and each anniversary.
We granted 1,000,000 stock options to an employee on January 1, 2015, at an exercise price of $0.60 per
share that expire in ten years from the grant date, and vest in equal one half parts on May 31, 2015 and
May 31, 2016.
A summary of the options granted to employees and non-employees under the plan and changes during
the nine months ended February 28, 2015 year ending May 31, 2014 is presented below:
Weighted
Weighted
Average
Average
Remaining
Aggregate
Number of
Exercise
Contractual
Intrinsic
Options
Price
Terms(In Years)
Value
Balance at June 1, 2013
3,800,000
$
1.26
7.78 years
$
108,750
Granted
850,000
1.35
Exercised
-
-
Forfeited or expired
(1,230,006)
$
1.35
Balance at May 31, 2014
3,419,994
$
1.36
7.90 years
$
126,750
Granted
1,100,000
.61
Exercised
(50,000)
.65
Forfeited or expired
(541,667)
$
1.87
Balance at February 28, 2015
3,928,327
$
1.14
7.86 years
$
Exercisable at February 28,
2,178,335
$
1.33
6.62 years
$
82,000
2015
Weighted average fair value of
options granted during the nine
months ending February 28,
2015
$
.61
18
ABAKAN INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28, 2015 and 2014
9. RELATED PARTY
Employment agreement
On December 20, 2014, we entered into an employment agreement effective January 1, 2015, with a
related individual to perform duties as the Chief Operating Officer of Abakan and to continue to serve
as the Chief Executive Officer of Abakan’s subsidiary, MesoCoat. The individual also serves as a
director of Abakan and MesoCoat. The employee retains previously granted stock options for his
service as a director. The terms of the employment agreement include a $20,000 per month salary of
which a portion is deferred, and a 1,000,000 stock options grant with an exercise price of $0.60 per
share that will expire ten years from the option grant date that vest in equal parts on May 31, 2015 and
May 31, 2016. The employment agreement will end on December 31, 2016 and at which time it can be
renewed for two one year periods. In the event that this agreement is terminated early, the employee
may be eligible for a severance payment.
10. COMMITMENTS
Contribution Agreement
Abakan and MesoCoat entered into a Contribution Agreement with Northern Alberta Institute of
Technology to establish a prototype demonstration facility for developing, testing and commercializing
wear-resistant clad pipe and components in Alberta, Canada. Out of the total project cost of $4,110,000;
CDN $2,750,000 is being provided by Alberta’s Ministry of Innovation and Advanced Education and
Western Economic Diversification Canada, CDN$160,000 by Northern Alberta Institute of Technology,
and the rest has been committed by MesoCoat and Abakan. The agreement requires Abakan and
MesoCoat to contribute cash of CDN$870,000 to the operating expenses and payroll of the facility which
will be invoiced quarterly with equal payments through January 2017. In addition, Abakan has
committed to spend CDN$330,000, either by itself or with industry partners, for product testing,
qualification, and the hiring of a sales person in Canada during the two year term of this project.
Abakan’s commitments in the agreement are a necessary precursor to commencing sales of CermaClad
wear resistant clad plate and pipe in Canada. MesoCoat has delivered equipment and will lease the
equipment over 24 months for a total rental value of CDN$500,000 of which CDN$250,000 has been
received as of February 28, 2015 and reflected in both rental revenue and deferred revenue liability. For
the nine months ending February 28, 2015 and 2014, Abakan has recorded no operating expense
reimbursement as the facility is not yet commissioned. The amounts are to be settled in Canadian dollars
and will be converted from US dollars at the exchange rate in effect at the time of payment.
Operating Leases – Lessor
Future minimum rental payments as of February 28, 2105, to be received on non-cancelable operating
lease in Alberta, Canada are contractually due in Canadian dollars and will be converted to US dollars at
the exchange rate in effect at the time of payment are as follows:
Year Ending
May 31,
2015
CDN$
83,333
2016
CDN$
166,667
CDN$
250,000
19
ABAKAN INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended February 28, 2015 and 2014
11. 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:
Sonoro Invest S.A.
On April 21, 2015, Abakan notified Sonoro Invest S.A. of its intent to borrow funds to satisfy that amount
due to George Town Associates S.A. on April 27, 2015. Sonoro responded that it believed that Abakan
was prohibited from borrowing additional funds not for the purpose of repaying amounts due to Sonoro.
The position taken by Sonoro is based on a Preliminary Injunction pursuant to which the Court enjoined
Abakan from assuming new debt. Abakan is in the process of seeking a settlement with Sonoro that
would include its consent to the assumption of debt to repay George Town.
George Town Associates S.A.
On April 22, 2015, Abakan received a Notice of Violation from George Town Associates S.A., in
connection with its failure to file a periodic report on Form 10-Q in a timely manner as required by the
Exchange Act pursuant to the terms and conditions of a Secured Convertible Promissory Note dated April
28, 2014. The Notice was followed by a Default Notice dated April 30, 2015, due to Abakan’s failure to
cure the violation within the time frame prescribed in the Note. Abakan is in the process of securing
financing to satisfy amounts due to George Town.
20
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, 2014, contained in Abakan’s Form 10-K. Our fiscal year end is May 31.
Abakan
Abakan 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 includes high-speed, large-area metal cladding
technology, long-life nano-composite anti-corrosion and wear coating materials, high-strength,
lightweight metal composites, and high-strength dissolvable materials. Operations are conducted through
our subsidiary, MesoCoat, Inc. (“MesoCoat”) and an affiliated entity, Powdermet, Inc. (“Powdermet”),
and Powdermet’s subsidiary Terves Inc. (“Terves”).
Abakan owned a 88.08% controlling interest in MesoCoat and a 24.1% non-controlling interest in
Powdermet as of February 28, 2015. Powdermet owns a 11.92% interest in MesoCoat, and a 82% interest
in Terves. Abakan’s interest in Powdermet represents an additional 2.87% indirect interest in MesoCoat.
Abakan’s combined direct and indirect interest in MesoCoat is 90.95%.
MesoCoat
MesoCoat’s Business
MesoCoat is an Ohio based materials science company intent on becoming a technology leader in metal
protection and repair based on its metal coating and metal cladding technologies. These technologies are
designed to address specific industry needs related to conventional oil and gas, oil sands, mining,
aerospace, defense, infrastructure, and shipbuilding. MesoCoat was originally formed by Powdermet to
focus on the further development and commercialization of Powdermet’s nano-composite coatings
technologies. The coatings and cladding assets of Powdermet were subsequently conveyed to MesoCoat
in July of 2008.
21
MesoCoathas since developed a proprietary metal cladding application process known as CermaClad and
a family of advanced nano-composite thermal spray coating materials known as PComP. CermaClad and
PComP combine corrosion and wear resistant alloys, and nano-engineered cermet materials with
proprietary high-speed coating or cladding application systems. Ten of MesoCoat’s products; 3 Corrosion
Resistant Alloy (CRA) materials (625,825, 316L), 3 Wear Resistant Alloy (WRA) material (Tungsten
Carbide (WC), Chrome Carbide (CRC), Structurally Amorphous Metal (SAM) Alloys) and 4 PComP
product families (PComP-W, PComP-T, PComP-S and PComP-M) have either undergone extensive
testing, or are being tested by oil and gas majors, pipe manufacturers, oil field equipment manufacturing
and service companies, original equipment manufacturers (OEMs) and other end users. CermaClad
products intended to clad the inside of a full length pipe and plates for the oil and gas, steel, mining, and
other industries, are in the development and qualification stage.
MesoCoat’s revenues are comprised of sales of PComP powder along with thermal spray application
services, research and development grants and equipment rental income. Current grants from U.S.
government agencies are to develop new uses for PComP powders and CermaClad applications to
develop solutions to critical problems, including certain projects for the Environmental Protection
Agency, the National Aeronautics and Space Agency, the Department of Energy and the National
Institute of Health. Rental income is generated from a 24 month equipment lease as part of a Contribution
Agreement with the Northern Alberta Institute of Technology to establish a prototype demonstration
facility for developing, testing and commercializing wear-resistant clad pipe and components in Alberta,
Canada.
Although the oil and gas industry is important to Abakan it is not the only industry that could benefit from
our low life-cycle cost products. The U.S. Department of Commerce counts 800 industry classifications
that face problems with corrosion and wear, which is a growing issue faced by companies worldwide.
Abakan’s advanced metal coating solutions addresses the concerns of several other large industries
including mining, aerospace and defense, chemical, petrochemical, infrastructure, nuclear, desalination,
and others. For example, the U.S. military alone spends over $40 billion annually to address wear and
corrosion of its assets (Source: The U.S. Army’s SBIR Commercialization Brochure, 2010). According to
‘The World Corrosion Organization’, the cost of corrosion to the global economy is $2.2 trillion annually,
or roughly 3% of the world’s GDP. The global market for products and services to combat wear and
corrosion is estimated at over $200 billion, which includes more than $103 billion annually in paints and
coatings, and a forecasted $100 billion in specialty steel, alloys, and metal composites (Sources: Data
Monitor and BCC Research).
Abakan is also developing solutions for the nuclear, healthcare, medical, and steel industries, primary
funded by government agencies.
PComP.
PComP is a family of nano-composite cermet coating materials used to impart wear and corrosion
resistance and to restore dimensions of worn metal components. Named for its particulate composite
powders, PComP, is the result of over a decade of nano-engineered materials development, and is now
one of the few commercially viable industry replacement solutions for hard chrome plating and thermal
spray carbide coatings. Note that PComP is a manufacturing methodology and not a product, which
means that with the PComP manufacturing methodology we can combine a variety of materials that
usually do not go-well together leading to the best-in-class corrosion- and wear-protection.
22
PComP competes against thermally sprayed carbide and other coatings such as chrome and nickel plating
in the $32 billion dollar (source, BCC Inc.) inorganic metal finishing market. Competing materials like
hexavalent chrome, carbides and tungsten carbide-cobalt have become a major concern for industrial
producers in the metal finishing industry since these materials are on the EPA’s hazardous materials
watch list and are legally banned in many countries. While businesses grapple with the need to transition
away from these harmful products, they continue to spend billions on these materials despite the harm
done to the environment. The adoption of green products and processes such as PComP thermal spray
coatings would place the business at a competitive advantage over destructive solutions while at the same
time mitigating environmental liabilities. PComP thermal spray coatings comprise a performance leading
solution platform which has shown order of significant improvements in head to head wear and corrosion
performance tests while offering a significantly better value proposition over hard chrome alternatives.
Using the PComP platform, MesoCoat has developed and patented a family of corrosion resistant and
wear resistant coating solutions that combine extreme corrosion and/or wear resistance, fracture
toughness (resiliency), and a low friction coefficient all in one product. In conventional materials science
toughness normally decreases as hardness and wear resistance increases. However, by combining nano-
level structure control and advanced ductile phase toughening materials science, MesoCoat has developed
a material structure that can be both very tough and very wear resistant (hard). Equally important, the
hardness of a wear coating normally limits the ease with which it can be machined. The unique
hierarchical structure of the PComP coating solutions results in a coating that can be machined through a
finish grinder much faster than a product with a traditional carbide coating which needs to be diamond
ground. The speed of coating application and final machining results in higher productivity and lower
costs in metal finishing operations.
The revolutionary nano-structure of the PComP coatings produces a coating that is self-polishing when in
use, resulting in friction properties approaching those of diamond-like carbon films and solid lubricants,
with the ability to be applied to large components at substantially lower cost than coatings such as
diamond-like carbon. This low friction property reduces wear, and improves energy efficiency and life in
sliding components such as drilling rotors, plungers, mandrels, ball and gate valves, rotating and sliding
seals, and metal processing equipment. When MesoCoat began operations in 2008, the primarily goal was
to commercialize the silicon-nitride based PComP S thermal spray coating material in the aerospace
industry as it provided performance similar to the conventionally used tungsten carbide coating (most
viable alternative for toxic chrome plating which is regulated by the Department of Defense) at 1/3rd the
density which could reduce the weight of coatings by approximately 200 lbs. on a single aircraft thereby
saving over $1 million a year in fuel costs.
However, when MesoCoat forayed into the oil and gas industry, it learned more about that industry’s
thermal spray coating needs which rely heavily on conventional tungsten carbide thermal spray powders.
Even though these powders provide coatings that are very hard (can withstand significant impact), the
higher hardness leads to lower toughness (cannot withstand stress, flexing, or vibrations) that leads to
spallation (flaking). Since most components used in the oil and gas industry such as rolls, mandrels, and
drilling tools, vibrate and flex in high-pressure environments, conventional tungsten carbide based
coatings tend to flake causing failure. In early 2010, MesoCoat began development work on a
replacement by integrating its PComP manufacturing process to produce a tungsten carbide coating
material that is both hard and tough. The result was the PComP W family of coating materials, which
produce coatings that are both hard and tough to withstand both impact and stress. PComP W coatings
can enable most oilfield and industrial components to operate 3-10X longer than conventional coatings
potentially saving millions of dollars in early replacement, downtime, and maintenance costs ordinarily
associated with flaking. A further result of this work was the development and commercialization of
titanium nitride based PComP T coatings.
23
MesoCoat is the only company that has been able to develop titanium-nitride (PComP T) and silicon-
nitride (PComP S) based thermal spray coatings. Researchers and scientists have been trying to develop
titanium-nitride and silicon-nitride based thermal spray coatings for several decades with no success.
Nonetheless, MesoCoat has not just been able to develop these thermal spray coatings but has also
demonstrated the value proposition for these coatings. Both the PComP S and PComP T families of
thermal spray powders have lower density and in testing have offered at least 10X higher resistance to
sliding wear compared to the widely used tungsten carbide coatings.
In 2013, MesoCoat with support from funds provided by Department of Energy, set its sight on
developing a non-stick corrosion-resistant coating for molten metal applications using the PComP
manufacturing methodology, which led to the development and commercialization of moly-boride based
PComP M coating materials. PComP M is like an industrial Teflon non-stick coating which protects
metal components from liquid metal corrosion; which means in any application where metal components
are submersed or exposed to liquid metals PComP M coatings can protect the metal component. PComP
M has shown more than a 6X life extension compared to the current state of art moly-boride based
powder in lab testing, and is currently being sold at a cost comparable to the current state-of-art moly-
boride based thermal spray powder. Rolls used in galvanizing, nozzles used in steel processing, dies and
trays used in aluminum production, and several other applications where liquid metal is used would see a
significant reduction in early-replacement, downtime, and the maintenance usually associated with the
early failure of conventional used moly-boride based coatings.
The PComP family of nano-composite coatings currently consists of five products, not including variation
in composition, 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 these, and several other alternatives are as follows:
Wear and Corrosion Resistance and Dimensional Restoration
PComP W is MesoCoat’s “nano-engineered” tungsten carbide coating solution offers industry leading
toughness and wear resistance for thermal spray coatings, making it better for critical high wear
applications such as gate valves and downhole drilling tools. PComP W is a replacement for conventional
tungsten carbide cobalt in the thermal spray industry and provides increased wear resistance, design
allowable (stress levels), and reduced friction in abrasive wear applications, with higher toughness and
impact resistance than ceramic alternatives.
PComP T is a titanium nitride based high corrosion/wear resistant, low friction thermal spray coating that
competes with hard chrome and diamond like carbon PVD (physical vapor deposition) alternatives for
hydraulic cylinders, piston rings, bearings, rotating shafts, and valve components where low stick-slip,
corrosion, and modest wear resistance are required. PComP T provides both wear and corrosion resistance
(unlike chrome), and significantly reduces environmental safety and health liabilities. Furthermore, in
many applications, thermal spray coatings such as PComP T provide life multiples over chrome (80X in
sliding wear application in testing reported by Caterpillar). Lower coefficient of friction protects seals
from premature wear and reduces energy consumption in rotating components through lower friction
losses, and the lower coating stresses and higher toughness enable thicker coatings to be applied than
chrome or other alternatives, meaning component life can be extended through enabling additional repair
cycles. Grinding and finishing of PComP T coatings can be done faster and cheaper with conventional
grinding techniques compared to the expensive diamond finishing process used for competing carbide
coatings.
24
PComP S is a silicon-nitride based hard chrome replacement solution for aerospace applications that
exhibits high toughness, wear resistance and displays increased spallation resistance. PComP S also has
the lowest density of any chrome alternative, enabling significant fuel savings to be realized in
transportation markets.
Liquid Metal Corrosion
PComP M is a hierarchically structured molybdenum boride based thermal spray coating material
designed for use in liquid metal corrosion application, especially the rolls used in galvanizing baths.
PComP M has demonstrated, in laboratory and initial field testing, vastly improved molten metal
corrosion resistance, improved thermal shock resistance, combined with increased durability and
reliability encountered in molten metal environments when compared to competitive coatings. MesoCoat
believes that its PComP M will be able to provide significant cost savings to industrial customers and
generate a new revenue stream within the $150+ million primary metals production equipment coatings
market. We intend to focus PComP M initially on the zinc pot stabilizer roll and pot bearing roll
refurbishment market.
Thermal Barrier Coatings
ZComP nano-composite thermal barrier coating, that in testing has shown 50% lower thermal
conductivity, with improved toughness and cyclic thermal life compared to conventional thermal barrier
coatings in the $500 million thermal barrier coatings market. MesoCoat has received interest from
multiple companies in multiple industries needing improved thermal barrier materials, but to date Abakan
has not formed any partnership with such entities. Abakan initially wants to introduce ZComP materials
into the turbine engine market, given the long qualification cycles associated with aerospace applications.
The Company is currently evaluating the next steps to accelerate qualification and commercialization of
ZComP.
Recent Developments
Hundreds of PComP W coated pumps have now been used in the field for over three years by one of the
largest oil field service companies operating in the oil sands of western Canada. Use of the PComP W
product has demonstrated a minimum 3X life extension over existing products. The same customer is
now using PComP W coated mandrels, plungers and other oil field components in field tests which also
have demonstrated a 3X life extension and are yet to fail. The field testing continues.
Metallurgic Solutions, SA de CV (“MetalSol”), Abakan’s partner in Mexico, after six months of side by
side testing, has secured test orders for PComP coatings with a large prospective customer in Mexico. Our
PComP coated roller screens looked as good as new, showing almost no sign of abrasion or dimensional
loss and did not need to be replaced. By comparison, the rolls protected with the steel company’s existing
coatings were absolutely battered, showed a dimensional loss of 6mm to 15mm and required replacement.
We have also received additional trial orders for coating other rolls and cladding components used in steel
and mining industries. Abakan expects to receive its first large commercial order from Mexico within the
next few weeks.
UP Scientech Materials Corp. (“UP Scientech”), Abakan’s partner in Asia, has begun its own evaluation
of PComP coatings and is in the process of introducing these products through its existing distribution
channels to drive adoption in China, Taiwan, Australia and elsewhere.
Meanwhile, Abakan has begun the testing and marketing of its powder and coating services in Canada,
Mexico, India, and China and is communicating with several entities in Thailand, Russia, Korea, Nigeria..
25
The ramp up of PComP powder production in Abakan’s Ohio manufacturing facility is in line with the
anticipated demand. MesoCoat scaled the production of PComP powders up to 6 tons/year by the end of
2014 and as of April of 2015 has scaled up that production to18 tons/year. On reaching that milestone,
MesoCoat will have scaled up production by 600% over a 12 month period, while continuing to sell all
the powders that it has produced to date.
The anticipated increase in PComP powder production by the end of April, 2015, caused MesoCoat’s
technical and sales team to recently spend a week in Houston visiting the largest oilfield services
companies and coating application shops. The goal of this visit was to reiterate the value that PComP
coatings would add to their operations, let these entities know that with increased powder production
capacity MesoCoat would be ready to take large orders, learn about their most important challenges, and
get test/sales orders. The MesoCoat team was successful on all of these fronts. The visit led to one of the
largest coating shops visited initiating the testing and qualification of PComP coatings for oilfield and
industrial components, one of the largest oilfield completion companies giving MesoCoat a component
for coating (being sold in the order of thousands of components per month), and assurances from other
oilfield completion companies that would begin testing and qualification of PComP coatings within the
next few weeks.
CermaClad
CermaClad is a multiple award winning technology used to produce coatings that protect metal, primarily
carbon steel, from wear and corrosion, that offers the benefits of corrosion resistant alloys such as
stainless steel, nickel, or titanium based alloys and wear resistant materials such as tungsten carbide and
chrome carbide at a fraction of the cost by adding a permanent thin layer of the expensive corrosion- and
wear-resistant layer on the surface of low-cost carbon steel. The result is a hybrid product offering the
wear and corrosion performance of costly alloys with the ease of fabrication and the lower cost of
traditional steel material.
Cladding refers to the process where a high performance wear or corrosion resistant metal alloy or
composite (the cladding material) is applied through the use of high pressure and/or high temperature
processes onto another dissimilar metal (the base metal or substrate) to enhance its durability, strength or
appearance. The majority of clad products produced today use carbon steel as the substrate and nickel
alloys, stainless steel, or various hard materials such as chrome carbides as the clad layer to protect that
underlying steel base metal from the environment it resides in. MesoCoat is utilizing a unique, patented,
“High Density Infrared (HDIR)” or ‘Plasma Arc Lamp’ technology, exclusively licensed from Oak Ridge
National Laboratory (“ORNL”) to produce clad steel. Testing by ORNL and Abakan has shown that the
plasma arc lamp is capable of applying a very high quality cladding at 2 to 10 times higher productivity
(100’s of Kg’s versus 3-20Kg/hr) than traditional laser bead or weld cladding techniques, in current wide
commercial use. MesoCoat believes that this plasma arc lamp represents the first truly scalable, large
area cladding technology. Scalable, low capital cost cladding technology enables the production of large
volumes of customized, premium, high margin clad steel products.
26
CermaClad clad steel is a metallurgically bonded, clad carbon steel materials solution that is optimized to
manage the risks and consequences of wear and corrosion damage and the failure of large assets including
oil and gas risers and flowlines, refinery/chemical processing towers and transfer lines, power plant heat
exchanger tubes, and other steel infrastructure. In corrosive environments, including unprocessed crude
oil that contains water, sulfides, and carbon dioxide, seawater, road salt, mining slurry transport lines,
chemical processing and transportation equipment, metals production, and other large industrial
applications, asset owners and operators either need to continually maintain and replace major assets, or
fabricate these assets using expensive, corrosion resistant alloy (CRA) materials, which substantially
increase capital costs. Clad steel offers a competing, lower cost solution to these alloys, allowing the
owner or operator to use clad carbon steel which typically costs about half of solid CRA. Combining the
reduced material cost with reduced fabrication, installation, and maintenance costs, cladding solutions
such as CermaClad are estimated to save up to 85% over the cost of using solid alloys, while still
providing essentially maintenance free corrosion lifetimes equal to the life of the asset. In the last 20
years, clad steel products have gained wide acceptance and continually increased its market share in oil
and gas exploration and production, mining, petrochemical processing and refining, nuclear, and power
generation industries. The oil and gas industry is the largest consumer of clad steel products. In order to
meet growing global energy demands, oil companies continue to extend their offshore drilling efforts into
deeper waters farther from shore. The higher temperatures and corrosivity (carbon dioxide, sea water,
hydrogen disulfide content, etc.) of these new reserves are resulting in a significantly increased demand
for corrosion resistant alloys.
Currently used cladding processes include weld overlay, roll-bonding, co-extrusion, explosion cladding,
and mechanical lining. While cladding carbon steel pipes is cheaper than using a solid stainless steel
alloy, current production technologies still have significant limitations which CermaClad is believed to
overcome. Directly comparable metallurgically clad pipes are primarily manufactured with roll-bonded
clad plate, that is bent and welded to form a pipe. Though a higher productivity process, Roll-bonded
plate-to-pipe involves a lot of welded area and the failure of that weld is the single most common reason
for pipeline leaks. Furthermore, current bimetal rolling mills are limited to produce sheets that are around
40 feet in length by 5 feet in width (less than 20 inch diameter), limiting the size of pipe that can be
fabricated. Expanding a roll-bonded plate manufacturing facility to enable the production of larger
diameter pipe needed for large gas projects would require very large investments, estimated to be in
excess of $400 million compared to an 8-line CermaClad large diameter pipe production facility that we
budget would cost $38 million.
Mechanically lined (bi-metal) pipe now makes up a significant portion of the clad pipe market. Bimetal
pipe is lower in cost than metallurgically clad pipe, but provides only a mechanical attachment between
the inner and outer pipe. This reduced bonding strength results in a higher risk of buckling, wrinkling and
disbonding when under stress, such as during bending, reeling, or application of external coatings on
these pipes. Mechanically lined pipe also raise concerns with respect to uniformity and reliability in that
the gap between the inner and outer pipes, coupled with the mixture of materials, leads to challenges in
NDT (non-destructive testing) inspections. Co-extrusion is another process that involves extruding a
bimetal billet into a clad pipe. Co-extrusion has not been successful in producing long lengths of larger
diameter pipes, and would require significant capital investment and further technology development to
be commercially acceptable. The other production process, weld overlay, does not have the productivity
needed to meet clad pipe demand, and is primarily used for smaller diameter and complex shapes, such as
manifolds and “Christmas trees” used in oil and gas, although weld overlay is a dominant technology for
wear resistant overlays that cannot be produced by the other techniques. A significant demand for thicker-
walled clad pipes also exists driven by higher pressure oilfields in Gulf of Mexico, and for large-diameter
clad pipes driven by large gas filed in Asia-Pacific. The current cladding technologies have several
quality and supply concerns regarding thick-walled and large-diameter clad pipes, and CermaClad
provides the ideal solution for these clad pipes.
27
CermaClad clad steel utilizes MesoCoat’s proprietary cladding process based on the use of a high-
intensity arc lamp to rapidly melt, fuse, and metallurgically bond (make inseparable) the protective,
proprietary cladding materials onto steel pipes and tubes (internal and external surfaces), plates and
sheets. CermaClad has been used for melting, fusing, and metallurgical bonding nickel based alloys,
stainless steel, copper based alloys, niobium, tungsten and chrome carbides, structurally amorphous
materials, and several other materials including titanium on metal substrates – so there is no limitation on
the materials that we can clad using CermaClad. The CermaClad clad steel product portfolio combines
this high-speed fusion cladding process with proprietary corrosion resistant alloy (“CRA”) and wear
resistant alloy (“WR”) coating materials, which incorporate patented micro-structural and compositional
modifications. The CermaClad process melts and fuses material within seconds to produce the
CermaClad product that offers a seamless metallurgical bond, a smooth surface, low porosity, and
minimal dilution of the overlay, along with good strength retention of the substrate. More importantly,
CermaClad clad pipe is expected to be easier to inspect and install (reel) irrespective of the size and
thickness of the pipe compared to current alternatives.
Clad steel is a specialized, profitable segment of the steel industry where demand has outstripped supply
and margins are high as a result. Historically, the typical contract for clad pipe was for 3 to 5 kilometers
of product with larger contracts for 20 to 30 kilometers of product. Typical requirements today, even for
those projects that will be put on hold or reevaluated with the recent drop in energy prices, are for tens of
kilometers with a number of long term projects needing hundreds of kilometers per project. As a result the
clad pipe market has grown rapidly and the limitations of current solutions in terms of installation,
inspectability, quality, and availability are inhibiting growth. The expected commercialization of
CermaClad clad pipes should be able to address these constrains to clad pipe market growth.
Management believes the competitive advantages of CermaClad over current competing technologies and
products are:
§ CermaClad clad steel provides a metallurgically bonded overlay, making the clad pipes easier to
inspect, bend, reel, and install compared to the widely used and slightly lower cost mechanically
bonded clad pipes.
§ CermaClad clad steel offers a seamless metallurgical cladding requiring only girth welds, unlike
the pipes made from metallurgically clad plates which have longitudinal welds.
§ CermaClad application technology utilizes a 30cm wide, high density, infrared, plasma arc lamp
compared to a 0.7cm wide laser beam or inert gas welding systems, resulting in application rates
much faster than current weld overlay technologies.
§ The proprietary process used to make CermaClad clad steel products is more flexible (it can do
both wear and corrosion resistant alloys, for example), and has relatively low capital costs for
initial and added capacity. This provides the advantage of being able to respond to customer
needs, such as meeting local content requirements, faster and with less investment risk than
currently established alternatives.
§ CermaClad is the only cladding technology that allows metallurgical cladding of layers as thin as
0.15mm that meets all the required metallurgical and mechanical specifications. Conversely,
CermaClad has also demonstrated cladding as thick as 15mm.
§ CermaClad products exceed the requirements of the defining API 5LD and DNV OS F101
standard requirements for clad pipes used in oil and gas applications.
§ CermaClad offers a smoother surface, minimal dilution, greater flexibility in materials, and the
ability to do thinner, lower cost claddings than current production technologies.
28
The CermaClad clad steel product lines under development include:
CermaClad CRA (Corrosion Resistant Alloys): 1-3mm thick CRA clad steel in a single pass, that
offers a lower cost alternative to solid nickel, stainless steel, and titanium alloys for oil and gas,
mining, desalination, pulp and paper, and chemical process.
§ CermaClad WR (Wear Resistant): 1-15mm thick carbide, metal matrix composite, structurally
amorphous metal, and nano-composite wear resistant clad steel that extends the life of steel
structures such as hydro-transport slurry lines, pump components, valve components, spools, T’s,
and elbows for oil sands, heavy oil, mining and mineral processing.
§ CermaClad LT (Low Thickness): Lower cost thin-clad (0.15-1mm) steel that exploits the unique
high purity capabilities of the CermaClad application process to provide thin claddings that
should provide 50-200 year corrosion free life for steel components exposed to atmospheric and
seawater corrosion environments.
§ CermaClad HT (High Temperature): Steel clad with nickel-chromium and metal-chromium-
aluminum alloys for high temperature applications such as heat exchanger tubing, boiler
waterwalls, and other energy production components offering greater compositional control
(higher performance) and lower cost than solid alloys or traditional weld overlays.
Recent Developments
MesoCoat continues to receive significant interest from oil and gas majors, national oil companies,
engineering firms, and steel companies globally due to quality and delivery concerns associated with the
current manufacturers of clad pipes. Meanwhile MesoCoat’s continues to progress towards the
development and qualification of its CermaClad clad pipes. MesoCoat expects to ship clad pipe sections
to prospective end users for testing by the end of FY2015, and expects to have full-length clad pipes
ready for qualification by the end of FY2016.
Since announcing its partnership with UP Scientech, MesoCoat has accelerated development of its clad
plate products. MesoCoat has been cladding small clad plates/samples since 2010 and is now scaling-up
to larger plates to eventually clad plates that are 3 meter X 2.5 meter (which is the largest clad plate being
sold at high volume in the industry currently). Unlike cladding pipes using CermaClad high intensity arc
lamp system which is a fairly complex process, cladding plates using CermaClad is relatively simple and
MesoCoat expects to have mid-sized clad plates ready for sale within the next 6-9 months. MesoCoat has
also decided to take commercial orders for smaller clad plates and flat components and expects to receive
a test order shortly.
MesoCoat’s partnership to establish a prototype demonstration facility for developing, testing and
commercializing wear-resistant clad pipe and components in Alberta, Canada was delayed due to some
facility inadequacies that have since been addressed. A CermaClad cladding system was shipped to the
demonstration facility in December for installation. Ancillary components and equipment have now been
ordered and are being installed. We expect that this facility will be commissioned by the end of May,
2015.
Current Grants
Abakan’s subsidiary MesoCoat has consistently received highly-competitive funding from several federal
and state agencies, which has significantly assisted it in developing a robust product pipeline. MesoCoat’s
PComP family of nano-composite thermal spray coating materials was incubated and developed using
federal funding. Below is a brief summary of recently completed and ongoing federally funded projects
that also provide an overview of the product pipeline.
29
Joining Dissimilar Metals
MesoCoat and Oak Ridge National Laboratory (ORNL), have been awarded $1 million by the
Department of Energy (DOE) to develop a process to join dissimilar metal alloys. The $1 million award is
shared equally by ORNL and MesoCoat. The primary objective of this project is to develop functional
gradient transition joints between carbon steel and austenitic stainless steel for nuclear reactors. The
research will directly address the needs described in development of advanced joining techniques for
materials for nuclear fission reactor applications. This collaborative project capitalizes on recent advances
made by each organization in the field of dissimilar metal joining and application of high-energy density
plasma arc lamp processing. This project will use our CermaClad plasma arc lamp to build gradient
transition joint for dissimilar metal welding.
In order to add new design and functionalities to metal components, equipment, and structures; it is
essential that engineers are provided with the tools to join dissimilar metals. For example, on the inside
the reactor may need corrosion or wear protection and on the outside heat-resistance or toughness. By
providing the technology to join dissimilar metals, MesoCoat is providing designers and engineers the
capabilities to explore, design, and develop new material systems. The uniqueness of MesoCoat’s
CermaClad process is the ability to melt, fuse, and metallurgically bond dissimilar materials.
Improving the ability to join dissimilar materials with engineered properties is enabling new approaches
to add limitless functionalities to metals, light-weighting automotive structures, improving methods for
energy production, creating next generation medical products and consumer devices, and many other
manufacturing and industrial uses. CermaClad technology is ideally-suited for additive manufacturing,
the newest trend in manufacturing to add layers of metals one upon the other for dimensional restoration
and extending the useable life of metal assets. Not many are aware of the problems caused by metal
components, equipment, and structures that do not last long enough. Apart from the massive costs
involved with infant failure of metals which includes downtime, maintenance, and replacement costs; it is
estimated that every tonne of metal production leads to 2.4 tonnes of CO2 emission. The impact of metals
that could last three to six times longer would be significant development that could lead to a paradigm
shift in metal asset protection and life extension.
Antimicrobial Coating for Healthcare
The National Institute of Health (NIH) provided $150,000 funding to MesoCoat to develop copper-based
antimicrobial coatings primarily for contact surfaces like door knobs, handles, rails, carts, poles, sinks,
etc. In addition to hospital use, these coatings could also be applied to many other public areas such as
airports, bus and railway stations, schools, restaurants and work places. Antimicrobial coatings could
have a significant positive impact on public health by preventing the onset of infections and diseases.
Under this program, MesoCoat intends to demonstrate the technical and manufacturing feasibility and
capabilities of producing durable, aesthetically pleasing and cost-effective, antimicrobial touch surfaces
for hospitals and public places. This development combines known antimicrobial copper alloys with a
low cost high volume process such as CermaClad capable of achieving touch surface market penetration
by offering a corrosion resistant aesthetically pleasing solution that is lower cost than stainless steel
components currently used with the known benefit of being anti-microbial. The project is designed to
provide the evidence and experience to verify the technical and economic feasibility of producing and
using copper-alloy cladded steel as a cost-effective, visually attractive antimicrobial material for touch
surfaces in the medical and healthcare and other industries.
30
Our initial test results have shown that after exposure to 1.25 x 108 colonies forming unit (CFU) of
Staphylococcus aureus bacteria, there was an 83% reduction in CFUs on the copper-based cladded
surfaces compared to the stainless steel surface actually used in hospitals.
Based on the extremely promising test results from Phase I of the development program and the huge
market need, Abakan expects to receive a Phase II funding of $1,000,000 from NIH to complete
development and commercialize this application.
Developing CermaClad as an Alternative to Toxic Galvanizing
The Environmental Protection Agency (EPA) provided $100,000 in funding to MesoCoat to develop zinc
coatings that have excellent corrosion resistance using its R&D100 award-winning CermaClad process,
which uses a high-density infrared (HDIR) lamp to fuse a uniform layer of metal onto metal surfaces.
Under this program, MesoCoat’s CermaClad process was used to coat the base materials with Zn in order
to minimize the detrimental effect on environment caused by the pickling step in the galvanizing process
conventionally used for coating steel parts.
Zinc powder was sourced to confirm a suitable supply for the CermaClad process. The powders were
evaluated for relative ease in manufacturing of an alloy precursor, prior to coating fusion on steel
surfaces. Precursor composition and thickness were down-selected and lamp processing parameters
determined to successfully melt and fuse a thin (0.1 mm) layer of zinc to plain carbon steel surfaces. The
coating surface composition contained 2-3 wt% Fe; the corresponding microstructure was evaluated and
found similar to commercial hot dip galvanized plates, having significant volume fraction -phase
encased by solid solution zinc. It was shown that fused zinc coatings behaved similarly to commercial
galvanized steel coatings. Finally, extensive testing was performed on both CermaClad zinc coatings and
commercial galvanized coatings. The CermaClad zinc coatings exhibited similar or better corrosion
properties than the commercially galvanized steel, surviving 500 hours of ASTM B117 Salt Fog testing.
Based on the extremely promising test results from the Phase I development program and the huge market
need, Abakan expects to receive a Phase II funding of $300,000 from EPA to complete development and
commercialize this application.
High-Temperature Coatings for Nuclear Reactors
National Aeronautics and Space Agency (NASA) provided $125,000 in funding to MesoCoat to develop
a series of nano-/micro-composite coated nuclear reactor facing components using MesoCoat's
CermaClad process. MesoCoat's CermaClad process has been used to coat carbon-carbon substrates with
Tungsten (W), and Molybdenum (Mo). The different combinations of substrates and coatings produced a
material structure that is capable of high heat transfer and is able to withstand the high-temperature and
high-heat flux environments present in fission energy reactors, such as nuclear thermal rockets. The
proposed concept is ideal for fission energy technology applications at high temperatures (less than
4400oF) where these nano-composite coatings that can withstand extreme heat and facilitate high heat
transfer for an extended period of time.
Based on the extremely promising test results from the Phase I development program and huge market
need, Abakan expects to receive a Phase II funding of $750,000 from NASA to complete development
and commercialize this application.
31
Extreme Coatings for Gears, Bearings, and Shafts
NASA provided $125,000 in funding to MesoCoat to develop advanced coatings that self-lubricate to
minimize friction and wear in extreme environments. MesoCoat’s R&D100 award-winning PComP™
nano-composite coatings have the same characteristics as diamond like carbon coating, but the additional
advantages of low cost application, ability to shield the substrate, and the ability to incorporate solid
lubricants into the nano-composite, and offer one of the few viable alternatives to diamond like carbon
(DLC) coatings with a (in at least one experts opinion) significantly higher probability of success in a
gearbox application.
MesoCoat achieved the goal of this program by thermal spraying hierarchical nano-structured hard
particle-based powders with specific chemistry. MesoCoat conducted preliminary testing to prove the
high wear resistance and low friction of novel materials under specified conditions. Under this program,
MesoCoat successfully demonstrated that the nano-structured thermally sprayed coatings exhibits wear
rates that are under the detection limit. MesoCoat successfully demonstrated that the proposed material is
a viable candidate for gears, bearings or shafts.
Based on the extremely promising test results from the Phase I development program and the huge market
need, Abakan expects to receive a Phase II funding of $750,000 from NASA to complete development
and commercialize this application.
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 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, personnel changes, the need to replace aging equipment associated with PComP and the
availability of financing.
TIME TO
PRODUCT
COMMERCIAL STATUS
COMMERCIALIZE
(MONTHS)
PComP W
Growth and Expansion
Current
PComP T
Market Entry
Current
PComP M
Market Entry
Current
PComP S
Prototype Qualification
12 to 24
PComP Coating Services
Market Entry
Current
ZComP
Development
On Hold
CermaClad CRA
Development
12 for qualification 18
for full scale production
CermaClad WR
Development
6 for plate sales from
Ohio plant
CermaClad LT
Development Delayed
24
CermaClad HT
Incubation
36
Product Commercial Expansion Timeline
32
Abakan’s near term plan is to expand the presence of its products in North and South America and the
Asia-Pacific market. We expect to soon enter into negotiations to construct a production facility in
Taiwan in partnership with UP Scientech. Metalsol has been working to get financial support from local
government and corporate entities to build a PComP coating services and clad pipe production facility in
Mexico.
Results of Operations
(000)
For the three months ended
For the nine months ended
February 28,
Change
February 28,
Change
Revenues
2015
2014
$
%
2015
2014
$
%
Commercial
$
55 $
69 $
(14)
(20) $
210 $
207 $
3
2
Contract and grants
189
94
95
100
512
229
283
123
Rental & Other income
51
-
51
-
51
10
41
407
295
163
132
81
773
446
327
73
Gross profit
84
86
(2)
(2)
350
181
169
93
General and
1,476
1,293
183
4,014
4,865
(851)
administrative
14
(17)
Stock options expense
262
353
(90)
(26)
787
972
(185)
(19)
Operation Loss
(1,654)
(1,560)
(95)
6
(4,451)
(5,656)
1,205
(21)
Interest exp &
(154)
(79)
(75)
(422)
(317)
105
amortization of discount
on debt
94
33
Other income (expense)
76
(74)
150 (204)
79
(296)
375 (127)
Loss before non-
controlling interest
(1,732)
(1,713)
(20)
1
4,794
(6,269)
1,475
(24)
Non-Controlling interest
in MesoCoat loss
84
341
(257)
(75)
249
1,335
(1,086)
(81)
Loss before income taxes
(1,648)
(1,372)
(277)
20
(4,545)
(4,934)
389
8
Income taxes
-
-
-
Net Losses
(1,648)
(1,372)
(27)
20
(4,545)
(4,934)
389
8
Revenues
The $132,000 increase in revenue, or 81%, from $295,000 for the current three month period as compared
to the prior comparative period revenue of $164,000, is the result of increased grant revenue primarily
from three awards. Abakan also began leasing a $1.6 million of lamp system in December 2014 to NAIT
as part of the partnership to establish a prototype demonstration facility for developing, testing and
commercializing wear-resistant clad pipe and components in Alberta, Canada. The total lease revenue
over a 24 month period will be $500,000 Canadian dollars or approximately $400,000 US dollars.
Abakan recorded $51,000 in revenue related to this lease for the current three month period. Commercial
revenue for the three month period was $55,000 and was a slight decrease from the prior comparative
period that can be attributed to the production facility being shut down in December of 2014 for repairs
and the installation of equipment.
The $327,000 increase in revenue, or 73% from $773,000 for the current nine month period over the prior
comparative period revenue of $446,000, is the result of increased factory production, award of three
grants and the revenue derived from leasing a lamp system to a demonstration facility in Alberta, Canada.
We expect grant revenue to remain consistent over the next twelve months, which will include the
continued work on grants in place. The current grants in place are a $1 million grant, to be shared equally
33
with the Oak Ridge National Laboratory over thirty months, from the DOE, to develop a process to join
dissimilar metal alloys and $150,000 SBIR (Small Business Innovation Research), award from the NIH,
to develop antimicrobial coatings based on its high-speed large-area metal cladding technology
CermaClad. Work on the SBIR is anticipated to continue through the next two quarters.
We expect an increase in commercial revenue over the next twelve months as MesoCoat completes its
PComP expansion plan. MesoCoat expects to better penetrate the market for PComP through qualified
PComP application partners in Houston, Calgary, and Florida, while simultaneously working directly
with OEMs, to build demand and market acceptance. MesoCoat is also relying on agents and partners
including MetalSol/Mexico and UP Plate/Taiwan to augment direct marketing resources to pursue
industry projects, get placed on approved vendors list, create demand and eventually preference, and
manage market acceptance risk. While implementing the PComP expansion, we continue to focus on the
development of both current and new products.
We also expect rental revenue and other income to increase over the next 12 months as we will continue
to earn $62,500 rental revenue in Canadian dollars per quarter. This is $50,000 US dollars per quarter
using a currency conversion of 80 percent.
Gross Profit
Gross profits in both periods can be wholly attributed to the operations of MesoCoat. . The gross profit
margin percentage decreased from 53% for the three month period ending February 28, 2014 to 28% for
the period ending February 28, 2015. The decrease was the result of the temporarily shut down of
commercial operations during December to complete repairs and equipment installation. The margins
benefited from the recognition of rental revenue during the period. The $169,000 increase in gross profit,
or 93% from $350,000 for current nine month period over the prior comparative period of $181,000, is
attributable to the award of additional grants during the current and prior periods and the recognition of
rental revenue.
We expect gross profit to increase over the next twelve months as MesoCoat expands sales of its PComP
product line, increases grant revenue due to the awards received after the end of the quarter and realizes
rental income each quarter.
Net Losses
Net losses increased by $276,097 or 20% to $1,647,632 in the current three month period from
$1,371,535 in the prior three month period while net losses decreased by $389,132 or 8% to $4,544,847
in the current nine month period from $4,933,979 in the prior nine month period.
We do not expect to realize net income in the near term due to anticipated operational expenses associated
most significantly with facility expansion, research and development, consulting, payroll expenses and
the depreciation and amortization of existing assets. The increase in expenses 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.
Despite management’s focus on ensuring operating efficiencies, we expect to continue to operate at a loss
through fiscal 2015.
34
Expenses
The $183,000 increase in operating expense, or 14% from $1,476,000 for the current three month period
as compared to the prior comparative period of $1,293,000, can be attributed to higher professional fees
which were offset by lower research and development costs. The increase in professional fees for the
quarter was attributable to higher legal and related fees as result of ongoing litigation and a Commission
inquiry. The research and development cost decreased due to the increase in the number of personnel and
the time spent in meeting grant revenue requirements and therefore these personnel costs were classified
as cost of sales.
The $851,000 decrease in operating expense, or 17% from $4,014,000 for the current nine month period
as compared to the prior comparative period of $4,865,000 can be attributed to a realignment of our
management team and labor force that included the decision not to fill non-critical positions eliminated in
the realignment, and our renewed focus on operating efficiencies that caused us to further examine our
research and development practices.
We expect that operating expenses will increase over the next 12 months as our aggressive growth
strategy over the next five years will require significant increases in personnel and facilities along with
significant research and development to ensure that products nearing commercialization are brought to
market as quickly and as effectively as possible.
Interest Expense and Amortization of Discount on Debt
The $75,000 increase in interest expense, or 94% from $154,000 for the current three month period as
compared to the prior comparative period of $79,000, can be attributed to the increase in our debt load
and the accrual of higher interest expenses associated with certain debt defaults which are currently being
contested through the judicial process. The $105,000 increase in interest expense, or 33% from $422,000
for current nine month period over the prior comparative period of $317,000, is similarly attributable to
the increase in our debt load and the accrual of higher interest expenses on certain debt defaults. The
increase was partially offset by the prior period discount on debt being fully amortized in the period.
Other Expense/Income
The $150,000 and $375,000 positive change in other expense / income in the three and nine month
periods ending February 28, 2015, over the prior comparative periods, was mainly due to the change in
Abakan’s ownership of MesoCoat at fiscal year-end May 2014 and increased profitability at Powdermet.
During the prior three and nine month periods, Powdermet was required to recognize their proportionate
share of MesoCoat’s loss in their profit and loss statement. In the current year, due to the change in their
ownership interest in MesoCoat, Powdermet elected to record its investment in MesoCoat on a cost basis
which does not require recognition of the MesoCoat’s loss or profit in their books. In addition,
Powdermet’s operating profit increased during the quarter due to an increase in sales. Abakan continues
to record their investment in Powdermet using the equity method.
We expect other expense to increase in future periods based on the recognition by higher interest due to
existing debt and that debt anticipated in future periods to support future expansion. We also anticipate
other income to increase due to the recognition of investment income from investments.
35
Non-controlling interest in MesoCoat loss
The $257,000 and $1,086,000 decreases in non-controlling interest of MesoCoat loss in the three and nine
month periods ending February 28, 2015, over the prior comparative periods, was due to the increase in
Abakan’s equity interest in MesoCoat and the corresponding decrease in its equity interest as a minority
owner of Powdermet.
We expect to continue to record the allocation of a non-controlling interest in MesoCoat in the future until
such time as Abakan’s ownership of MesoCoat increases to 100%.
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 a significant investment amount for development activities for the period from June 27,
2006, (inception) to February 28, 2015, which amounted to $10,078,564, which sum does not include
funds received from government grants and awards. A large portion of these expenditures are related to
plant, property and equipment in the construction of the manufacturing facility in Euclid, Ohio, and to its
minority interest in Powdermet.
Liquidity and Capital Resources
Abakan has experienced significant changes in liquidity, capital resources, and stockholders’ equity.
Abakan had stockholders’ equity of $5,154,726 and a working capital deficit of $8,046,253 at February
28, 2015.
Cash flows
Key elements to the Consolidation Statement of Cash Flows for the nine months ended February 28, 2015
and 2014:
2015
2014
Net Change in Cash and Cash Equivalents
Provided by (used in):
Operating activities
$
(3,196,522) $
(1,656,379)
Investing activities
(384,718)
(549,100)
Financing activities
3,820,740
2,032,092
Effect of exchange rate on cash
766
-
Net Change in cash and cash equivalents
$
240,266 $
(173,387)
Net cash used in operating 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
expense 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.
36
Net cash used in investing activities in the current period can be primarily attributed to the purchase of
property, plant and equipment. 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 current period is attributable to proceeds from loans
payable, 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, including debt either in default or
coming due in the near term, or to satisfy our cash needs over the next twelve months and as such Abakan
will require additional debt or equity financing. Management to this end initiated a private equity
placement prior to period end of its restricted common stock, at a price of $0.40 a share pursuant to which
Abakan has raised $3,535,800 as of the filing date of this report and settled debt, accounts payable and
services in an amount of $180,000. Nonetheless, additional capital will be required to meet obligations
and needs over the next twelve months. Except for the private equity placement noted, we had no other
commitments or arrangements for financing at February 28, 2015, though we continue to pursue a number
of prospective sources that include industry or strategic partners, sale of additional equity through our
ongoing private placement, the procurement of long term debt, shareholder loans or the settlement of
additional debt for equity. We face certain financial obstacles to attracting new financing due to our
historical record of net losses, working capital deficits and ongoing litigation. Therefore, despite our
efforts we can provide no assurance that Abakan will be able to obtain the financing required to meet its
stated objectives or even to continue as a going concern.
Most urgent of Abakan’s required financing obligations is the payment of $1,341,963 now past due as of
April 27, 2015, to a secured third party creditor of MesoCoat. Should Abakan fail to repay this debt
substantially all of MesoCoat’s assets may become the property of the third party creditor on the
occurrence of default and action by the creditor to seize those assets. A notice of default was received
from the creditor dated April 30, 2015. Abakan is in the process of securing a financing to repay said
creditor. However, neither a financing to satisfy MesoCoat’s loan obligations nor any changes to the
existing terms of the loan documents have been agreed.
Abakan does not expect to pay cash dividends in the foreseeable future.
Abakan has a defined stock option plan titled “The Amended Abakan Inc., 2009 Stock Option Plan” and
contractual commitments with all of its officers and directors.
Abakan has plans for the purchase of plant or equipment in connection with expansion of the PComP
powder production commercial line.
Abakan intends to increase the number of employees engaged by MesoCoat on completion on the PComP
product line expansion and upon completion of development and commercialization of the CermaClad
product in the Euclid, Ohio manufacturing facility.
Off Balance Sheet Arrangements
As of February 28, 2015, 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.
37
Going Concern
Abakan’s auditors have expressed an opinion that refers to its ability to continue as going concern as a
result of net losses since inception and a working capital deficit of $7,927,372 as of May 31, 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
current report. Forward looking statements reflect our current expectations and beliefs regarding our
future results of operations, performance, and achievements. These statements are subject to risks and
uncertainties and are based upon assumptions and beliefs that may or may not materialize. These
statements include, but are not limited to, statements concerning:
§ our anticipated financial performance;
§ uncertainties related to the commercialization of proprietary technologies held by entities in which
we have an investment interest;
§ our ability to generate revenue from operations or gains on investments;
§ our ability to raise additional capital to fund cash requirements for operations;
§ the volatility of the stock market; and
§ general economic conditions.
We wish to caution readers that our operating results are subject to various risks and uncertainties that
could cause our actual results to differ materially from those discussed or anticipated including the factors
set forth in the section entitled Risk Factors included elsewhere in this report. We also wish to advise
readers not to place any undue reliance on the forward looking statements contained in this report, which
reflect our beliefs and expectations only as of the date of this report. We assume no obligation to update
or revise these forward looking statements to reflect new events or circumstances or any changes in our
beliefs or expectations, other that is required by law.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required.
38
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 acting chief financial officer, of
the effectiveness of Abakan’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-
15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)) as of February 28, 2015. 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 ineffective in recording, processing,
summarizing, and reporting information required to be disclosed, within the time periods specified in the
Commission’s rules and forms, and such information was not accumulated and communicated to
management, including the chief executive officer and the chief financial officer, to allow timely
decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
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.
39
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Sonoro Invest S.A.
On October 2, 2014, Sonoro Invest, S.A. (“Sonoro”) initiated legal proceedings against Abakan alleging
that it defaulted on two convertible debt obligations and a promissory note due to Sonoro in the principal
aggregate amount of $2,105,000. The complaint seeks $3,187,057 which amount includes interest,
penalties and legal fees. The Court granted a Temporary Restraining Order in favor of Sonoro on
November 6, 2014 and on February 11, 2015, the Company and Sonoro’s attorneys agreed to terms of a
Preliminary Injunction enjoining Abakan from undertaking certain actions “outside of its normal business
without Sonoro’s consent, which will not be unreasonably withheld” pending the outcome of the legal
proceedings. The actions that Abakan is enjoined from undertaking include paying dividends, acquiring
its own shares, becoming liable for significant new debt outside normal course business, disposing
significant amounts of its assets, lending amounts in excess of $100,000, and effecting any distribution of
its capital stock outside a previously approved equity placement. The parties are in the discovery stage.
Abakan believes that it has mitigating defenses to the lawsuit. A trial date is set for October 5, 2015.
On April 21, 2015, Abakan noticed Sonoro Invest S.A. of its intent to borrow funds to satisfy that amount
due to George Town Associates S.A. on April 27, 2015. Sonoro responded that it believed that Abakan
was prohibited from accruing new debt not for the purpose of repaying amounts due to Sonoro. The
position taken by Sonoro is based on a Preliminary Injunction pursuant to which the Court enjoined
Abakan from assuming new debt. Abakan is in the process of seeking a settlement with Sonoro that
would include its consent to the assumption of debt to repay George Town.
Joe T. Eberhard
On August 28, 2014, Joe Eberhard filed a complaint in the United States District Southern District of
Florida alleging that Abakan defaulted on a convertible note and promissory note in the principal
aggregate amount of $550,000. The complaint seeks $720,699 plus interest, penalties and legal fees.
Abakan believes that it has mitigating defenses to the lawsuit. Court proceedings are in the discovery
stage and Abakan has been in settlement discussions with Sonoro through a mediator.
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 was based on Paloma’s failure to perform
according to the terms of a consulting agreement dated May 2, 2011. Abakan no longer intends to proceed
with its complaint and expects that the legal proceedings will be dismissed without prejudice.
Securities and Exchange Commission
Abakan received notice of a non-public fact finding inquiry from the Securities and Exchange
Commission (“Commission”) on November 21, 2014, with a formal order to produce certain
documentation. The Commission seeks to determine whether there have been any violations of federal
securities laws. The inquiry does not mean that the Commission has concluded that Abakan or anyone
associated with Abakan has violated federal securities laws or that the Commission has a negative opinion
of any Abakan related person, entity or security. Abakan is cooperating with the Commission’s
investigation.
40
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 is the subject of a formal inquiry by the Commission which inquiry may harm our business and
results of operations.
Abakan is the subject of a non-public fact finding inquiry instigated by the Commission. We can neither
determine the focus of the inquiry nor predict its outcome. We have incurred and will continue to incur
expenses related to the Commission’s inquiry, which expenses may be substantial, including
indemnification costs for which we may be responsible. Abakan does carry Director’s & Officers liability
insurance, which coverage may mitigate the financial expense associated with this inquiry. Should there
be an adverse event in connection with the Commission’s inquiry, our business and results of operations
may be adversely impacted. Furthermore, our responses to the Commission’s inquiry may require
significant diversion of management’s attention and resources.
MesoCoat has secured its assets against the payment of certain loan amounts due in April of 2015.
Should MesoCoat be unable to repay amounts due to a secured third party creditor of approximately
$1,341,963 that was due on April 27, 2015, substantially all of MesoCoat’s assets may become the
property of a third party creditor. Abakan is in the process of securing a financing sufficient to repay said
creditor and believes that MesoCoat’s obligations will be satisfied or otherwise amended to avert seizure
of its assets. However, neither a financing to satisfy MesoCoat’s loan obligations nor any changes to the
existing terms of the loan documents have been agreed. Abakan received a notice of default on April 30,
2015.
Abakan has a history of significant operating losses and such losses may continue in the future.
Abakan incurred net losses of $24,046,944 for the period from June 27, 2006 (inception) to February 28,
2015. Since we have been without significant revenue since inception and have only recently transitioned
to producing revenue that is insufficient to support operations, losses may likely continue for the
foreseeable future.
Abakan has a history of uncertainty about continuing as a going concern.
Abakan’s audits for the periods ended May 31, 2014 and 2013 expressed an opinion as to its ability to
continue as a going concern as a result of net losses since inception and a working capital deficit of
$7,927,372 as of May 31, 2014. Until Abakan is able to produce net income over successive future
periods its ability to continue as a going concern will remain in jeopardy.
Abakan requires capital funding.
Abakan must raise additional funds, either through equity offerings, debt placements or joint ventures, to
maintain operations and meet our long term financial commitments. Additional capital, if in the form of
equity, will result in dilution to our current shareholders. Should Abakan be unable to realized future
income it ability to continue as a going concern will remain in jeopardy.
41
Abakan has defaulted on certain unsecured debt obligations
Abakan has defaulted on certain significant unsecured debt obligations due prior to or subsequent to the
end of this quarterly reporting period, which defaults have caused the original obligations to increase.
Abakan does intend to address its obligations but without additional capital funding it may be unable to
satisfy the debt holders which in turn is subjecting Abakan to legal action.
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. However,
Abakan’s financial resources are limited, which limitation may slow the pace at which proprietary
technologies can be commercialized. Should Abakan be unable to improve its financial condition through
debt or equity offerings, the ability to successfully advance its business plan will be severely challenged.
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 good 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 us.
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 competitive entities 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.
42
Market acceptance of the products and processes produced by MesoCoat and Powdermet is critical to
our growth.
We expect to generate revenue and realize a gain on our interest in Powdermet from the development and
sale of products and processes produced by MesoCoat and Powdermet. Market acceptance of those
products is therefore critical to our growth. If our customers do not accept or purchase those products or
processes produced by MesoCoat and Powdermet, then our revenue, cash flow and operating results will
be negatively impacted.
General economic conditions will affect our operations.
Changes in the general domestic and international climate may adversely affect the financial performance
of Abakan, MesoCoat and Powdermet. Factors that may contribute to a change in the general economic
climate include industrial disputes, interest rates, inflation, international currency fluctuations and
political and social reform. Further, the delayed revival of the global economy is not conducive to rapid
growth, particularly of technology companies with newly commercialized products.
MesoCoat and Powdermet rely upon patents and other intellectual property.
MesoCoat and Powdermet rely on a combination of patent applications, trade secrets, trademarks,
copyrights and licenses, together with non-disclosure and confidentiality agreements, to establish and
protect proprietary rights to technologies they develop. Should either of MesoCoat or Powdermet be
unable to adequately protect their intellectual property rights or become subject to a claim of
infringement, their businesses and that of Abakan may be materially adversely affected.
MesoCoat and Powdermet expect to prepare patent applications in accordance with their respective
worldwide intellectual property strategies on acquiring new technologies. However, neither they nor
Abakan can be certain that any patents will be issued with respect to future patents pending or future
patent applications. Further, neither they nor Abakan know whether any future patents will be upheld as
valid, proven enforceable against alleged infringers or be effective in preventing the development of
competitive patents. Abakan believes that MesoCoat and Powdermet have each implemented a
sophisticated internal intellectual property management system to promote effective identification and
protection of their products and know-how in connection with the technologies they have developed and
may develop in the future
We may not be able to effectively manage our growth.
We expect considerable future growth in our business. Such growth will come from the addition of new
plants, the increase in global personnel, and the commercialization of new products. Additionally, our
products should have an impact on the cladding industry; as companies learn that they can receive
materials with a short lead time at a higher quality and lower price, market demand should grow,
expanding the overall market itself. To achieve growth in an efficient and timely manner, we will have to
maintain strict controls over our internal management, technical, accounting, marketing, and research and
development departments. We believe that we have retained sufficient quality personnel to manage our
anticipated future growth though we are still striving to improve financial accounting oversight to ensure
that adequate reporting and control systems in place. Should we be unable to successfully manage our
anticipated future growth by adherence to these strictures, costs may increase, growth could be impaired
and our ability to keep pace with technological advances may be impaired which failures could result in a
loss of future customers.
43
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 each develops, any undetected defects could harm their reputation
and that of Abakan, diminish their customer base, shrink revenues and expose themselves and us to
product liability claims. Any imposition of liability that is not covered by insurance or is in excess of
insurance coverage could have a material adverse effect on our business, results of operations and
financial condition.
The market for our stock is limited and our stock price may be volatile.
The market for our common stock has been limited due to low trading volume and the small number of
brokerage firms acting as market makers. Due to the limitations of our market and the volatility in the
market price of our stock, investors may face difficulties in selling shares at attractive prices when they
want to sell. The average daily trading volume for our stock has varied significantly from week to week
and from month to month, and the trading volume often varies widely from day to day.
Abakan’s common stock is deemed to be “penny stock”, which determination may make 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.
44
The elimination of monetary liability against Abakan’s directors, officers and employees under Nevada
law and the existence of indemnification rights to our directors, officers and employees may result in
substantial expenditures by Abakan and may discourage lawsuits against our directors, officers and
employees.
Abakan’s certificate of incorporation contains a specific provision that eliminates the liability of directors
for monetary damages to us and our stockholders; further, Abakan is prepared to give such
indemnification to its directors and officers to the extent provided by Nevada law. Abakan may also have
additional contractual indemnification obligations under its employment agreements with its executive
officers and indemnification obligations to its directors. 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. Although Abakan does carry Director’s &
Officers liability insurance, which coverage may mitigate the financial expense associated with
indemnification claims, 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 Abakan’s directors and officers even though
such actions, if successful, might otherwise benefit us and our stockholders.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On December 11, 2014, Abakan authorized the grant of 100,000 stock options with an exercise price of
$0.65 per share that expire ten years from the date of grant vesting in equal one-third parts annually
beginning on date of grant to CFO Consultants Inc., 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 a isolated private transaction by Abakan which did not involve a
public offering; (2) the offeree had access to the kind of information which registration would disclose;
(3) the offeree is an entity owned by a former officer and director of Abakan and (4) the offeree is
financially sophisticated.
On January 1, 2015, Abakan authorized the grant of 1,000,000 stock options with an exercise price of
$0.60 per share that expire ten years from the date of grant vesting in equal one-half parts on May 31,
2015 and May 31, 2016 to Stephen Goss, Chief Operating Officer of Abakan and Chief Executive Officer
of MesoCoat, 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 a isolated private transaction by Abakan which did not involve a
public offering; (2) the offeree had access to the kind of information which registration would disclose;
(3) the offeree is an officer and director of Abakan and (4) the offeree is financially sophisticated.
ITEM 3.
DEFAULTS ON SENIOR SECURITIES
None.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
45
ITEM 5.
OTHER INFORMATION
Notice of Default
On April 22, 2015, Abakan received a Notice of Violation from George Town Associates S.A., in
connection with its failure to file a periodic report on Form 10-Q in a timely manner as required by the
Exchange Act pursuant to the terms and conditions of a Secured Convertible Promissory Note dated April
28, 2014. The Notice was followed by a Default Notice dated April 30, 2015, due to Abakan’s failure to
cure the violation within the time frame prescribed in the Note. The amount due to George Town is
$1,341,963.34 plus default interest. Abakan is in the process of securing financing to satisfy amounts due
to George Town.
Appointment of Chief Operating Officer
On January 1, 2015, Stephen Goss was appointed as the Chief Operating Officer of Abakan pursuant to
the terms and conditions of an Employment Agreement dated December 20, 2014. He will also continue
to serve as the Chief Executive Officer of MesoCoat under the Employment Agreement. The terms of the
employment agreement include a $20,000 per month salary of which a portion is deferred, and granted
1,000,000 stock options with an exercise price of $0.60 per share that will expire ten years from the
option grant date that vest in equal parts on May 31, 2015 and May 31, 2016. The Employment
Agreement will end on December 31, 2016 and which time it can be renewed for 2 one year periods. In
the event that this agreement is terminated early, the employee may be eligible for a severance payment.
Mr. Goss continues to also serve as a director of Abakan and MesoCoat.
ITEM 6.
Exhibits required to be attached by Item 601 of Regulation S-K are listed in the Index to Exhibits on page
48 of this Form 10-Q, and are incorporated herein by this reference.
46
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Abakan Inc.
Date
/s/ Robert H. Miller
May 4, 2015
By: Robert H. Miller
Its: Chief Executive Officer, and Director
/s/ Costas Takkas
May 4, 2015
By: Costas Takkas
Its: Chief Financial Officer and Principal Accounting Officer
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INDEX TO EXHIBITS
Exhibit No.
Exhibit Description
3.1*
Articles of Incorporation and Certificate of Amendment, incorporated hereto by reference to
the Form SB-2, filed with the Commission on June 19, 2007.
3.2*
Bylaws, incorporated hereto by reference to the Form SB-2, filed with the Commission on
June 19, 2007.
10.1*
Lease Agreement between Powdermet and Sherman Properties, LLC dated March 7, 2007,
incorporated hereto by reference to the Form 10-K filed with the Commission on September
13, 2011.
10.2*
License agreement between MesoCoat and Powdermet dated July 22, 2008, incorporated
hereto by reference to the Form 10-K/A-2 filed with the Commission on December 27, 2011.
10.3*
Exclusive license between MesoCoat and UT-Battelle, LLC, dated September 22, 2009,
incorporated hereto by reference to the Form 10-K/A-2 filed with the Commission on
December 27, 2011.
10.4*
Articles of Merger dated November 9, 2009, incorporated hereto by reference to the Form 8-
K filed with the Commission on December 9, 2009.
10.5*
Agreement and Plan of Merger dated November 9, 2009, incorporated hereto by reference to
the Form 8-K filed with the Commission on December 9, 2009.
10.5*
Consulting agreement dated December 1, 2009, between Abakan and Mr. Greenbaum,
incorporated hereto by reference to the Form 8-K filed with the Commission on May 28,
2010.
10.7*
Employment agreement dated December 1, 2009, between MesoCoat and Andrew Sherman,
incorporated hereto by reference to the Form 10-K filed with the Commission on September
13, 2011.
10.8*
Consulting agreement date December 1, 2009 between Abakan and Prosper Financial Inc.,
incorporated hereto by reference to the Form 10-K filed with the Commission on September
13, 2011.
10.9*
Consulting agreement dated December 8, 2009 between Abakan and Robert Miller,
incorporated hereto by reference to the Form 10-K filed with the Commission on September
13, 2011.
10.10*
Investment Agreement dated December 9, 2009, between Abakan, MesoCoat and
Powdermet, incorporated hereto by reference to the Form 8-K filed with the Commission on
December 17, 2009.
10.11*
Agreement date March 17, 2010 between Abakan and Sonnen Corporation, incorporated
hereto by reference to the Form 10-K filed with the Commission on September 13, 2011.
10.12*
Agreement dated April 30, 2010 between Abakan and Mr. Buschor, incorporated hereto by
reference to the Form 8-K filed with the Commission on May 11, 2010.
10.13*
Commercial lease agreement date June 1, 2010, between Powdermet and MesoCoat,
incorporated hereto by reference to the Form 10-K filed with the Commission on September
13, 2011.
10.14*
Stock Purchase Agreement dated June 29, 2010 between Abakan and Kennametal,
incorporated hereto by reference to the Form 8-K filed with the Commission on September
15, 2010.
10.15*
Employment agreement dated August 20, 2010, between Abakan and Mr. Takkas,
incorporated hereto by reference to the Form 8-K filed with the Commission on August 26,
2010.
10.16*
Amendment No. 1 to Stock Purchase Agreement between Abakan and Kennametal dated
September 7, 2010, incorporated hereto by reference to the Form 8-K filed with the
Commission on September 15, 2010.
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10.17*
Amendment to the Investment Agreement dated December 8, 2010, between Abakan,
MesoCoat and Powdermet, incorporated hereto by reference to the Form 10-Q filed with the
Commission on January 19, 2011.
10.18*
Cooperation Agreement between MesoCoat and Petroleo Brasileiro S.A. dated January 11,
2011, incorporated by reference to the Form 8-K/A-3 filed with the Commission on March 6,
2012. (Portions of this exhibit have been omitted pursuant to a request for confidential
treatment.)
10.19*
Amendment No. 2 to Stock Purchase Agreement between Abakan and Kennametal dated
January 19, 2011, incorporated hereto by reference to the Form 8-K filed with the
Commission on July 13, 2011.
10.20*
Accord and Satisfaction Agreement dated March 21, 2011 between Abakan and Kennametal,
Inc., incorporated hereto by reference to the Form 8-K filed with the Commission on March
25, 2011.
10.21*
Assignment Agreement dated March 25, 2011 with Polythermics LLC and MesoCoat,
incorporated hereto by reference to the Form 10-Q/A filed with the Commission on
September 27, 2011.
10.22*
Exclusivity Agreement between MesoCoat and Mattson Technology, Inc. dated April 7,
2011, incorporated hereto by reference to the Form 8-K/A-3 filed with the Commission on
March 6, 2012. (Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.)
10.23*
Accord and Satisfaction of Investment Agreement dated May 31, 2014, incorporated hereto
by reference to the Form 8-K filed with the Commission on June 3, 2014.
10.24*
UP Letter Agreement dated November 13, 2014, incorporated hereto by reference to the
Form 8-K filed with the Commission on November 25, 2014.
10.25*
Employment Agreement dated December 20, 2014, between Abakan and Stephen Goss
incorporated hereto by reference to the Form 10-Q filed with the Commission on January 14,
2015..
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, 2013.
21*
Subsidiaries of Abakan, incorporated hereto by reference to the Form 10-K filed with the
Commission on October 1, 2014.
Certification of the Chief Executive Officer pursuant to Rule 13a-14 of the Exchange Act as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, attached.
Certification of the Chief Financial Officer pursuant to Rule 13a-14 of the Exchange Act as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, attached.
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, attached.
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, attached.
101. INS XBRL Instance Document†
101. PRE XBRL Taxonomy Extension Presentation Linkbase†
101. LAB XBRL Taxonomy Extension Label Linkbase†
101. DEF XBRL Taxonomy Extension Label Linkbase†
101. CAL XBRL Taxonomy Extension Label Linkbase†
101. SCH XBRL Taxonomy Extension Schema†
*
Incorporated by reference to previous filings of Abakan.
†
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed “furnished”
and not “filed” or part of a registration statement or prospectus for purposes of Section 11 or
12 of the Securities Act of 1933, or deemed “furnished” and not “filed” for purposes of
Section 18 of the Securities and Exchange Act of 1934, and otherwise is not subject to
liability under these sections.
49