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 August 31, 2014.
o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the
transition period from
to
.
Commission file number: 000-52784
ABAKAN INC.
(Exact name of registrant as specified in its charter)
Nevada
98-0507522
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
2665 S. Bayshore Drive, Suite 450, Miami, Florida 33133
(Address of principal executive offices) (Zip Code)
(786) 206-5368
(Registrant’s telephone number, including area code)
N/A
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:
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 October 20, 2014 was 71,281,088.
1
TABLE OF CONTENTS
PART 1- FINANCIAL INFORMATION
Item1.
3
Condensed Consolidated Balance Sheets for the period ended
4
August 31, 2014 (unaudited) and May 31, 2014
Unaudited Condensed Consolidated Statements of Operations for the
5
Three months ended August 31, 2014 and 2013
Unaudited Condensed Consolidated Statements of Cash Flows for the
6
Three months ended August 31, 2014 and 2013
Condensed Notes to Consolidated Financial Statements (Unaudited)
7
Management's Discussion and Analysis of Financial Condition and Results of
15
Operations
Quantitative and Qualitative Disclosures about Market Risk
27
Controls and Procedures
28
PART II-OTHER INFORMATION
Legal Proceedings
29
Risk Factors
29
Unregistered Sales of Equity Securities and Use of Proceeds
34
Defaults Upon Senior Securities
34
Mine Safety Disclosures
34
Other Information
34
Exhibits
34
35
36
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
August 31,
May 31,
2014
2014
(unaudited)
ASSETS
Current assets
Cash and cash equivalents
$
104,020 $
31,111
Accounts receivable
100,459
119,122
Prepaid expenses
190,544
185,770
Total current assets
395,023
336,003
Non-current assets
Deferred finance fees, net
14,070
14,070
Property, plant and equipment, net
5,527,745
5,539,549
Patents and licenses, net
6,102,006
6,106,686
Assignment agreement - MesoCoat
161,186
171,055
Investment - Powdermet (Note 3)
2,133,084
2,151,817
Goodwill
364,384
364,384
Total Assets
$
14,697,498 $
14,683,564
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable
$
1,565,317 $
1,552,402
Accounts payable - related parties
724,298
675,041
Capital leases - current portion
31,621
31,465
Loans payable
5,509,472
4,820,816
Accrued interest - loans payable
418,051
306,160
Loan payable- related parties
216,300
224,799
Accrued interest – related parties
6,836
480
Accrued liabilities
668,932
652,212
Total current liabilities
9,140,827
8,263,375
Non-current liabilities
Loans payable (Note 4)
1,011,517
1,056,106
Capital leases - non-current portion (Note 4)
52,229
54,040
Total liabilities
10,204,573
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
68,418,615 issued and outstanding – August 31, 2014,
68,374,815 issued and outstanding - May 31, 2014
6,844
6,840
Subscription receivable
-
(28,000)
Subscription payable
205,000
-0-
Paid-in capital
24,869,897
24,530,074
Contributed capital
5,050
5,050
Accumulated deficit
(20,837,869)
(19,502,097)
4,248,922
5,011,867
Non-controlling interest
244,003
298,176
Total stockholders' equity
4,492,925
5,310,043
Total liabilities and stockholders' equity
$
14,697,498 $
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
August 31,
Revenues
2014
2013
Commercial
$
138,746 $
25,247
Contract and grants
188,150
63,403
326,896
88,650
Cost of revenues
106,670
80,532
Gross profit
220,226
8,118
Expenses
General and administrative
General and administrative
200,241
186,360
Professional fees
104,419
320,322
Professional fees - related parties
15,000
18,028
Consulting
236,837
273,809
Consulting - related parties
66,500
78,500
Payroll and benefits expense
143,160
533,985
Depreciation and amortization
198,820
198,419
Research and development
179,657
488,617
Stock options expense
322,872
318,480
Total expenses
1,467,506
2,416,520
Loss from operations
(1,247,280)
(2,408,402)
Other (expense) income
Interest expense:
Interest – loans
(133,305)
(27,800)
Interest - related parties
(4,769)
(613)
Amortization of discount on debt
-
(148,479)
Total interest expense
(138,074)
(176,892)
Interest income
-
3
Equity in Powdermet (loss)
(18,733)
(144,832)
Total Other (expense) income
(156,807)
(321,721)
Net profit/ (loss) before non-controlling interest
(1,404,087)
(2,730,123)
Non-controlling interest in MesoCoat Loss
68,315
591,320
Net (loss) attributable to Abakan Inc.
(1,335,772)
(2,138,803)
Provision for income taxes
-
-
Net (loss)
$
(1,335,772) $
(2,138,803)
Net (loss) per share – basic
$
(0.02) $
(0.03)
Net (loss) per share – diluted
$
(0.02) $
(0.03)
Weighted average number of common
shares outstanding – basic
64,418,615
64,284,855
Weighted average number of common
shares outstanding – diluted
64,418,615
64,284,855
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5
ABAKAN INC.
UNAUDITED CONDENSE CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended
August 31,
2014
2013
NET CASH (USED IN) OPERATING ACTIVITIES
$
(621,883) $
(572,281)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant, equipment and website
(172,046)
(297,209)
Capitalized patents and licenses
(75)
(4,738)
NET CASH USED IN INVESTING ACTIVITIES
(172,121)
(301,947)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock
-
76,244
Proceeds from loans payable
652,963
595,267
Payments on loans payable
(8,896)
(1,997)
Proceeds from loans payable - related parties
1,501
-
Payments on loans payable – related parties
(10,000)
-
Repayments of capital leases
(1,655)
(1,544)
Proceeds from subscription receivable
28,000
-
Proceeds from stock payable
205,000
-
NET CASH PROVIDED BY FINANCING ACTIVITIES
866,913
667,970
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
72,909
(206,258)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
31,111
233,040
CASH AND CASH EQUIVALENTS, END OF PERIOD
$
104,020 $
26,782
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
ABAKAN INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the three months ended August 31, 2014 and 2013
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
In the opinion of management, the accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States of
America (GAAP) for interim financial information and with the instructions to Form 10-Q. Accordingly,
they do not include all of the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of Abakan’s financial position as of August 31, 2014, and the
results of its operations and cash flows for the three months ended August 31, 2014, have been made.
Operating results for the three months ended August 31, 2014 are not necessarily indicative of the results
for the year.
These condensed consolidated financial statements should be read in conjunction with the financial
statements and notes for the year ended May 31, 2014 contained in Abakan’s Form 10-K.
Consolidation Policy
The accompanying August 31, 2014 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 August 31, 2014 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 August 31, 2014, 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.
Development Stage Enterprise
At August 31, 2014, Abakan’s business operations had not fully developed and are dependent upon
funding and therefore Abakan is considered a development stage enterprise. Abakan has adopted FASB
ASU 2014-10 concerning our development stage enterprise financial statement presentation.
7
ABAKAN INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the three months ended August 31, 2014 and 2013
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Accounts Receivable
Accounts receivable are stated at face value, less an allowance for doubtful accounts. Abakan provides an
allowance for doubtful accounts based on management's periodic review of accounts, including the
delinquency of account balances. Accounts are considered delinquent when payments have not been
received within the agreed upon terms, and are written off when management determines that collection is
not probable. As of August 31, 2014 management has determined that no allowance for doubtful accounts
is required.
Subsequent Events
In accordance with ASC 855-10 “Subsequent Events”, Abakan has evaluated subsequent events and
transactions for potential recognition or disclosure in the financial statements through the date the
financial statements were issued (Note 9).
2. GOING CONCERN
The accompanying financial statements have been prepared assuming that Abakan will continue as a
going concern. Abakan had net losses for the period of June 27, 2006 (inception) to the period ended
August 31, 2014, of $20,837,869 and a working capital deficit of $8,745,804. 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.
8
ABAKAN INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the three months ended August 31, 2014 and 2013
3. INVESTMENT IN NON-CONTROLLING INTEREST
Powdermet, Inc.
Abakan owns a 24.1% interest in Powdermet. Powdermet owns 11.08% of MesoCoat as of August 31,
2014. 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 11.08% and therefore Powdermet has begun to account for its investment using the cost
method.
We have analyzed our investment in 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 loss for three months ended August 31, 2014
(18,733)
Investment balance, August 31, 2014
$
2,133,084
Below is a table with summary financial results of operations and financial position of Powdermet.
Powdermet Inc.
For the three months
For the three months
ended
ended
August 31, 2014
August 31, 2013
Equity Percentage
24.1%
41%
Condensed income statement information:
Total revenues
$
807,954 $
446,811
Total cost of revenues
208,342
128,903
Gross margin
599,612
317,908
Total expenses
(647,643)
(287,299)
Other income/ (expense)
(68,315)
(591,320)
Provision for income tax benefit
38,616
207,463
Net profit/ (loss)
$
(77,730) $
(353,248)
Abakan’s equity in net profit/(loss):
$
(18,733) $
(144,832)
Condensed balance sheet information:
August 31, 2014
May 31, 2014
Total current assets
$
1,054,177 $
822,467
Total non-current assets
2,960,905
3,088,733
Total assets
$
4,015,082 $
3,911,200
Total current liabilities
$
593,820 $
424,085
Total non-current liabilities
936,163
924,286
Total equity
2,485,099
2,562,829
Total liabilities and equity
$
4,015,082 $
3,911,200
9
ABAKAN INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the three months ended August 31, 2014 and 2013
4. LOANS PAYABLE
As of August 31, 2014 and May 31, 2014, the loans payable balance comprised of:
Description
August 31, 2014
May 31, 2014
Convertible demand note to an unrelated entity bearing 5% interest per annum which matures
1,500,000 $
1,500,000
on September 15, 2014.
Convertible demand note to an unrelated entity bearing 5% interest per annum which matures
200,000
200,000
on September 15, 2014. The note is shown net of a discount of $-0- and $-0-, respectively,
attributable to the beneficial conversion feature, and an effective interest rate of 176% due to
attached warrants.
Convertible demand note to an unrelated entity bearing 5% interest per annum which matured
500,000
500,000
on July 14, 2014. The note is shown net of a discount of $-0- and $-0-, respectively,
attributable to the beneficial conversion feature, and an effective interest rate of 143% due to
attached warrants.
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum
70,000
70,000
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum
3,850
3,850
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum
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
55,000
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
132,800
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
548,205
130,000
Collateralized demand note to an unrelated entity bearing 5% interest per annum
1,341,963
1,341,963
Collateralized term note to an unrelated entity bearing 5.15% interest per annum which
125,330
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
35,000
35,000
Uncollateralized demand note to an unrelated entity bearing 7% interest per annum
20,000
20,000
Collateralized note to an unrelated entity bearing 1% interest for the first year and then 7%
1,000,000
1,000,000
per annum for years two – seven.
Uncollateralized demand note to a related entity bearing 6% interest per annum
60,000
-0-
Uncollateralized demand note to a related entity bearing 8% interest per annum
91,958
-0-
Convertible demand note to an unrelated entity bearing 7.5% imputed interest per annum
38,066
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;
83,850
85,505
collateralized by certain equipment with a cost of $205,157.
6,821,139 $
6,187,226
Less current liabilities
5,757,393
5,077,080
Total long term liabilities
$
1,063,746 $
1,110,146
On July 14, 2014, Abakan defaulted on a convertible debt obligation in the principal amount of $500,000.
The present default is in addition to a default on a promissory note due on September 15, 2014, in the
principal amount of $50,000. On August 28, 2014, the note holder filed a complaint in the United States
District Southern District of Florida. The complaint seeks $720,698.72 plus interest, penalties and legal
fees.
10
ABAKAN INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the three months ended August 31, 2014 and 2013
5. STOCKHOLDERS' EQUITY
Common Stock Issuances
For the three months ended August 31, 2014, Abakan did not issue any shares for private placements or
conversion of debt to shares. On July 31, 2014, Abakan issued 43,800 shares of our common stock for
services valued at $31,098.
Common Stock Deposits
For the three months ended August 31, 2014, Abakan received common stock subscriptions for an
aggregate total of $205,000, which subscriptions were accepted subsequent to period end.
Common Stock Warrants
A summary of the common stock warrants granted, forfeited or expired during the three months ended
August 31, 2014 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
(150,000)
2.00
Balance at August 31, 2014
1,889,568
$
1.88
0.98 years
Exercisable at August 31, 2014
1,889,658
$
1.88
0.98 years
Weighted average fair value of
warranted granted during the three
months ended August 31, 2014
$
NA
The following table summarizes information about the common stock warrants outstanding at August
31, 2014:
Warrants Exercisable
Weighted
Weighted
Weighted
Range of
Average
Average
Average
Exercise
Number
Remaining
Exercise
Number
Exercise
Price
Outstanding
Contractual Life
Price
Exercisable
Price
$
1.20
724,634
1.63 Years
$
1.20
$
724,634 $
1.20
$
1.50
378,000
.93 Years
$
1.50
$
378,000 $
1.50
$
2.00
75,000
.08 Years
$
2.00
$
75,000 $
2.00
$
2.70
576,272
.38 Years
$
2.70
$
576,272 $
2.70
$
3.00
135,662
.63 Years
$
3.00
$
135,662 $
3.00
1,889,658
.98 Years
$
1.88
$
1,889,658 $
1.88
11
ABAKAN INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the three months ended August 31, 2014 and 2013
6. EARNINGS-PER-SHARE CALCULATION
Basic earnings per common share for the three months ended August 31, 2014 and 2013 are calculated by
dividing net income by weighted-average common shares outstanding during the period. Diluted earnings
per common share for the three months ended August 31, 2014 and 2013 are calculated by dividing net
income by weighted-average common shares outstanding during the period plus dilutive potential
common shares, which are determined as follows:
For the three months
For the three months
ended August 31, 2014
ended August 31, 2013
Net earnings (loss) from operations
$
(1,335,772)
$
(2,138,803)
Weighted-average common shares
64,418,615
64,284,855
Effect of dilutive securities:
Warrants
-
-
Options to purchase common stock
-
-
Dilutive potential common shares
64,418,615
64,284,855
Net earnings per share from operations:
Basic
$
(0.02)
$
(0.03)
Diluted
$
(0.02)
$
(0.03)
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.
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 August 31,
ended August 31,
2014
2013
Common Stock Equivalents:
Warrants
1,889,658
2,842,992
Options to purchase common stock
3,244,994
3,796,667
Total of Common Stock Equivalents:
5,134,652
6,639,659
12
ABAKAN INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the three months ended August 31, 2014 and 2013
7. STOCK – BASED COMPENSATION
2009 Stock Option Plan – Abakan
Our board of directors adopted and approved our 2009 Stock option Plan (“Plan”) on December 14, 2009,
as amended on June 14, 2012, which provides for the granting and issuance of up to 10 million shares of
our common stock. The total value of employee and non-employee stock options granted during the three
months ended August 31, 2014 and 2013, was $-0- and $234,271, respectively.
A summary of the options granted to employees and non-employees under the plan and changes during
the three months ended August 31, 2014 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
-
-
Exercised
(50,000)
.65
Forfeited or expired
(125,000)
$
2.61
Balance at August 31, 2014
3,244,994
$
1.39
7.27 years
$
110,167
Exercisable at August 31, 2014
2,201,631
$
1.36
7.27 years
$
--
Weighted average fair value of
options granted during the three
months ending August 31, 2014
$
N/A
8. COMMITMENTS
There were no new commitments for the three months period ending August 31, 2014.
13
ABAKAN INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the three months ended August 31, 2014 and 2013
9. SUBSEQUENT EVENTS
Management has evaluated subsequent events after the balance sheet date, through the issuance of the
financial statements, for appropriate accounting and disclosure. Abakan has determined that there were no
such events that warrant disclosure or recognition in the financial statements, except for the following:
Default Sonoro Invest S.A. Notes
On September 15, 2014, Abakan defaulted on convertible debt obligations and a debt obligation to
Sonoro Invest, S.A. (“Sonoro”) in the principal aggregate amount of $2,105,000. Sonoro initiated legal
proceedings against Abakan to recover amounts due plus penalties and interest on October 2, 2014.
Private Placements
On August 19, 2014, Abakan’s board of directors initiated a private placement of up to eighteen million
seven hundred and fifty thousand (18,750,000) shares of its restricted common stock, at a price of $0.40 a
share, for anticipated gross proceeds of seven million five hundred thousand dollars ($7,500,000), to
support ongoing operations, retire outstanding debt and bolster product development. The private
placement has realized $491,800 in cash proceeds as of the filing date of this report causing Abakan to
issue one million two hundred and twenty nine thousand five hundred (1,229,500) restricted shares in
connection therewith.
On October 6, 2014, Abakan’s board of directors authorized the issuance of one million seven hundred
ninety-two thousand, nine hundred seventy-three (1,792,973) restricted shares due to the down-side
protection offered to investors in two private placements offered in April 2014 and May 2014,
respectively. The provision of downside protection further resulted in the cancellation of warrants
attached to the placements that entitled those investors with down side protection to purchase 832,487
additional restricted shares of Abakan.
14
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONAND 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 energetic materials. Operations are conducted through our subsidiary,
MesoCoat, Inc. (“MesoCoat”) and an affiliated entity, Powdermet, Inc. (“Powdermet”).
Abakan owns an 88.08% controlling interest in MesoCoat and a 24.1% non-controlling interest in
Powdermet. Powdermet owns a 11.92% interest in MesoCoat. Abakan’s interest in Powdermet represents
an additional 3.0% indirect interest in MesoCoat. Abakan’s combined direct and indirect interest in
MesoCoat is equal to 90.5% ownership.
MesoCoat
MesoCoat’s Business
MesoCoat is an Ohio based materials science company intending to become a technology leader in metal
protection and repair based on its metal coating and metal cladding technologies designed to address
specific industry needs related to conventional oil and gas, oil sands, mining, aerospace, defense,
infrastructure, and shipbuilding. The company was originally formed as a wholly owned subsidiary of
Powdermet, known as Powdermet Coating Technologies, Inc., to focus on the further development and
commercialization of Powdermet’s nano-composite coatings technologies. The company was renamed as
MesoCoat in March of 2008. Thereafter, in July of 2008, the coatings and cladding assets of Powdermet
were conveyed to MesoCoat through an asset transfer, an IP license and technology transfer, and a
manufacturing support agreement.
15
MesoCoat has exclusively licensed and developed a proprietary metal cladding application process as
well as advanced nano-composite coating materials that combine corrosion and wear resistant alloys, and
nano-engineered cermet materials with proprietary high-speed coating or cladding application systems.
The result is protective cladding solutions that will be offered on a competitive basis with existing market
solutions while the PComP™ coating materials unite high strength, hardness, fracture toughness, and a
low coefficient of friction into one product structure. 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) that 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.
MesoCoat’s revenues are comprised of sales of the PComP™ powder and thermal spray applications in
addition to grants that are awarded to further the development of various products. New grants from U.S.
government agencies are to develop new uses for PComP™ powders and to develop new solutions to
critical problems, including certain applications for NASA. CermaCladTM clad products, which will
include the cladding of the inside of a full length pipe for the oil and gas industries, are in the
development and qualification stage. Meanwhile, MesoCoat has expanded its technical team and
transitioned staff from Powdermet to MesoCoat, in line with the requirements of various development
projects and the expansion of the PComP™ powder and coating services.
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 and carbides.
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 magnitude improvements in head to head wear and
corrosion performance tests while offering a significantly better value proposition over other hard chrome
alternatives.
On 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.
16
The revolutionary nano-structure of the PComP™ coatings produces a coating that is self-smoothing in
service, resulting in friction properties approaching those of diamond-like carbon films and solid
lubricants, with the ability to be used structurally and applied to large components at a fraction of the cost
of coatings such as diamond-like carbon. 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.
The PComP™ product platform, combined with metal finishing applications of the large area weld
overlay technologies underlying the CermaClad™ clad steel product family provides a high degree of
product differentiation and a sustainable competitive advantage, which includes OEM components and
the maintenance, repair, and overhaul of industrial assets and machinery in the “components
manufacturing and repair” segment of MesoCoat’s business.
The PComP™ family of nanocomposite 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™ T is a titanium carbo-nitride based high corrosion/wear resistant, low friction high velocity
oxygen fuel (HVOF) 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™ provides
both wear and corrosion resistance (unlike chrome), and significantly reduces environmental safety and
health liabilities. Furthermore, in many applications, thermal spray coatings such as PComP™ provide
life multiples over chrome (80 times in cylinder liner application in testing reported by Caterpillar).
Lower coefficient of friction protects seals from premature wear and reduces energy consumption in
rotating components through lower friction losses, and the lower coating stresses and higher toughness
enable thicker coatings to be applied than chrome or other alternatives, meaning component life can be
extended through enabling additional repair cycles. 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.
PComP™ S is a silicon-nitride based hard chrome replacement solution for aerospace applications that
exhibits high toughness, wear resistance and displays increased spallation resistance. PComP™ S also has
the lowest density of any chrome alternative, enabling significant fuel savings to be realized in
transportation markets.
PComP™ W is MesoCoat’s “nano-engineered” tungsten carbide coating solution that offers industry
leading toughness and wear resistance for thermal spray coatings, making it better for critical high wear
applications such as gate valves and downhole drilling tools. PComP™ W replaces conventional tungsten
carbide cobalt in the thermal spray industry and provides increased wear resistance, design allowable
(stress levels), and reduced friction in abrasive wear applications, with higher toughness and impact
resistance than ceramic alternatives such as alumina-titania.
17
Liquid Metal Corrosion
PComP™ -M is a hierarchically structured molybdenum boride coating 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, combined with
increased durability and reliability, in the rapidly changing environment encountered in molten metal
contact when compared to conventional materials. 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 expect to focus PComP™ -M
initially on zinc pot stabilizer roll and pot bearing roll refurbishment market.
Thermal Barrier Coatings
ZComP™ is MesoCoat’s nano-composite thermal barrier coatings that offers 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.
Recent Developments
The PComP™ ramp up of coating materials to 18 tonnes has been delayed due to the need to implement
necessary modifications to our existing production facility. MesoCoat expects that the modifications will
be completed in December 2014. Meanwhile, MesoCoat has developed a plan to construct a new facility
at its present location dedicated to the production of PComP™ to enable the second stage ramp up in
production of PComP™ powders to 160 tonnes.
Abakan’s sales agent in Mexico, Metallurgic Solutions, S.A. de CV (“MetalSol”) reported to us on
October 16, 2014, that roller screens (Rolls) coated with MesoCoat’s PComP™ W104 exhibited almost
no wear when compared to the conventional Rolls that were used in the same operating cycles that
exhibited dimensional loss of between 6 -15 mm due to wear. Since maintaining the absolute dimensions
of Rolls is directly associated with filtering the right sized pellets, the use of PComP™ W coatings can
effectively double the life of Rolls used in ire ore processing. The life extension associated with
PComP™ W104 directly translates into lower maintenance costs, less downtime and higher net revenues.
MesoCoat and MetalSol expect to procure an annual contract to coat Rolls with PComP™ W104 at the
facility in which these results were obtained.
CermaClad™
CermaClad™ is a multiple award winning technology 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 significantly lower cost by permanently altering, or cladding, the surface of a high
strength, low cost carbon steel with a layer of a much higher cost wear or corrosion resistant alloy. 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.
18
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” or HDIR technology, exclusively licensed from Oak Ridge National Laboratory
(“ORNL”) to produce clad steel. Testing by ORNL has shown that this HDIR technology 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 HDIR process represents the first truly scalable, large area cladding
technology. Scalable, low capital cost cladding technology then enables the production of large volumes
of customized, premium, high margin clad steel products.
CermaClad™ clad steel is a premier, 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
seawater, road salt, mining slurry transport lines, unprocessed oil containing water, sulphides and carbon
dioxide, chemical processing and transportation equipment, metals production, and other large industrial
applications, asset owners and operators either need to continually maintain and replace major assets, or
fabricate these assets using expensive, corrosion resistant alloy (CRA) materials, which substantially
increase capital costs.
Clad steel, and CermaClad™ in particular, offer 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 75% 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 Metallurgical clad pipes are primarily manufactured using roll-bonded
clad plate which is then bent and welded to form a pipe. Though a higher productivity process, Roll-
bonded 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 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 roll
mill size to enable the production of larger diameter pipe needed for large gas projects in Southeast Asia
would require very large investments, estimated to be in excess of a $400M compared to similar capacity
from an 8-line CermaClad™ large diameter pipe production facility budgeted to cost $43 million.
19
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
meet growing demand for the thicker wall and larger diameter clad pipes that CermaClad™ is targeted.
The remaining 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 tree’s” used in oil and gas, although weld overlay is a dominant technology for wear resistant
overlays that cannot be produced by the other techniques.
Worldwide, there is a large and growing need for clad pipes as deeper and hotter, corrosive reserves come
into production. Current production methods not only have the above limitations, but plants are
operating at capacity, creating an increasing tight supply and lead-times of 2 years or more to delivery. A
number of organizations have stated that the market for clad pipe is expected to grow from approximately
$2 billion per year currently, to $4 billion to $8 billion within 2 to 4 years.
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, sheets,
and bars. 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 microstructural and compositional modifications. The HDIR process melts
and fuses material onto the inside of a pipe 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 easier to
inspect and install (reel) irrespective of the size and thickness of the pipe compared to current alternatives.
Today, clad steel is a specialized, profitable segment of the steel industry where demand has outstripped
supply and margins are high as a result. Management believes that the CermaClad™ process is scalable
to large volumes with a modest capital investment that is lower than that invested in existing production
methods.
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. Currently, typical requirements are for tens of kilometers with growing
numbers of projects needing hundreds of kilometers per project. As a result the clad pipe market is
growing rapidly and the limitations of current solutions in terms of installation, inspectability, quality, and
availability are restraining this growth. Full commercialization of CermaClad™ clad pipes can 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.
20
§ 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 “lamp”
compared to a 0.7 cm wide laser “torch” for laser or inert gas welding torches, 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™ products exceed the requirements of the defining API 5LD and DNV OS F101
standard requirements for clad pipe.
§ CermaClad™ offers a smoother surface, minimal dilution, greater flexibility in materials, and the
ability to do thinner, lower cost claddings than current production technologies.
The CermaClad™ clad steel product lines under development include:
Recent Developments
MesoCoat’s partnership with Northern Alberta Institute of Technology (NAIT) to establish a prototype
demonstration facility for developing, testing and commercializing wear-resistant clad pipe and
components in Alberta, Canada has been delayed due some facility inadequacies that need to be addressed
before our shipping of a full lamp system for installation. We had planned to ship the equipment in
August but now anticipate a ship date in October 2014.
CermaClad™ product development has moved ahead this October, 2014, achieving the longest runs both
in time and coated area to date. Initial quality control inspection was satisfactory and further metallurgical
tests are currently being carried out to validate this success. MesoCoat continues to increase the length of
coating pipe and improve cooling parameters. Recent progress may make possible a shorter timeline to
market than that currently anticipated for CermaClad™ corrosion resistant products.
21
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, Mattson, personnel changes, the need to replace aging equipment associated with PComP™ and
availability of financing.
TIME TO
PRODUCT
COMMERCIAL STATUS
COMMERCIALIZE
(MONTHS)
PComP™ W
Growth and Expansion
Current
PComP™ T
Market Entry
Current
PComP™ M
Field Testing
Current
PComP™ S
Prototype Qualification
12
PComP™ Coating Services
Market Entry
Current
ZComP™
Development
18
CermaClad™ CRA Euclid, Ohio
Full scale product API qualification
9 for small scale orders
CermaClad™ CRA 4 line plant
Full scale product API qualification
28 full scale production
CermaClad™ WR
Development
8 plate sales from OH
CermaClad™ LT
Development Delayed
24
CermaClad™ HT
Incubation
36
Product Commercial Expansion Timeline
Abakan’s near term plan is to expand the presence of its products in North America and the Asia-Pacific
market. Our attempts to negotiate reasonable terms for a “build to suit” agreement to construct a
manufacturing plant in the Recife, Brazil free trade zone have been abandoned. We continue to consider
the best strategy to secure direct access for our products to Brazilian markets. Meanwhile, our wholly
owned Asian subsidiary, PT MesoCoat Indonesia, is negotiating the terms of a “build-to-suit” agreement
to construct a manufacturing plant on the island of Batam, Indonesia. The expected time-frame for the
completion of this project is yet to be finalized.
In Mexico our sales agent Metalsol has been working to get financial support from government and
corporate entities to build a production facility in Mexico.
22
Results of Operations
For the three months ended
August 31,
Change
Revenues
2014
2013
$
%
Commercial
$
138,746 $
25,247 $
113,499
450
Contract and grants
188,150
63,403
124,747
197
Other income
-
-
-
-
326,896
88,650
238,246
269
Gross profit
220,226
8,118
212,108
2613
General and administrative
1,144,634
2,098,040
(953,406)
(45)
Stock options expense
322,872
318,480
4,392
1
Operation Loss
(1,247,280)
(2,408,402)
1,161,122
48
Interest exp & amortization of debt discount
(138,074)
(176,892)
38,818
(22)
Other income (expense)
(18,733)
(144,829)
126,096
(87)
Loss before non-controlling interest
(1,404,087)
(2,730,123)
1,326,036
(49)
Non-Controlling interest in MesoCoat loss
68,315
591,320
(523,005)
(88)
Loss before income taxes
(1,335,772)
(2,138,803)
(803,031)
(38)
Income taxes
-
-
-
Net Income
(1,335,772)
(2,138,803)
(803,031)
(38)
Revenues
Revenues for the quarter ending August 31, 2014 were $326,896, as compared to $88,650 for the quarter
ending August 31, 2013, an increase of 269%. Revenues for the two periods can be wholly attributed to
the operations of MesoCoat.
Revenue in the current period was derived from commercial revenues of $138,746 as compared to
$25,247 in the prior year same period, contract and grant revenues of $188,150 in the current period as
compared to $63,403 in the prior year same period. Commercial revenue increased by 450% as
MesoCoat continues implementation of its commercial products. The 197% increase in contract and grant
revenue in the current period over the prior year same period is due to an award of three grants versus one
in the previous period.
We expect grant revenue to increase over the next twelve months as MesoCoat completes the current
outstanding grants plus additional revenue to be earned on two grants awarded subsequent to the end of
the quarter. Since the end of the quarter, MesoCoat, along with Oak Ridge National Laboratory, have
been awarded $1 million by the Department of Energy to develop a process to join dissimilar metal
alloys. The award will be shared equally over thirty months. MesoCoat has also won a $150,000 SBIR
(Small Business Innovation Research), award from the National Institute of Health to develop
antimicrobial coatings using its high-speed large-area metal cladding technology CermaClad™. Work on
the SBIR is anticipated to take six months.
We expect an increase in commercial revenue over the next twelve months as MesoCoat implements the
PComP™ expansion plan. Meanwhile, we continue to focus on the development of both current and new
products while continuing to commercialize existing products lines.
23
Gross Profit
Gross profits in both periods can be wholly attributed to the operations of MesoCoat. The $212,108
increase in gross profit in the three month period ending August 31, 2014 over the three month period
ending August 31, 2013, is the result of the increase in commercial as the company continues to increase
its production capacity. In addition, the work on the current grants contributed to the gross profit
increasing.
We expect gross profit to increase over the next twelve months as result of the expected increase in gross
profit throughout the year as MesoCoat expands its PComP™ product line and increases in grant revenue
due to the awards received after the end of the quarter.
Net Losses
We do not expect to realize net income in the near term as anticipated operational expenses associated
most significantly with research and development, consulting, payroll expenses and the depreciation and
amortization of existing assets. The increase in expenses are expected to be the direct result of continued
research and development costs associated with the CermClad™ 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.
Expenses
Operating expenses for the quarter ended August 31, 2014, were $1,144,634 compared to $2,098,040 for
the quarter ended August 31, 2013, a decrease of 45%. The decrease in operating expenses over the prior
period can be attributed to significant decreases in professional fees, payroll & benefits and research and
development costs which accounted for $915,688 of the $953,406 decrease. The decreases can be
attributed to a realignment of our management team and labor force that included the decision not to full
non-critical positions eliminated in the realignment, our renewed focus on operating efficiencies that
caused us further examination of our research and development practices and the absence of any
contribution of our restricted common stock to the MesoCoat and Powdermet retirement plans that
accounted for of an expense of $235,000 in the prior period.
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 $38,818 decrease in interest and amortization expenses in the three month period ending August 31,
2014, over the three month period ending August 31, 2013, was attributed to the prior discounts being
fully amortized. The current quarter represents interest expense and increased over the prior year due to
increase debt.
24
Other Expense/Income
The $126,096 decrease in other expense / income in the three month period ending August 31, 2014, over
the three month period ending August 31, 2013, was due to Abakan’s reduction of a $18,733 equity loss
in Powdermet income in the period ending August 31, 2014, versus a $144,829 loss in the period ending
August 31, 2013.
We expect to continue to incur other expense in future periods due to the interest accruing on convertible
debt and the anticipated increase in interest on new debentures that are required for future growth.
Income Tax Expense (Benefit)
Abakan may have a prospective income tax benefit resulting from a net operating loss carry-forward and
start up costs that will offset any future operating profit once taxable income is generated.
Capital Expenditures
Abakan has spent significant amounts of investment activities for the period from June 27, 2006,
(inception) to August 31, 2014, which amounted to $9,394,971. A large portion of these expenditures are
related to plant, property and equipment in the construction of the manufacturing facility in Euclid, Ohio,
and a 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 $4,492,925 and a working capital deficit of $8,745,804 at August 31,
2014.
Cash flows
Key elements to the Consolidation Statement of Cash Flows for the three months ended August 31, 2014
and 2013:
2014
2013
Net Change in Cash and Cash Equivalents
Provided by (used in):
Operating activities
$
(621,883) $
(572,281)
Investing activities
(172,121)
(301,947)
Financing activities
866,913
667,970
Net Change in cash and cash equivalents
$
72,909 $
(206,258)
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.
25
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 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 up to eighteen million seven hundred
and fifty thousand (18,750,000) shares of its restricted common stock, at a price of $0.40 a share pursuant
to which Abakan had raised $491,800 as of the filing date of this report and expects to include the
extinguishment of debt for equity in an amount up to $2,000,000. Abakan had further expected to allocate
$4 to $5 million dollars of the private placement to secure an industry partner, which expectation, if
realized, is no longer to be considered as part of this private equity placement but will be made part of
separate agreements under consideration. Regardless of the realization of proceeds from the current
private equity placement, additional capital will still 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 August 31, 2014, though we continue to pursue a number of prospective
sources that include industry or strategic partners, sale of additional equity, the procurement of long term
debt, shareholder loans or the settlement of additional debt for equity. We face certain financial obstacles
to attracting new financing due to our historical record of net losses and working capital deficits.
Therefore, despite our efforts we can provide no assurance that Abakan will be able to obtain the
financing required to meet its stated objectives or even to continue as a going concern.
Abakan does not expect to pay cash dividends in the foreseeable future.
Abakan has a defined stock option plan titled “The Abakan Inc., 2009 Stock Option Plan” and contractual
commitments with all of its officers and directors.
Abakan has plans for the 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 new Euclid, Ohio manufacturing facility.
Off Balance Sheet Arrangements
As of August 31, 2014, Abakan had no off-balance sheet arrangements that have or are reasonably likely
to have a current or future effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to
stockholders.
26
Going Concern
Abakan’s auditors have expressed an opinion that refers 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. 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.
27
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 August 31, 2014. Disclosure
controls and procedures are designed to ensure that information required to be disclosed in reports filed or
submitted under the Exchange Act is recorded, processed, summarized, and reported within the time
periods specified in the Commission’s rules and forms, and that such information is accumulated and
communicated to management, including the chief executive officer and the chief financial officer, to
allow timely decisions regarding required disclosures.
Based on that evaluation, Abakan’s management concluded, as of the end of the period covered by this
report, that Abakan’s disclosure controls and procedures were 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.
28
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Paloma Capital Group Ltd.
Abakan initiated legal proceedings against Paloma Capital Group Ltd (“Paloma”) on July 2, 2013, in the
Circuit Court in and for Miami-Dade County. The claim is based on Paloma’s failure to perform
according to the terms of a consulting agreement dated May 2, 2011, pursuant to which Paloma was to
introduce suitable investors to the Abakan in exchange for certain consideration including 50,000 shares
of Abakan and 150,000 stock options to purchase shares of Abakan. The suit demands the return of the
Abakan shares and the stock options. Paloma is yet to be served with the complaint. Abakan no longer
intends to proceed with its complaint and expects that the legal proceedings will be dismissed without
prejudice.
Joe T. Eberhard
Joe T. Eberhard initiated legal proceedings against Abakan on August 29, 2014, in the United States
District Southern District of Florida. The claim is based on Abakan’s failure to repay amounts due on
certain promissory notes. The complaint seeks $720,698.72 plus interest, penalties and legal fees. The
parties remain in the discovery process. Abakan believes that it has mitigating defenses to the lawsuit, and
has obtained an extension of time in which to respond to the complaint and will do so in due course.
Sonoro Invest S.A.
Sonoro Invest S.A. initiated legal proceedings against Abakan on October 2, 2014, in the United States
District Southern District of Florida. The claim is based on Abakan’s failure to pay amounts due on
certain promissory notes. The complaint seeks $3,187,056.98 plus interest and legal fees. Abakan believes
that it has mitigating defenses to the lawsuit, and will respond to the complaint in due course.
ITEM 1A.
RISK FACTORS
Abakan’s operations and securities are subject to a number of risks. Below we have identified and
discussed the material risks that we are likely to face. Should any of the following risks occur, they will
adversely affect our business, financial condition, and/or results of operations as well as the future trading
price and/or the value of our securities.
Abakan has a history of significant operating losses and such losses may continue in the future.
Abakan incurred net losses of $20,837,869 for the period from June 27, 2006 (inception) to August 31,
2014. 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.
29
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.
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.
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 third party creditor of approximately $1,340,000
on April 29, 2015, all of its assets, with limited exceptions, absent any change in certain loan documents,
will become the property of a third party creditor on declaration of default. Abakan is in the process of
securing a financing sufficient to repay said creditor and is confident that MesoCoat’s obligations will be
satisfied or otherwise amended to avert any default. However, neither the financing to satisfy MesoCoat’s
loan obligations nor any changes to the existing terms and conditions of the loan documents have been
agreed.
Abakan’s success is dependent on its ability to commercialize proprietary technologies to the point of
generating sufficient revenues to sustain and expand operations.
Abakan’s near term future operation is dependent on its ability to commercialize proprietary technologies
to produce sufficient revenue to sustain and expand operations. The success of these endeavors will
require that sufficient funding be available to assist in the development of its business interests. Currently,
Abakan’s financial resources are limited, which limitation may slow the pace at which proprietary
technologies can be commercialized. Should 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 significant likelihood that our ability to successfully advance our business will be severely
limited.
30
The coatings industry is likely to undergo technological change so our products and processes could
become obsolete at any time.
Evolving technology, updated industry standards, and frequent new product and process introductions are
likely to characterize the coatings industry going forward so our products or processes could become
obsolete at any time. Competitors could develop products or processes similar to or better than our own,
finish development of new technologies in advance of our research and development, or be more
successful at marketing new products or processes, any of which factors may hurt our prospects for
success.
MesoCoat and Powdermet compete with larger and better financed corporations.
Competition within the industrial coatings industry and other high technology industries is intense. While
each of MesoCoat and Powdermet’s products are distinguished by next-generation innovations that are
more sophisticated and cost effective than many competitive products currently in the market place, a
number of entities and new competitors may enter the market in the future. Some of MesoCoat’s and
Powdermet’s existing and potential competitors have longer operating histories, greater name recognition,
larger customer bases and significantly greater financial, technical and marketing resources than we do,
including well known multi-national corporations. Accordingly, MesoCoat’s and Powdermet’s products
could become obsolete at any time. Competitors could develop products similar to or better than our own,
finish development of new technologies in advance of either MesoCoat’s or Powdermet’s research and
development, or be more successful at marketing new products, any of which factors may hurt our
prospects for success.
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.
31
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.
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.
32
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.
The elimination of monetary liability against Abakan’s directors, officers and employees under Nevada
law and the existence of indemnification rights to our directors, officers and employees may result in
substantial expenditures by Abakan and may discourage lawsuits against our directors, officers and
employees.
Abakan’s certificate of incorporation contains a specific provision that eliminates the liability of directors
for monetary damages to us and our stockholders; further, Abakan is prepared to give such
indemnification to its directors and officers to the extent provided by Nevada law. Abakan may also have
contractual indemnification obligations under its employment agreements with its executive officers. The
foregoing indemnification obligations could result in our incurring substantial expenditures to cover the
cost of settlement or damage awards against directors and officers, which Abakan may be unable to
recoup. These provisions and resultant costs may also discourage us from bringing a lawsuit against
directors and officers for breaches of their fiduciary duties and may similarly discourage the filing of
derivative litigation by our stockholders against Abakan’s directors and officers even though such actions,
if successful, might otherwise benefit the us and our stockholders.
33
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On July 31, 2014 our board of directors authorized the issuance of 25,000 restricted shares at $0.71 per
share to David Charbonneau in order to terminate one hundred and twenty five thousand (125,000) stock
options granted in accordance with a settlement of stock option agreement pursuant to the exemption
from registration provided by Section 4(2) of the Securities Act of 1933, as amended (“Securities Act”).
Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the
following factors: (1) the issuance was an isolated private transactions by Abakan which did not involve a
public offering; (2) the offeree had access to the kind of information which registration would disclose;
and (3) the offeree is a former officer and director of Abakan and (4) the offeree is financially
sophisticated.
On July 31, 2014 our board of directors authorized the issuance of 18,800 restricted shares at $0.71 per
share to CFO Consultants, Inc. for services rendered in accordance with a consulting agreement pursuant
to the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended
(“Securities Act”).
Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the
following factors: (1) the issuance was an isolated private transactions by Abakan which did not involve a
public offering; (2) the offeree had access to the kind of information which registration would disclose;
and (3) the offeree is an entity owned by a former 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.
ITEM 5.
OTHER INFORMATION
None.
ITEM 6.
Exhibits required to be attached by Item 601 of Regulation S-K are listed in the Index to Exhibits on page
36 of this Form 10-Q, and are incorporated herein by this reference.
34
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
October 20, 2014
By: Robert H. Miller
Its: Chief Executive Officer, and Director
/s/ Costas Takkas
October 20, 2014
By: Costas Takkas
Its: Chief Financial Officer and Principal Accounting Officer
35
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.
36
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.
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
37
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14 OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert H. Miller certify that:
1. I have reviewed this report on Form 10-Q of Abakan Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the period presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and
internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)
for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including any consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal controls
over financial reporting which are reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal controls over financial reporting.
Date: October 20, 2014
/s/ Robert H. Miller
Robert H. Miller
Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14 OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Costas Takkas certify that:
1. I have reviewed this report on Form 10-Q of Abakan Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the period presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and
internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)
for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including any consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal controls
over financial reporting which are reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal controls over financial reporting.
Date: October 20, 2014
/s/ Costas Takkas
Costas Takkas
Chief Financial Officer
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the report on Form 10-Q of Abakan Inc. for the quarterly period ended August 31,
2014, as filed with the Securities and Exchange Commission on the date hereof, I, Robert H. Miller, do
hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of
2002, that, to the best of my knowledge and belief:
(1) This report fully complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2) The information contained in this report fairly presents, in all material respects, the financial
condition of the registrant at the end of the period covered by this report and results of operations
of the registrant for the period covered by this report.
Date: October 20, 2014
/s/ Robert H. Miller
Robert H. Miller
Chief Executive Officer
This certification accompanies this report pursuant to §906 of the Sarbanes-Oxley Act of 2002 and shall
not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the registrant
for the purposes of §18 of the Securities Exchange Act of 1934, as amended. This certification shall not
be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended (whether made before or after the date of this report),
irrespective of any general incorporation language contained in such filing.
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the report on Form 10-Q of Abakan Inc. for the quarterly period ended August 31,
2014, as filed with the Securities and Exchange Commission on the date hereof, I, Costas Takkas, do
hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of
2002, that, to the best of my knowledge and belief:
(1) This report fully complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2) The information contained in this report fairly presents, in all material respects, the financial
condition of the registrant at the end of the period covered by this report and results of operations
of the registrant for the period covered by this report.
Date: October 20, 2014
/s/ Costas Takkas
Costas Takkas
Chief Financial Officer
This certification accompanies this report pursuant to §906 of the Sarbanes-Oxley Act of 2002 and shall
not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the registrant
for the purposes of §18 of the Securities Exchange Act of 1934, as amended. This certification shall not
be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended (whether made before or after the date of this report),
irrespective of any general incorporation language contained in such filing.
|
Note: 9. Subsequent Events: Default Sonoro Invest S.a. Notes (Policies)
|
3 Months Ended |
|---|---|
|
Aug. 31, 2014
|
|
| Policies | |
| Default Sonoro Invest S.a. Notes | Default Sonoro Invest S.A. Notes
On September 15, 2014, Abakan defaulted on convertible debt obligations and a debt obligation to Sonoro Invest, S.A. (“Sonoro”) in the principal aggregate amount of $2,105,000. Sonoro initiated legal proceedings against Abakan to recover amounts due plus penalties and interest on October 2, 2014. |
|
Note: 4. Loans Payable
|
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
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Aug. 31, 2014
|
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| Notes | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Note: 4. Loans Payable | NOTE: 4. LOANS PAYABLE
As of August 31, 2014 and May 31, 2014, the loans payable balance comprised of:
On July 14, 2014, Abakan defaulted on a convertible debt obligation in the principal amount of $500,000. The present default is in addition to a default on a promissory note due on September 15, 2014, in the principal amount of $50,000. On August 28, 2014, the note holder filed a complaint in the United States District Southern District of Florida. The complaint seeks $720,698.72 plus interest, penalties and legal fees. |