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EX-31 - EXHIBIT 31 ABAKAN - ABAKAN, INCexhibit31.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q/A

(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, 2011

 

    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

(State or other jurisdiction of

incorporation or organization)

98-0507522 

 (I.R.S. Employer

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 o   No þ.

 

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 24, 2011, was 59,377,425.

1


 

 

TABLE OF CONTENTS

PART 1- FINANCIAL INFORMATION

Item1.  

Financial Statements:

4

 

Condensed Consolidated Balance Sheets for the period ended

August 31, 2011(unaudited) and May 31, 2011

5

 

Unaudited Condensed Consolidated Statements of Operations for the

Three months ended August 31, 2011 and 2010, and cumulative amounts from development stage activities (June 27, 2600 (Inception) through August 31, 2011)

5

 

Unaudited Consolidated Condensed Statements of Cash Flows for the

Three months ended August 31, 2011 and 2010, and cumulative amounts from development stage activities (June 27, 2006 (inception) through August 31, 2011)

6

 

Condensed Notes to Financial Statements (Unaudited)

9

Item 2. 

Management's Discussion and Analysis of Financial Condition and Results of Operations

29

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

42

Item 4. 

Controls and Procedures

43

 

 

 

PART II-OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

43

Item 1A.  

Risk Factors

43

Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

48

Item 3.

  Defaults Upon Senior Securities

49

Item 4.

(Removed and Reserved)

49

Item 5.  

Other Information

50

Item 6. 

Exhibits

50

 

Signatures

51

 

Index to Exhibits

52

 

 

 

 

 

 

2


 

As used herein the terms “Company,” “we,” “our,” and “us” refer to Abakan Inc. unless context indicates otherwise.

 

EXPLANATORY NOTE

 

The Company’s Form 10-Q filed on October 24, 2011 (the “Original Filing”) has been amended hereby in its entirety on Form 10-Q/A (this “Amendment”) to clarify disclosure in the Management’s Discussion and Analysis section and to furnish Exhibit 101 – Interactive Data File (“XBRL Exhibit”) in accordance with Rule 405 of Regulation S-T.

 

 

Unless indicated otherwise, the disclosures in this Amendment continue to describe conditions as of the date of the Original Filing, and the disclosures contained herein have not been updated to reflect events, results or developments that have occurred after the Original Filing, or to modify or update those disclosures affected by subsequent events. Among other things, forward-looking statements made in the Original Filing have not been revised to reflect events, results or developments that have occurred or facts that have become known to us after the date of the Original Filing, and such forward-looking statements should be read in their historical context. This Amendment should be read in conjunction with the Company’s filings made with the Securities and Exchange Commission (“Commission”) subsequent to the Original Filing, including any amendments to those filings.

 

3


 

PART I – FINANCIAL INFORMATION

 

ITEM 1.          FINANCIAL STATEMENTS

 

As used herein, the terms “we,” “our,” and “us” refer to Abakan Inc. (formerly “Waste to Energy Group 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/A 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.

 

 

 

 

 

 

 

4


 

ABAKAN, INC.

(Formerly known as Waste to Energy Group, Inc.)

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

August 31, 2011

 

May 31, 2011

 

 

 

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

ASSETS

Current assets

 

 

 

 

 

 

 

    Cash and cash equivalents

 

 

$

       770,682

$

             -  

    Accounts receivable

 

 

 

         126,618

 

               -  

    Note receivable - related parties

 

 

            4,500

 

          4,500

    Prepaid expenses

 

 

 

 

            6,177

 

         16,200

    Prepaid expenses - related parties

 

 

                 -  

 

          1,485

        Total current assets

 

 

 

         907,977

 

         22,185

Noncurrent assets

 

 

 

 

 

 

 

    Property, plant and equipment, net (Note 4)

 

      2,186,124

 

          4,630

    Patents and licenses, net (Note 5)

 

 

      2,097,625

 

               -  

    Assignment agreement - MesoCoat

 

 

         250,000

 

       250,000

    Investment deposit on MesoCoat investment

 

                 -  

 

    2,050,000

    Investment in minority interest - MesoCoat (Note 6)

 

                 -  

 

       858,418

    Investment in minority interest - Powdermet (Note 6)

 

      1,767,705

 

    1,721,656

    Goodwill

 

 

 

 

      4,335,646

 

               -  

    Finance fees, net

 

 

 

 

            3,315

 

               -  

        Total Assets

 

 

 

$

   11,548,392

$

   4,906,889

 

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities

 

 

 

 

 

 

 

    Accounts payable

 

 

 

$

      515,860

$

     202,017

    Accounts payable - related parties

 

 

         116,768

 

         79,214

    Capital leases - current portion

 

 

          13,222

 

               -  

    Loans payable (Note 8)

 

 

 

         379,328

 

         70,600

    Accrued interest - loans payable (Note 8)

 

         121,407

 

         41,532

    Accrued liabilities

 

 

 

 

         245,099

 

       139,689

        Total current liabilities

 

 

 

      1,391,684

 

       533,052

Noncurrent liabilities

 

 

 

 

 

 

 

    Loans payable, net of discounts of $1,110,863 (Note 8)

 

      3,927,633

 

    1,400,914

    Capital leases - noncurrent portion

 

 

          26,298

 

               -  

        Total liabilities

 

 

 

 

      5,345,615

 

    1,933,966

Commitments and contingencies

 

 

 

 

 

Stockholders' equity (Note 9)

 

 

 

 

 

 

    Preferred stock, $0.0001 par value, 50,000,000 shares

 

 

 

 

        authorized, none issued and outstanding

 

                   -

 

                 -

    Common stock, par value $0.0001, 2,500,000,000 shares       

        authorized, 59,377,425 issued and outstanding – August

        31, 2011, 59,247,425 issued and outstanding May 31, 2011

 

5,937

 

5,924

    Paid-in capital

 

 

 

 

      9,330,907

 

    8,330,530

    Subscription receivable

 

 

 

                   -

 

     (165,465)

    Contributed capital

 

 

 

            5,050

 

          5,050

    Accumulated deficit during the development stage

 

            4,553,248

 

   (5,203,116)

 

 

 

      4,788,646

 

    2,972,923

    Non-controlling interest

 

 

 

      1,414,131

 

               -  

        Total stockholders' equity

 

 

 

      6,202,777

 

    2,972,923

        Total liabilities and stockholders' equity

$

   11,548,392

$

   4,906,889

 

See accompanying notes to financial statements.

5


 

ABAKAN, INC.

(Formerly known as Waste to Energy Group, Inc.)

(A DEVELOPMENT STAGE ENTERPRISE)

UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative  amounts

 

 

 

 

 

 

 

 from development

 

 

 

 

 

 

 

stage activities

 

 

 

For the three months ended

 

June 27, 2006

 

 

 

August 31,

 

(Inception) to

 

 

 

2011

 

2010

 

August 31, 2011

Revenues

 

 

 

 

 

 

 

Commercial

$

                6,177

$

                         -  

$

                        6,177

Contract and grants

 

              298,114

 

                           -  

 

                       298,114

Other income

 

                44,097

 

                           -  

 

                         45,693

 

 

 

              348,388

 

                           -  

 

                       349,984

 

 

 

 

 

 

 

 

Cost of Revenues

 

              303,332

 

                           -  

 

                       303,332

Gross profit

 

                45,056

 

                           -  

 

                         46,652

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

    General and administrative

 

 

 

 

 

 

General and administrative

 

              106,205

 

                   29,458

 

                       376,171

Professional fees

 

                74,761

 

                   58,891

 

                       397,819

Professional fees - related parties

                15,000

 

                   15,000

 

                       120,000

Consulting

 

              225,372

 

                 105,045

 

                    1,001,218

Consulting - related parties

 

                76,577

 

                 116,600

 

                    1,009,977

Payroll and benefits expense

 

              137,607

 

                   24,557

 

                       394,476

Depreciation and amortization

                82,059

 

                     1,378

 

                       111,285

Impairment of asset

 

                         -

 

                             -

 

                       180,000

    Stock expense on note conversion

                         -

 

                             -

 

                       337,660

    Stock options expense

 

              338,517

 

                 169,024

 

                    1,616,269

        Total expenses

 

           1,056,098

 

                 519,953

 

                    5,544,875

 

 

 

 

 

 

 

 

Loss from operations

 

         (1,011,042)

 

               (519,953)

 

                  (5,498,223)

 

 

 

 

 

 

 

 

Other (expense) income

 

 

 

 

 

 

    Interest expense:

 

 

 

 

 

 

Interest - loans

 

              (35,580)

 

                   (4,006)

 

                       (88,208)

Interest - related parties

 

                         -

 

                             -

 

                         (5,442)

Liquidated damages

 

                         -

 

                             -

 

                     (250,000)

         Amortization of discount on debt

            (123,535)

 

                             -

 

                     (261,025)

        Total interest expense

 

            (159,115)

 

                   (4,006)

 

                     (604,675)

 

 

 

 

 

 

 

 

    Interest income

 

                     147

 

                        861

 

                           4,276

    Loss on debt settlement

 

                       -  

 

                           -  

 

                         (5,257)

    Gain on debt settlement

 

                       -  

 

                           -  

 

                       200,709

    Unrealized gain on MesoCoat acquisition

           1,764,345

 

                           -  

 

                    1,764,345

    Equity in Powdermet income

 

                46,049

 

                           -  

 

                       117,705

    Equity in MesoCoat loss

 

              (44,408)

 

               (122,015)

 

                     (586,020)

    Non-controlling interest in MesoCoat loss

                53,892

 

                           -  

 

                         53,892

Loss before provision for income taxes

              649,868

 

               (645,113)

 

                  (4,553,248)

 

 

 

 

 

 

 

 

    Provision for income taxes

 

                       -  

 

                           -  

 

                                 -  

Net profit/ (loss)

$

            649,868

$

            (645,113)

$

                (4,553,248)

Net profit/ (loss) per share - basic

$

                  0.01

$

                   (0.01)

 

 

Net profit/ (loss) per share - diluted

$

                  0.01

$

                  (0.01)

 

 

 

 

 

 

 

 

 

 

Weighted average number of common

 

 

 

 

 

  shares outstanding - basic

 

         59,330,468

 

            55,115,000

 

 

Weighted average number of common

 

 

 

 

 

  shares outstanding - diluted

 

         67,485,701

 

            55,115,000

 

 

 

See accompanying notes to financial statements.

 

 

6


 

ABAKAN, INC.

(Formerly known as Waste to Energy Group, Inc.)

(A DEVELOPMENT STAGE ENTERPRISE)

UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

 

 

 

 

 

Cumulative

 

 

 

 

 

 

 

 

 

 amounts from

 

 

 

 

 

 

 

 

 

development stage

 

 

 

 

 

For the three months ended

 

activities June 27,

 

 

 

 

 

August 31,

 

2006 (Inception) to

 

 

 

 

 

2011

 

2010

 

August 31, 2011

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM DEVELOPMENT STAGE ACTIVITIES

 

 

 

 

         Net profit/ (loss) from development stage activities                $

      649,868

$

      (645,113)

$

           (4,553,248)

        Adjustments to reconcile net profit/ (loss) to net

 

 

 

 

 

 

             cash provided by (used in) development stage activities:

 

 

 

 

 

Depreciation and amortization

 

           82,059

 

              1,378

 

                  111,285

 

Amortization of discount on debt

 

         123,535

 

                      -

 

                  261,025

 

Amortization of deferred financing fees

 

                292

 

                      -

 

                         292

 

Stock options expense

 

 

         338,517

 

          169,024

 

               1,616,269

 

Stock expense from note conversion

 

                     -

 

                      -

 

                  337,660

 

Stock issued for services

 

 

           76,000

 

                      -

 

                  597,401

 

Equity in investee loss

 

 

           44,408

 

          122,015

 

                  514,365

 

Equity in investee profit

 

 

          (46,049)

 

                      -

 

                  (46,049)

 

Non-controlling interest profit

 

          (53,892)

 

                      -

 

                  (53,892)

 

Unrealized gain on MesoCoat acquisition

 

      (1,764,345)

 

                      -

 

              (1,764,345)

        Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

           44,839

 

                      -

 

                    44,839

 

Notes receivable - related parties

 

                     -

 

              4,000

 

                    (4,500)

 

Prepaid expenses

 

 

           10,023

 

            12,098

 

                  (20,330)

 

Prepaid expenses - related parties

 

             1,485

 

                      -

 

                    14,152

 

Accounts payable

 

 

           45,447

 

            15,692

 

                  385,933

 

Accounts payable - related parties

 

           37,554

 

            30,917

 

                  199,499

 

Accrued interest - related parties

 

                     -

 

                      -

 

                      2,664

 

Accrued interest - loans payable

 

           35,525

 

              4,006

 

                    89,968

 

Accrued liabilities

 

 

           39,865

 

                      -

 

                  112,293

 

Waste to Energy Group Inc.

 

                     -

 

                      -

 

                  180,000

        Total adjustments

 

 

 

      (984,392)

 

          359,130

 

               2,578,874

 

 NET CASH FLOW PROVIDED BY (USED IN)             DEVELOPMENT STAGE ACTIVITES

     

(334,524)

 

        

(285,983)

 

             

 (1,974,374)

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

Purchase of furniture, computer equipment and website

        (288,993)

 

                (917)

 

                (322,849)

 

MesoCoat - minority interest, net of cash assumed in business combination

 

        (307,000)

 

                      -

 

             (3,142,380)

 

Powdermet - minority interest

 

                     -

 

                      -

 

             (1,650,000)

 

Capitalized patents and licenses

 

            (2,195)

 

                      -

 

                (102,195)

 

Waste to Energy Group Inc.

 

                     -

 

                      -

 

                (180,000)

 

 

 

 

 

 

 

 

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

     16,462

 

                (917)

 

             (5,397,424)

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

Proceeds from sale of common stock

 

         245,465

 

                      -

 

               4,421,606

 

Proceeds from loans payable

 

         846,665

 

          460,769

 

               3,618,467

 

Proceeds from loans payable - related parties

                     -

 

                      -

 

                    79,680

 

Payments on loans payable - related parties

                     -

 

                      -

 

                    21,063

 

Repayments of capital leases

 

            (3,387)

 

                      -

 

                    (3,387)

 

Proceeds from capital contributed

 

                     -

 

                      -

 

                      5,050

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

      1,088,744

 

          460,769

 

               8,142,480

      

NET INCREASE (DECREASE)  IN CASH AND CASH

    EQUIVALENTS

         770,682

 

          173,869

 

                  770,682

 

CASH AND CASH EQUIVALENTS, BEGINNING OF

    PERIOD

                   -  

 

            40,564

 

                              -

 

CASH AND CASH EQUIVALENTS, END OF PERIOD     $

          770,682

$

       214,433

$

            770,682

 

See accompanying notes to financial statements.

 

7


 

ABAKAN, INC.

(Formerly known as Waste to Energy Group, Inc.)

(A DEVELOPMENT STAGE ENTERPRISE)

UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

 

 

 

 

 

Cumulative

 

 

 

 

 

 

 

 

 

 amounts from

 

 

 

 

 

 

 

 

 

development stage

 

 

 

 

 

 

 

 

 

activities

 

 

 

 

 

For the three months ended

 

June 27, 2006

 

 

 

 

 

August 31,

 

(Inception) to

Continued

 

 

 

2011

 

2010

 

August 31, 2011

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosures:

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

                -  

$

                  -  

$

                          -  

 

Cash paid for interest

 

$

                 -  

$

                  -  

$

                       964

 

 

 

 

 

 

 

 

 

 

Supplemental Non-cash Disclosures:

 

 

 

 

 

 

 

      Notes and accounts payable converted to stock

 

 

 

 

 

 

 

Accounts payable - related parties

$

                 -  

$

         (64,011)

$

             (205,971)

 

Loans payable

 

 

 

                   -  

 

           (25,000)

 

                (650,169)

 

Accrued interest

 

 

                   -  

 

                    -  

 

                    (4,331)

 

Notes payable - related parties

 

                   -  

 

           (99,515)

 

                  (99,515)

 

Accrued interest - related parties

 

                   -  

 

             (9,724)

 

                    (9,724)

 

Common stock

 

 

                   -  

 

          200,000

 

                  974,460

 

Subscription payable

 

 

                   -  

 

                    -  

 

                    (3,000)

 

Subscription receivable

 

 

                   -  

 

             (1,750)

 

                    (1,750)

 

 

 

 

$

                 -  

$

                   -

$

                         -  

      Stock issued for assignment agreement - MesoCoat

 

 

 

 

 

 

Assignment agreement - MesoCoat

$

                 -  

$

                  -  

$

              (150,000)

 

Common stock

 

 

                   -   

 

                    -  

 

                  150,000

 

 

 

 

$

                 -  

$

                  -  

$

                          -  

      Non-cash write off of balances

 

 

 

 

 

 

 

 

Accounts payable - related parties

$

                 -  

$

                  -  

$

                  52,030

 

Loans payable

 

 

 

                   -  

 

                    -  

 

                       (156)

 

Accrued interest

 

 

                   -  

 

                    -  

 

                       (553)

 

Notes payable - related parties

 

                   -  

 

                    -  

 

                  (52,260)

 

Accrued interest - related parties

 

                   -  

 

                    -  

 

                       (811)

 

Subscription receivable

 

 

                   -  

 

                    -  

 

                      1,750

 

 

 

 

$

                 -  

$

                  -  

$

                         -  

      Beneficial conversion valuation

 

 

 

 

 

 

 

 

Additional paid-in capital

 

$

       505,873

$

                  -  

$

            1,241,449

 

Discount on convertible debts

 

        (505,873)

 

                    -  

 

             (1,241,449)

 

 

 

 

$

                   -

$

                  -  

$

                            -

      Controlling interest purchase - MesoCoat

 

 

 

 

 

 

 

Accounts receivable

 

$

       171,457

$

                 -  

$

                171,457

 

Property and equipment, net

 

      1,899,598

 

                    -  

 

               1,899,598

 

Patents and licenses, net

 

 

      2,170,391

 

                    -  

 

               2,170,391

 

Deferred financing fees

 

 

             3,607

 

                    -  

 

                      3,607

 

     Total assets

 

 

      4,245,053

 

                    -  

 

               4,245,053

 

Accounts payable

 

 

        (268,398)

 

                    -  

 

                (268,398)

 

Capital leases

 

 

 

          (42,906)

 

                    -  

 

                  (42,906)

 

Loans Payable and accrued interest

 

     (2,415,469)

 

                    -  

 

             (2,415,469)

 

Other accrued liabilities

 

 

          (65,545)

 

                    -  

 

                  (65,545)

 

    Total liabilities

 

 

     (2,792,318)

 

                    -  

 

             (2,792,318)

 

  Net assets

 

 

 

      1,452,735

 

                    -  

 

               1,452,735

 

Noncontrolling interest equity

 

     (1,468,023)

 

                    -  

 

             (1,468,023)

 

Goodwill

 

 

 

      4,335,646

 

                    -  

 

               4,335,646

 

Investment in MesoCoat

 

 

     (1,849,665)

 

                    -  

 

             (1,849,665)

 

   MesoCoat net assets received

$

    2,470,694

$

                  -  

$

             2,470,694

 

See accompanying notes to financial statements.

 

 

8


 

NOTE 1 – BUSINESS

 

Your Digital Memories, Inc. was incorporated in the state of Nevada on June 27, 2006.

 

Waste to Energy Group Inc., a wholly-owned subsidiary of Your Digital Memories Inc., was incorporated in the state of Nevada on August 13, 2008. Waste to Energy Group Inc. and Your Digital Memories Inc. entered into an Agreement and Plan of Merger on August 14, 2008. The board of directors of Waste to Energy Group Inc. and Your Digital Memories Inc. deemed it advisable and in the best interest of their respective companies and shareholders that Waste to Energy be merged with and into Your Digital Memories Inc. with Your Digital Memories Inc. remaining as the surviving corporation under the name Waste to Energy Group Inc.

 

Abakan Inc., a wholly-owned subsidiary of Waste to Energy Group Inc., was incorporated in the state of Nevada on November 6, 2009. Abakan Inc. and Waste to Energy Group Inc. entered into an Agreement and Plan of Merger on November 6, 2009. The board of directors of Abakan Inc. and Waste to Energy Group Inc. deemed it advisable and in the best interest of their respective companies and shareholders that Abakan Inc. be merged with and into Waste to Energy Group Inc. with Waste to Energy Group Inc. remaining as the surviving corporation under the name “Abakan Inc.”

 

Unless the context indicates otherwise, all references herein to “Abakan,” “we,” “us,” and “our” refer to Abakan Inc. and its consolidated subsidiaries. Abakan is in the development stage as defined under FASB ASC 915-10, "Development Stage Entities."

 

On December 10, 2009 Abakan purchased a thirty-four percent (34%) interest in MesoCoat, Inc. ("MesoCoat"), and on July 13, 2011 purchased an additional seventeen percent (17%), for an aggregate total of fifty-one percent (51%) of the outstanding stock of MesoCoat.

 

MesoCoat (formerly “Powdermet Coating Technologies, Inc.”) was incorporated in Nevada as a wholly owned subsidiary of Powdermet, Inc. ("Powdermet") on May 18, 2007. Operations began in 2008 and effective March 31, 2008 it was renamed as MesoCoat. Future success of operations is subject to several technical hurdles and risk factors, including satisfactory product development, regulatory approval and market acceptance of MesoCoat’s products and its continued ability to obtain future funding. MesoCoat is currently in the development stage, as operations consist primarily of research and development expenditures, and revenues from planned principal operations that have not yet been realized. MesoCoat has invested heavily in intellectual property, machinery and equipment to initiate the research and development of its core technology. Currently, MesoCoat’s revenue consists almost entirely of government grants and cooperative reimbursement agreements.

 

On March 21, 2011, Abakan purchased 596,813 shares of Powdermet from Kennametal, Inc., an unrelated party, equal to a fully diluted 41% interest in Powdermet.

 

Powdermet was formed in 1996 as an Ohio corporation and has since developed a product platform of advanced materials solutions derived from nano-engineered particle agglomerate technology and derived hierarchically structured materials.

 

On June 8, 2011, Abakan formed a wholly owned subsidiary company named, AMP Distributors, Ltd. (“AMP Distributors”), a Grand Cayman corporation. We formed AMP Distributors to distribute MesoCoat products to consumer markets.

9


 

NOTE 1 – BUSINESS - continued

 

Abakan’s plan of operation is to acquire interests in early stage companies. Since those firms are typically pre-commercialization, it is anticipated that each firm Abakan decides to acquire will need successive rounds of financing to fund research & development, lengthy qualification periods, sales and marketing efforts. However, this may not necessarily be the case if a company which we acquire has a new technology with existing sales or we agree to a licensing strategy.

 

Abakan’s acquisition strategy is to make sure it negotiates upfront future ownership based on a series of value creating steps whereby we have the right to continue or discontinue investing based on an investee meeting those milestone steps. Our approach allows management to forecast potential financing needs of any given firm in stages to plan for present and future fundraising efforts.  Further, our approach also enables Abakan to hedge its investing if it feels a company is not performing up to the goals that were anticipated during the negotiating process. By taking this approach, each investee company is expected to reach certain operating milestones prior to receiving the next round of fundraising or us exercising our next round of acquisition.

 


NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 

Consolidation Policy

 

The accompanying August 31, 2011 financial statements include Abakan’s accounts and the accounts of its’ subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

 

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, 2011, and the results of its operations and cash flows for the three months ended August 31, 2011, have been made.  Operating results for the three months ended August 31, 2011 are not necessarily indicative of the results that may be expected for the year ended May 31, 2012.

 

These condensed consolidated financial statements should be read in conjunction with the financial statements and notes for the year ended May 31, 2011, thereto contained in Abakan’s ’s Form 10-K/A.

 

Non-Controlling Interest

 

Non-controlling interest represents the minority members’ proportionate share of the equity of MesoCoat, Inc.  The Parent’s controlling interest in MesoCoat requires that its operations be included in the unaudited condensed consolidated financial statements.  The equity interest of MesoCoat that is not owned by the Parent is shown as non-controlling interest in the unaudited condensed consolidated financial statements.

 

10


 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Development Stage Enterprise

At August 31, 2011, Abakan’s business operations had not fully developed and it is highly dependent upon funding and therefore is considered a development stage enterprise.

 

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, 2011 management has determined that no allowance for doubtful accounts is required.

 

Property, plant, and equipment

 

Property, plant, and equipment are stated at cost less accumulated depreciation and amortization. Maintenance and repairs are charged to operations as incurred. Depreciation and amortization are based on the straight-line method over the estimated useful lives of the related assets. When assets are retired or otherwise disposed of, the cost and accumulated depreciation and amortization are removed from the accounts, and any resulting gain or loss is reflected in operations in the period realized.

 

Asset construction in progress

 

 Construction in progress assets, represent assets that are in process of construction and rehabilitation in order to bring them to operational status. All costs are captured in a separate Construction in Progress account, and are included in the “Property, plant, and Equipment – net” amounts, and when the asset is ready to enter service, the total costs are capitalized and depreciation commences per the schedule below.

 

Depreciation

Depreciation

 

Depreciation is computed on the straight-line method net of salvage value with useful lives as follows:

                       

                        Computer equipment and software                  3 - 5 years

            Office furniture and equipment                                   5 - 7 years

            Machinery and equipment                               7 - 10 years

                        Leasehold improvements                                 balance of lease term

 

Patent and technology licenses

 

Patent costs are recorded at the cost to obtain the patent and are amortized on a straight-line basis over their estimated useful lives up to 20 years, beginning when the patent is secured by Abakan. License costs are recorded at the cost to obtain the license and are amortized on a straight-line basis over effective term of the license, up to 15 years.

 

 

 

11


 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Goodwill

 

In accordance with GAAP, goodwill in the amount of $4,355,646 related to the acquisition of MescoCoat will be evaluated for impairment on an annual basis starting fiscal year ending May 31, 2013.

 

Revenue Recognition


Abakan recognizes revenue when there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price if fixed or determinable, and collectability is reasonably assured.

 

Grant Revenue

 

Revenue from grants is generally recorded when earned as defined under the terms of the agreements. Each grant document sets the timing of amounts that are allowed to be billed and how to bill those amounts. We generally look at a two week time period to bill from and work on the incurred costs for the same time period and bill according to preset amounts that are allowed to be billed for per the grant documents. This is then billed through a government billing system, reviewed by the government department, and then payment is sent to us.

 

Research and development costs

 

Research and development costs are charged to expense as incurred and are included in operating expenses. Total research and development costs were $133,248 for the period ended August 31, 2011.

 

Advertising Expenses

 

Advertising costs are expensed as incurred. Advertising expenses are included in general and administrative expense in the accompanying statement of operations.

 

Shipping and Handling Costs

 

Abakan’s shipping and handling costs are included in cost of sales for all periods presented.

 

Use of Estimates in the Preparation of Financial Statements

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.  Actual results could differ from those estimates and assumptions.

 

 

 

 

 

 

12


 

NOTE 3 – GOING CONCERN
 

The accompanying financial statements have been prepared assuming that Abakan will continue as a going concern.  Abakan has net losses for the period of June 27, 2006 (inception) to the period ended August 31, 2011, of $4,553,248, and a working capital deficit of $483,707.  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.

 

 

NOTE 4 – PROPERTY, PLANT, AND EQUIPMENT

 

Property, plant and equipment consisted of the following:

 

 

August 31, 2011

May 31, 2011

Machinery and equipment

$                  313,472

$                        -

Construction in progress- assets

1,870,447

-

Computer equipment and office furniture

32,529

12,856

Leasehold Improvements

46,927

-

 

2,263,375

12,856

Less accumulated depreciation and amortization

 

(77,251)

 

(8,266)

 

2,186,124

4,630

 

Depreciation and amortization expense was $7,098 and $1,378 for the three months ended August 31, 2011 and 2010, respectively. On July 13, 2011 we completed our second purchase of ownership in Mesocoat, Inc, as more fully discussed in Note 7. Because of consolidation of Mesocoat’s accounting with ours we gained $1,961,526 of property and equipment, accumulated depreciation of $61,928.

 

 

NOTE 5 - PATENTS AND LICENSES

 

Patents and licenses consist of the following:

 

 

 

 

 

Patents

$

    156,715

 

Licenses

 

2,079,529

 

 

 

2,236,244

 

Less accumulated amortization

 

 (138,619)

 

$

2,097,625

 

Amortization expense was $74,961 for the three months ended August 31, 2011. In the three months ended August 31, 2011, we have capitalized an additional $2,195 on patents and licenses, and have begun amortizing those according to our policy.

13


 

NOTE 6 - INVESTMENT IN NON-CONTROLLING INTEREST

 

MesoCoat, Inc.

 

On July 13, 2011, we have acquired an additional 86,156 shares of common stock from MesoCoat, representing seventeen percent (17%) of their outstanding common stock, in exchange for $2,800,000 in cash. Accordingly, beginning on July 13, 2011 and for subsequent periods, since our ownership has increased to 51%, and we can affect control of the MesoCoat, we will consolidate the financials of MesoCoat into ours.

 

We have analyzed our investment for the period of June 1 through July 12, 2011 in accordance of “Investments – Equity Method and Joint Ventures” (ASC 323), and concluded that our 34% minority interest investment did give us significant influence over MesoCoat’s business actions, board of directors, or its management, and therefore we did 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.

 

December 10, 2009, initial investment

 $     1,400,030

Equity in loss for year ended May 31, 2010

         (191,665)

Investment balance, May 31, 2010

 $     1,208,365

Equity in loss for year ended May 31, 2011

         (349,947)

Investment balance, May 31, 2011

 $        858,418

Equity in loss for period ended July 12, 2011

          (44,408)

Investment balance, July 12, 2011

    $         814,010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14


 

NOTE 6 - INVESTMENT IN NON-CONTROLLING INTEREST - continued

 

Below is a table with summary financial results of operations and financial position of MesoCoat:

 

MesoCoat Inc.

UNAUDITED

 

 

For the period June 1 -

July 12, 2011

 

For the three months ended August 31, 2010

Equity Percentage

34%

 

34%

Condensed income statement information:

 

 

 

Total revenues

 $         245,389

 

 $        326,743

Total cost of revenues

           229,641

 

           385,786

Gross margin

         15,748

 

         (59,314)

Total expenses

         146,359

 

         299,555

Net loss

 $      (130,611)

 

 $     (358,869)

Abakan's equity in net loss

 $        (44,408)

 

 $     (122,015)

 

 

 

 

For the period June 1 -

July 12, 2011

 

 

For the year ended May 31, 2011

Condensed balance sheet information:

 

 

 

Total current assets

 $      1,199,061

 

 $      980,635

Total non-current assets

         4,073,596

 

         4,019,646

Total assets

 $      5,272,657

 

 $   5,000,281

Total current liabilities

 $         691,771

 

 $   1,005,334

Total non-current liabilities

         2,100,547

 

           2,104,092

Total equity

         2,480,339

 

         1,890,855

Total liabilities and equity

 $      5,272,657

 

 $   5,000,281

 

 

Powdermet, Inc.

 

We have analyzed our investment in accordance of “Investments – Equity Method and Joint Ventures” (ASC 323), and concluded that when the stock purchase agreement is completed our 41% minority interest investment does give us significant influence over Powdermet’s business actions, board of directors, or its management, and therefore we will account for our investment using the Equity Method. The table below reconciles our investment amount and equity method amounts to the amount on the accompanying balance sheet.

 

March 21, 2011, initial investment

 $   1,650,000

Equity in profit for period of March 21

through May 31, 2011

 

          71,656

Investment balance, May 31, 2011

 $   1,721,656

Equity in profit for period ended August 31, 2011

 

          46,049

Investment balance, August 31, 2011

 $   1,767,705

 

 

 

15


 

NOTE 6 - INVESTMENT IN NON-CONTROLLING INTEREST - continued

 

Below is a table with summary financial results of operations and financial position of Powdermet:

 

Powdermet Inc.

 

For the three months ended August 31, 2011

For the year ended

May 31, 2011

Equity Percentage

41%

41%

Condensed income statement

     information:

 

 

Total revenues

 $         580,664

 

Total cost of revenues

           216,847

 

Gross margin

           363,817

 

Total expenses

          251,502

 

Net profit

 $         112,315

 

Abakan's equity in net profit

 $          46,049

 

Condensed balance sheet information:

 

 

Total current assets

 $         637,178

 $         438,869

Total non-current assets

           787,360

           857,866

Total assets

 $      1,424,538

 $      1,296,735

Total current liabilities

 $         603,061

 $         648,351

Total non-current liabilities

           806,377

           745,599

Total equity

            15,100

            (97,215)

Total liabilities and equity

 $      1,424,538

 $      1,296,735

 

 

NOTE 7 - MATERIAL BUSINESS COMBINATION

 

On December 10, 2009, Abakan acquired 34% of the outstanding common shares of Mesocoat, Inc. (Mesocoat). On July 13, 2011, Abakan acquired 17% of the outstanding common shares of Mesocoat for an aggregate total of 51% of the outstanding common shares. The goodwill of $4,335,646 arising from the acquisition of a non-controlling interest consists largely of the excess fair value paid due to the added values associated with progress associated with ongoing research and development completed, values credited to the product and intellectual property portfolio owned by MesoCoat and scientific recognition over and above that recorded in relation to the credibility attached to government and university grants. Abakan believes that the MesoCoat acquisition is in line with its business plan and the amount paid will be supported on completion of independent valuations. None of the goodwill recognized is expected to be deductible for income tax purposes.

 

 

 

 

 

 

 

16


 

NOTE 7 - MATERIAL BUSINESS COMBINATION - continued

 

The following table summarizes the consideration paid for MesoCoat and the amounts of the estimated fair values of the identifiable assets acquired and liabilities assumed recognized at the acquisition date, as well as the fair value at the acquisition date of the non-controlling interest in Mesocoat at July 13, 2011:

 

Consideration:

 

     Cash paid for 17% equity

$  2,800,000

     Fair value of Abakan’s 34% equity interest in 

     MesoCoat held before business combination

 

2,578,355

 

$  5,378,355

Recognized amounts of identifiable assets acquired and liabilities assumed:

Financial assets

$      1,229,454

Other asset

3,607

Property, plant, and equipment

1,899,598

Identifiable intangible assets

2,170,391

Financial liabilities

(2,792,318)

Liability arising from a contingency

                (0)

Total identifiable net assets

2,510,732

Non-controlling interest in MesoCoat

(1,468,023)

Goodwill

    4,335,646

 

$  5,378,355

 

The fair value of the financial assets acquired includes cash and cash equivalents and accounts receivables under with an aggregate fair value of $1,229,454.

 

The fair value of the acquired property, plant and equipment and identifiable intangible assets is provisional pending receipt of the final valuations for those assets.

 

The fair value of the non-controlling interest in MesoCoat was estimated by applying the negotiated share price per share and applying that to the outstanding shares of MesoCoat. This fair value measurement is based on significant inputs that are not observable in the market and, therefore, represents a Level 3 measurement as defined in FASB ASC 820. Key assumptions include (a) negotiated share price, (b) financial multiples of companies deemed to be similar to MesoCoat, and (d) adjustments because of the lack of control or lack of marketability that market participants would consider when estimating the fair value of the non-controlling interest in MesoCoat. This estimate is provisional pending receipt of the final valuation of the non-controlling interest.

 

Abakan recognized a gain of $1,764,345 as a result of reevaluating to fair value its 34% equity interest in MesoCoat held before the business combination. The gain is included in other income in Abakan’s income statement for the period ended August 31, 2011.

 

The following (unaudited) pro forma consolidated results of operations have been prepared as if the acquisition of MesoCoat had occurred at June 1, 2011:

 

 

 

17


 

NOTE 7 - MATERIAL BUSINESS COMBINATION - continued

 

UNAUDITED PROFORMA CONSOLIDATED

CONDENSED STATEMENTS OF OPERATIONS

 

 

 

 

 

For the three month period ended

 

 

 

 

 

June 1 - August 31,

 

 

 

 

 

2011

 

2010

Revenues

 

 

 

 

 

 

 

Commercial

 

 

 

$           28,359

 

$               10,571

Contract and grants

 

 

 

503,634

 

279,275

Other income

 

 

 

61,784

 

7,576

 Total revenues

 

 

 

593,777

 

297,422

Cost of Revenues

 

 

 

532,973

 

404,220

Gross profit

 

 

 

60,804

 

(106,798)

Expenses

 

 

 

 

 

 

 

    General and administrative

 

 

 

 

 

 

General and administrative

 

 

 

174,695

 

220,059

Professional fees

 

 

 

74,761

 

58,891

Professional fees - related 

parties

 

 

15,000

 

15,000

Consulting

 

 

 

252,647

 

105,045

Consulting - related parties

 

 

 

76,577

 

116,600

Payroll and benefits expense

 

 

176,818

 

107,606

Depreciation and amortization

 

 

86,702

 

10,189

    Stock options expense

 

 

 

338,517

 

169,024

        Total expenses

 

 

 

1,195,717

 

802,414

Loss from operations

 

 

 

(1,134,913)

 

(909,212)

Other (expense) income

 

 

 

 

 

 

    Interest expense:

 

 

 

 

 

 

Interest - loans

 

 

 

(37,870)

 

(9,676)

         Amortization of discount on debt

 

 

(127,984)

 

(13,348)

        Total interest expense

 

 

 

(165,854)

 

(23,024)

    Interest income

 

 

 

147

 

861

    Unrealized gain on MesoCoat acquisition

 

 

1,764,345

 

-

    Equity in Powdermet income

 

 

 

46,049

 

-

    Equity in MesoCoat loss

 

 

 

(44,408)

 

(122,015)

    Non-controlling interest in MesoCoat loss

 

 

53,892

 

-

Loss before provision for income taxes

 

 

519,258

 

(1,053,391)

    Provision for income taxes

 

 

 

-

 

-

Net profit/ (loss)

 

 

 

$         519,258

 

$         (1,053,391)

Net profit/ (loss) per share - basic

 

 

 $              0.01

 

 $                 (0.02)

Net profit/ (loss) per share - diluted

 

 

 $              0.01

 

 $                 (0.02)

 

The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results.

 

 

18


 

 NOTE 8 – NOTES PAYABLE

 

As of August 31, 2011 and May 31, 2011, the loans payable balance comprised of:

 

Description

August 31, 2011

 

May 31, 2011

 

 

 

 

Convertible demand note to an unrelated entity bearing 5% interest per annum which matures on April 13, 2013. The note is shown net of a discount of $141,517 attributable to the beneficial conversion feature.

 $      358,483

 

 $       337,256  

Convertible demand note to an unrelated entity bearing 5% interest per annum which matures on March 17, 2013. The note is shown net of a discount of $376,841 attributable to the beneficial conversion feature.

  1,123,159

 

      1,063,658  

Convertible demand note to an unrelated entity bearing 5% interest per annum which matures on June 7, 2013. The note is shown net of a discount of $94,555 attributable to the beneficial conversion feature.

  105,445

 

              -  

Convertible demand note to an unrelated entity bearing 5% interest per annum which matures on July 14, 2013. The note is shown net of a discount of $301,764 attributable to the beneficial conversion feature.

  198,237

 

              -  

Convertible demand note to an unrelated entity bearing 5% interest per annum which matures on August 29, 2013. The note is shown net of a discount of $75,646 attributable to the beneficial conversion feature.

  71,019

 

              -  

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

           600 

 

            600  

Convertible demand note to an unrelated entity bearing 7.5% interest per annum which matures on July 22, 2013. The note is shown net of a discount of $89,579 attributable to the beneficial conversion feature.

  308,728

 

              -  

Convertible demand note to an unrelated entity bearing 7.5% imputed interest per annum which matures on July 10, 2018. The note is shown net of a discount of $30,961 attributable to the beneficial conversion feature.

  71,290

 

              -  

Capital leases payable to various vendors expiring in various years through May 2013; collateralized by certain equipment with a cost of $71,127.

39,520

 

-

Uncollateralized demand note to an unrelated entity for royalties

           2,000,000 

 

            -  

 

 $   4,346,481

 

 $   1,471,514

Less current liabilities

         392,550

 

       70,600

Total long term liabilities

$   3,953,931

 

$   1,400,914

 

 

 

 

 

19


 

NOTE 8 – NOTES PAYABLE - continued

 

Abakan also owed $121,407 and $41,532 in accrued interest for the above notes as of August 31, 2011 and May 31, 2011, respectively.

 

As of August 31, 2011 and May 31, 2011, Abakan had no restrictive covenants attached to any of the above referenced notes.

 

Future maturity of our notes payable is presented in the table below:

 

For the years ended May 31,

 

2012

$        87,811

2013

3,267,621

2014 and beyond

2,102,250

 

$   5,457,682

 

Convertible Debentures

 

On June 7, July 14, and August 29, 2011 we signed three convertible debentures for a total of $846,665, due June 7, July 14 and August 29, 2013, respectively. As of August 31, 2011, we received all of the proceeds from these debentures. The notes bear an interest rate of 5% per annum, if any amounts are not paid when due the interest rate will adjust and will be 10% per annum until paid.

 

The notes have a provision for conversion of the outstanding amounts owed  into conversion units for $1.00 per unit; units consists of one share of our common stock and one-half share common stock warrant to purchase shares of stock for $1.50 per share, with an expiration date of two years from the conversion date. We have analyzed these detachable warrants in accordance with FASB ASC 470-20-25-4, Debt with conversion options, and have determined that they have a beneficial conversion feature. Accordingly we have valued these notes using the Black-Scholes method and have arrived at an aggregate total $505,873, of relative fair value that was recorded as additional paid-in capital and has been recorded as a discount on debt against the corresponding convertible note payable. In our valuation of the warrant value we used the following terms:

 

 

June 7, 2011

July 14 2011

August 29, 2011

Expected volatility (based on

     historical volatility)

170.29%

170.29%

170.29%

Expected dividends

0.00

0.00

0.00

Expected term in years

2.0

2.0

2.0

Risk-free rate

0.39%

0.38%

0.20%

 

In accordance with FASB ASC 470-20-55-32, we are amortizing this amount on the straight-line method over the life of the notes payable of 24 months. For the three months ended August 31, 2011, we have recorded $33,907 in amortization of discount on debt and are reflected as a component of interest expense in our statement of operations. The remaining aggregate total of $471,966 will be amortized over the remaining life of the notes.

 

20


 

NOTE 9 – STOCKHOLDERS' EQUITY

Common Shares – Authorized

 

Abakan has 2,500,000,000 common shares authorized at a par value of $0.0001 per share and 50,000,000 shares of preferred stock, par value $0.0001 per share.  All common stock shares have equal voting rights, are non-assessable and have one vote per share.  Voting rights are not cumulative and, therefore, the holders of more than 50% of the common stock could, if they choose to do so, elect all the directors of Abakan.

 

Common Stock Issuances

 

For the three months ended August 31, 2011, we issued the following shares:

 

Private placements

 

On June 6, 2011, we closed a private placement for $20,000, or 20,000 units consisting of one share of our restricted common stock and one-half share common stock warrant to purchase shares of our common stock, with a purchase price of $1.50 per share and an expiration date of two years from the closing. In connection with this placement we had no offering costs for a net of $20,000.

 

On June 10, 2011, we closed a private placement for $30,000, or 30,000 units consisting of one share of our restricted common stock and one-half share common stock warrant to purchase shares of our common stock, with a purchase price of $1.50 per share and an expiration date of two years from the closing. In connection with this placement we had no offering costs for a net of $30,000.

 

On July 6, 2011, we closed a private placement for $30,000, or 30,000 units consisting of one share of our restricted common stock and one-half share common stock warrant to purchase shares of our common stock, with a purchase price of $1.50 per share and an expiration date of two years from the closing. In connection with this placement we had no offering costs for a net of $30,000.

 

Share based compensation

 

On July 29, 2011, Abakan issued 50,000 shares of our common stock for services performed valued at $76,000.

 

 

 

 

 

 

 

 

 

 

 

21


 

NOTE 9 – STOCKHOLDERS' EQUITY - continued

Common Stock Warrants

 

In connection with the above private placements we valued the common stock warrants granted during the period ended August 31, 2011, using the Black-Scholes model with the following assumptions: 

 

 

June 6, 2011

June 10, 2011

July 6, 2011

Expected volatility (based on

     historical volatility)

170.29%

170.29%

170.29%

Expected dividends

0.00

0.00

0.00

Expected term in years

10

2.00

2.00

Risk-free rate

0.39%

0.41%

0.43%

 

The expected volatility assumption was based upon historical stock price volatility measured on a daily basis. The risk-free interest rate assumption is based upon U.S. Treasury bond interest rates appropriate for the term of the Abakan’s warrants. The dividend yield assumption is based on our history and expectation of dividend payments. All warrants are immediately exercisable upon granting, with the exception of the warrants connected with the convertible debentures (Note 8), which are immediately exercisable upon conversion of the debt.

 

A summary of the common stock warrants granted during the period ended August 31, 2011 and the year ended May 31, 2011 is presented below:

 

 

Number of Warrants

 

 

Number of Warrants

Balance at June 1, 2011

2,670,233

 

Balance at June 1, 2010

2,300,000

Granted

40,000

 

Granted

370,233

Exercised

-

 

Exercised

-

Forfeited or Expired

-

 

Forfeited or Expired

-

Balance at August 31, 2011

2,710,233

 

Balance at May 31, 2011

2,670,233

Exercisable at August 31, 2011

2,710,233

 

Exercisable at May 31, 2011

2,670,233

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

22


 

NOTE 10 – EARNINGS-PER-SHARE CALCULATION

 

Basic earnings per common share for the periods ended August 31, 2011 and 2010 are calculated by dividing net income by weighted-average common shares outstanding during the period. Diluted earnings per common share for the periods ended August 31, 2011 and 2010 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 ended August 31, 2011

For the three months ended August 31, 2010

Net earnings from operations

$          649,868

$       (645,113)

Weighted-average common shares

      59,330,468

      55,115,000


Effect of dilutive securities:

Warrants

         2,710,233

-

Options to purchase common stock

5,445,000

-

Dilutive potential common shares

67,485,701

55,115,000

 

 

 

Net earnings per share from operations:

 

 

         Basic

      $                 0.01

         $            (0.01)

         Diluted

 $                 0.01

       $            (0.01)

 

Dilutive potential common shares are calculated in accordance with the treasury stock method, which assumes that proceeds from the exercise of all warrants and options are used to repurchase common stock at market value. The amount of shares remaining after the proceeds are exhausted represents the potentially dilutive effect of the securities. The increasing number of warrants used in the calculation is a result of the increasing market value of 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

23


 

NOTE 11 – RELATED PARTY TRANSACTIONS

 

Due to the common control between Abakan and its related parties, Abakan is exposed to the potential that ownership risks and rewards could be transferred among the parties. In addition to related party transactions mentioned elsewhere, we have entered into the agreement below:

 

Consulting Agreements

 

On June 1, 2011, we entered into a consulting agreement commencing June 1, 2011, with an unrelated individual to provide business consulting. The terms of the consulting agreement are that the consultant will be paid $9,000 per month. We also agreed to reimburse the consultant for all reasonable business expenses incurred by her in the performance of her duties, and will be in effect until June 30, 2012.

 

 

NOTE 12 – STOCK – BASED COMPENSATION

 

2009 Stock Option Plan

 

Our board of directors adopted and approved our 2009 Stock option Plan (“Plan”) on December 14, 2009, which provides for the granting and issuance of up to 10 million shares of our common stock. On August 15, 2011, we granted 25,000 stock options to a consultant at an exercise price of $1.25 per share, and these options will expire ten years from the grant date, and will vest in equal one third parts on the anniversary of the option grant date. After these grants there will be 4,455,000 available for future grant.

 

Our board of directors administers our Plan, however, they may delegate this authority to a committee formed to perform the administration function of the Plan. The board of directors or a committee of the board has the authority to construe and interpret provisions of the Plan as well as to determine the terms of an award.  Our board of directors may amend or modify the Plan at any time.  However, no amendment or modification shall adversely affect the rights and obligations with respect to outstanding awards unless the holder consents to that amendment or modification.

 

The Plan permits us to grant Non-Statutory stock options to our employees, directors and consultants.  The options issued under this Plan are intended to be Non-Statutory Stock Options exempt from Code Section 409A.

 

The duration of a stock option granted under our Plan cannot exceed ten years.  The exercise price of an incentive stock option cannot be less than 100% of the fair market value of the common stock on the date of grant.

 

The Plan administrator determines the term of stock options granted under our Plan, up to a maximum of ten years, except in the case of certain events, as described below.  Unless the terms of an optionee's stock option agreement provide otherwise, if an optionee's relationship with us ceases for any reason other than disability or death, the optionee may exercise any vested options for a period of ninety days following the cessation of service.  If an optionee's service relationship with us ceases due to disability or death the optionee or a beneficiary may exercise any vested options for a period of 12 months in the event of disability or death. 

 

24


 

NOTE 12 – STOCK – BASED COMPENSATION - continued

 

2009 Stock Option Plan (continued)

 

Unless the Plan administrator provides otherwise, options generally are not transferable except by will, the laws of descent and distribution, or pursuant to a domestic relations order.  An optionee may designate a beneficiary, however, who may exercise the option following the optionee's death.

 

The value of employee and non-employee stock warrants granted during the three months ended August 31, 2011 was estimated using the Black-Scholes model with the following assumptions: 

 

 

August 15, 2011

Expected volatility (based on

     historical volatility)

170.29%

Expected dividends

0.00

Expected term in years

10

Risk-free rate

2.29%

 

The expected volatility assumption was based upon historical stock price volatility measured on a daily basis. The risk-free interest rate assumption is based upon U.S. Treasury bond interest rates appropriate for the term of the Abakan’s employee stock options. The dividend yield assumption is based on our history and expectation of dividend payments.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

25


 

NOTE 12 – STOCK – BASED COMPENSATION – continued

 

A summary of the options granted to employees and non-employees under the plan and changes during the years ended May 31, 2011 and the three months ended August 31, 2011 is presented below:

 

 

Number of Options

 

Weighted Average Exercise Price

Weighted Average Remaining Contractual Terms

(In Years)

 

Aggregate Intrinsic Value

Balance at June 1, 2010

 

3,150,000

$

 

0.64

 

 

 

Granted

2,370,000

 

0.87

 

 

 

Exercised

-

 

-                       

 

 

 

Forfeited or expired

(100,000)

 

0.60

 

 

 

Balance at May 31, 2011

5,420,000

$

0.75

 

9.00 years

$

185,000

Exercisable at May 31, 2011

983,240

$

0.63

 

9.00 years

$

--

Weighted average fair value of

options granted during the year

ended May 31, 2011

 

$

0.87

 

 

 

Balance at June 1, 2011

 

5,420,000

$

 

0.75

 

 

 

Granted

25,000

 

1.25

 

 

 

Exercised

-

 

-

 

 

 

Forfeited or expired

-

 

-

 

 

 

Balance at August 31, 2011

5,445,000

$

0.85

 

9.00 years

$

185,000

Exercisable at August 31, 2011

983,240

$

0.63

 

9.00 years

$

--

Weighted average fair value of options granted during the year ended August 31, 2011

 

$

1.25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26


 

NOTE 12 – STOCK – BASED COMPENSATION – continued

 

The following table summarizes information about employee stock options under the 2009 Plan outstanding at August 31, 2011:

 

Options Outstanding

Options Exercisable

 

Range of Exercise Price

 

Number Outstanding at August 31, 2011

 

Weighted Average Remaining Contractual Life

 

Weighted Average Exercise Price

 

Intrinsic Value

Number Exercisable at August 31, 2011

 

Weighted Average Exercise Price

 

Aggregate Intrinsic Value

$

0.60

 

2,700,000

 

8.00 Years

$

0.60

$

--

933,240

$

0.60

$

--

$

0.65

 

1,400,000

 

8.00 Years

$

0.65

$

120,000

--

$

0.00

$

--

$

0.75

 

100,000

 

9.00 Years

$

0.75

$

15,000

--

$

0.00

$

--

$

1.01

 

25,000

 

9.00 Years

$

1.01

$

--

--

$

0.00

$

--

$

1.02

 

650,000

 

10.0 Years

$

1.02

$

50,000

--

$

0.00

$

--

$

1.05

 

270,000

 

10.0 Years

$

1.05

$

--

50,000

$

1.01

$

--

$

1.25

 

50,000

 

10.0 Years

$

1.25

$

--

--

$

0.00

$

--

$

1.30

 

250,000

 

10.0 Years

$

1.30

$

--

--

$

0.00

$

--

 

 

 

5,445,000

 

9.0 Years

$

0.85

$

185,000

983,240

$

0.63

$

--

 

 

The total value of employee and non-employee stock options granted during the three months ended August 31, 2011 and 2010, was $30,553 and $129,734, respectively. During three months ended August 31, 2011 and 2010 Abakan recorded $338,517 and $169,024, respectively, in stock-based compensation expense relating to stock option grants.

 

2009 Stock Option Plan (continued)

 

 

At August 31, 2011 and 2010 there was $2,471,408 and $1,660,853, respectively, of total unrecognized compensation cost related to stock options granted under the plan.  That cost is expected to be recognized pro-rata through August 15, 2014. The following table represents the stock options expense for the each of the next four fiscal years ended May 31:

 

 

For years ended May 31,

 

Expense

 

 

 

2012

 

 $   995,203

2013

 

      1,084,035

2014

 

        390,060

2015

 

2,110

 

 

 $   2,471,408

 

 

 

 

 

27


 

NOTE 13 – COMMITMENTS

 

Leases

 

Abakan leases its office space in Miami on a month to month basis at a cost of $2,213 a month paid to Prosper Financial, Inc., a related party. Abakan is also committed to a non-cancellable operating lease for a vehicle that expires in March 2012.

 

MesoCoat subleases its research and development and laboratory space from Powdermet, a related party. The cost of the sub-lease to MesoCoat is $6,700 per month that expires on May 31, 2020.

 

MesoCoat also leases machinery and equipment under various capital lease arrangements, which expires through May 2013. These leases are included in long-term and short-term debt and the related assets have been capitalized. Total expense related to the operating leases was $12,375 for the period of July 13 through August 31, 2011. Interest expense for the leases for the period of July 13 through August 31, 2011 was $1,173.

 

Minimum annual rental commitments are as follows at August 31, 2011:

 

For the years ended May 31,

Capital Leases

Operating Leases

 

 

 

2012

$                       21,210

$                         61,490

2013

                         23,192

                           80,490

2014

                                   -

                           80,400

2015

                                   -

                           80,400

2016 and thereafter

                                   -

                         402,000

Total minimum lease payment

                       $44,402

$                       704,690

 

 

 

Less amount representing interest

                           4,883

 

Present value of net minimum capital lease payments

                        39,520

 

Less current maturities

                        13,222

 

Long-term obligations under capital leases

$                      26,298

 

 

 

NOTE 13 – RECENT ACCOUNTING PRONOUNCEMENTS

 

We have examined all recent accounting pronouncements and believe that none of them will have a material impact on the financial statements of Abakan.

 

 

NOTE 14– SUBSEQUENT EVENTS

In accordance with Accounting Standards Codification (ASC) topic 855-10 “Subsequent Events”, the Company has evaluated subsequent events through October 24, 2011, the date which the financial statements were available to be issued. The Company has determined that there were no such events that warrant disclosure or recognition in the financial statements.

 


 

28

ITEM 2.                                                                                                                                        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

ITEM 2.         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 2.         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSItem 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this quarterly report contain forward-looking statements that involve risks and uncertainties. Forward-looking statements can also be identified by words such as “anticipates,” “expects,” “believes,” “plans,” “predicts,” and similar terms. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include but are not limited to those discussed in the subsection entitled Forward-Looking Statements and Factors That May Affect Future Results and Financial Condition below. The following discussion should be read in conjunction with our financial statements and notes thereto included in this quarterly report. Our fiscal year end is May 31.

 

Abakan

 

Abakan intends to become a leader in the multi-billion dollar advanced coatings and metal formulations markets by assembling controlling interests in a small number of next generation technology firms. We expect to achieve this goal by investing in R&D firms and technology start-ups that have the potential to substantially impact the surface engineering and energy management needs of Fortune 1000 companies and government entities. Abakan is actively involved in supporting the R&D, market development, and commercialization efforts of those entities in which it has invested. We have to date acquired a 51% controlling interest in MesoCoat, Inc. (“MesoCoat”) and a 41% non-controlling interest in Powdermet, Inc. (“Powdermet”). Since Powdermet owns 49% of MesoCoat, Abakan’s interest in Powdermet represents a 20% indirect interest in MesoCoat. Accordingly, we have a combined 71% interest in MesoCoat through both direct and indirect ownership interests.

 

Acquisitions

 

On December 11, 2009, Abakan executed an Investment Agreement, dated December 9, 2009, with MesoCoat and Powdermet in order to purchase 79,334 newly issued MesoCoat shares, equal to a fully diluted 34% equity interest in MesoCoat for $1,400,030. Powdermet was MesoCoat’s sole shareholder prior to the transaction owned 52% by Andrew Sherman (the CEO and a director of both MesoCoat and Powdermet who became a director of Abakan on August 20, 2010), 41% by Kennametal, Inc. (an unrelated company) and 7% by other unrelated parties.

 

On March 21, 2011, Abakan purchased 596,813 shares of Powdermet from Kennametal equal to a fully diluted 41% interest in Powdermet.

 

On July 11, 2011 the Abakan placed MesoCoat and Powdermet on notice of its intent to complete the purchase of an additional equity interest in MesoCoat in accordance with the Investment Agreement. Abakan completed the purchase of 86,156 newly issued shares, equal to a fully diluted 17% equity interest in MesoCoat for $2,800,000 on July 13, 2011, thereby increasing its direct ownership of MesoCoat to a fully diluted 51% interest.

 

The Investment Agreement provides us with additional options to increase our equity interest in MesoCoat, as follows:

 

 

 

 

 

  • An option which entitles us to purchase an additional 24% equity interest in exchange for $16,000,000 by July 13, 2012. The exercise of this option would increase our direct holdings to a fully diluted 75% of MesoCoat and entitle Abakan’s management to appoint a fourth member to MesoCoat’s five-person board of directors (Abakan currently has a right to appoint three of MesoCoat’s directors, one of which must be independent).
  • An option which entitles minority shareholders of MesoCoat, for a period of 12 months after the exercise of the option detailed above, to cause Abakan to pay an aggregate amount of $14,600,000, payable in shares of our common stock or a combination of cash and shares, in exchange for all remaining outstanding shares of MesoCoat.

29


 

 

On March 21, 2011, Abakan fulfilled the terms of a Stock Purchase Agreement with Kennametal, Inc., dated June 28, 2010, as amended on September 7, 2010 and replaced on March 25, 2011 through an Accord and Satisfaction Agreement, to purchase 596,813 shares of Powdermet, equal to a 41% interest in Powdermet, for $1,650,000.

 

The terms and conditions of the Investment Agreement with Powdermet to acquire an equity interest in MesoCoat and the terms and conditions of the Stock Purchase Agreement with Kennametal, Inc., to acquire an equity interest in Powdermet (and thereby an indirect interest in MesoCoat) were negotiated on an arms-length basis by unrelated parties without the benefit of a third party appraisal of the current or future value of either investment. Rather, our valuation of both investments was based on our analysis of what its products and technologies could do, what solutions it had for specific markets, what market share could be captured, how MesoCoat intended to commercialize its products and how realistic were MesoCoat’s financial projections.  We completed a detailed analysis of these questions and prepared a document that specifically considered the facts and supported our conclusions. Our reliance on options to increase our investment in MesoCoat is consistent with our valuation model going forward which dictates that options will only be exercised at the price agreed if developmental milestones in respect to value as determined by us are achieved within the parameters of our agreement. The exercise of the initial option permitted under the Investment Agreement is our measure of the fair value of our investment in MesoCoat on the date of exercise.

 

Operations

 

MesoCoat’s Business

 

MesoCoat is an Ohio-based materials-science company intent on becoming a technology leader in metal protection and repair based on its metal coating and metal cladding technologies designed to address specific industry needs related to conventional oil and gas, oil sands, mining, aerospace, defense, infrastructure, and shipbuilding. The company was originally formed as a wholly owned subsidiary of Powdermet, known as Powdermet Coating Technologies, Inc., to focus on the further development and commercialization of Powdermet’s nanocomposite coatings technologies. The company was renamed as MesoCoat in March of 2008. Thereafter, in July of 2008, the coatings and cladding assets of Powdermet were conveyed to MesoCoat through an asset transfer, an IP license, and a technology transfer and manufacturing support agreement.

 

 

 

 

 

 

 

30


 

MesoCoat has exclusively licensed and developed a proprietary metal cladding application process as well as advanced nano-composite coating materials that combine corrosion and wear resistant alloys, and nano-engineered cermet materials with proprietary high-speed application systems. The result is protective cladding applications that will be offered on a competitive basis with existing market solutions. The coating materials unite high strength, hardness, fracture toughness, and a low coefficient of friction into one product structure. MesoCoat’s products are currently undergoing extensive testing by the U.S. Air Force, U.S. Navy and Marine Corp, oil field service companies, and original equipment manufacturers (OEMs).

 

MesoCoat products nearing commercialization are CermaCladTM for cladding applications and PComP TM for cermet-metallic composite powder thermal spray applications.

 

CermaClad

 

CermaClad™ is a premier metallurgically bonded, high rate cladding solution optimized to manage the risks and consequences of corrosion damage and the failure of large assets such as oil and gas pipelines, refineries, ships, and bridges. In corrosive environments, including seawater, road salt, unprocessed oil, chemical processing, metals production, and other industrial applications, asset owners and operators either need to periodically maintain and replace major assets,  using expensive, corrosion resistant alloy materials, which substantially run up costs, or clad their carbon steel with a corrosion resistant alloy coating. Cladding solutions such as CermaClad™ can save up to 80% of the cost of using solid alloys, while providing equivalent maintenance free corrosion lifetimes equal to the life of the asset. Clad metals are widely used in oil and gas exploration and production, marine transportation, mining, petrochemical processing and refining, nuclear, paper and pulp, desalination, and power generation industries. Each industry sector has different needs for this material. For instance, to meet growing global energy demands, oil companies continue to extend their offshore drilling efforts into deeper seas. The higher temperatures and corrosivity of deeper reserves eliminate plastics and other solutions from consideration, increasing the use of corrosion resistant alloys and lower-cost clad pipe alternatives.

 

CermaClad™ is MesoCoat’s proprietary cladding process which utilizes a high density infrared fusion heat source – an arc lamp – to metallurgically bond (make inseparable) metals, corrosion resistant alloys and/or cermets onto a metal substrate. Using this process, products like pipe and plates can be protected against harsh operating environments with great efficiency and speed compared to competing weld overlay products. Today, cladded steel is a specialized segment of the steel industry where it is estimated that demand outstrips supply.

 

The competitive advantages of CermaCladover current competing technologies and products are:

 

·         Cermaclad and other clad overlays are substantially lower cost than pure alloy products

·         CermaCladproduces a metallurgically bonded overlay, reducing risk of catastrophic failure and buckling of lined pipes such as industry leader Butting’s BuBi bimetallic pipe

·         CermaClad can be applied to seamless pipe, eliminating 90% of welds which are a common source of early failure.

·         CermaCladapplication technology occurs with a 30-40cm wide “torch” compared to less than 1 cm for laser or inert gas welding torches, resulting in planned application rates over an order of magnitude faster than current weld overlay technologies.

·         CermaClad produces a smooth overlay that is virtually free of base metal dilution, improving inspectability and corrosion resistance, and eliminating many sources of corrosion and fatigue initiation.  Smooth surfaces also decrease flow resistance, enabling reduced friction losses in pipeline applications.

31


 

The CermaClad™ product line in development today is as follows:

 

  • CermaCladCR (Corrosion Resistant Alloys)
  • CermaCladWR (Wear Resistant)
  • CermaCladHT (High Temperature)
  • CermaCladLT (Low Thickness)

 

PComP

 

PComP™ is a series of nanocomposite cermet coatings that are used to impart wear and corrosion resistance, and to restore dimensions, of metal components.  PComP competes against chrome and nickel plating, and tungsten carbide in the multibillion dollar inorganic metal finishing market.  Competing materials like hexavalent chrome, carbides and tungsten carbide cobalt have become major headaches for industrial producers in the metal finishing industry since these materials are on the EPA’s hazardous materials watch list and are legally banned in several countries. Industry spends billions annually on these hazardous materials, and Mesocoat’s customers can gain a competitive advantage while mitigating environmental liabilities by adopting green products and processes into their product offerings. While businesses grapple with the need to transition away from these harmful products, MesoCoat has developed a solution platform that we plan to offer at substantially lower cost and higher productivity than leading chrome alternatives, and which has shown order of magnitude improvements in head to head wear and corrosion performance testing.

 

PComP™, named for its particulate composite powders, is one of the few economically viable industry replacement solutions for hard chrome and carbides due to the product line’s advanced corrosion, friction, wear and thermal barrier properties.

 

MesoCoat scientists have developed and patented a family of corrosion resistant coating solutions that combine extreme wear resistance, fracture toughness (resiliency), and a low friction coefficient all in one product structure. In conventional materials science toughness normally decreases as hardness and wear resistance increases by combining nano-level structure control and advanced materials science, , MesoCoat has developed a patented coating structure that can be both very tough and very wear resistant. Equally important, the hardness of a wear coating normally limits the ease with which it can be machined. The unique nanostructural design of the PComP™ coating solutions results in a coatings that can be machined through a finish grinder much faster than a product with a traditional carbide coating. The speed of coating application and final machining results in higher productivity and lower costs in metal finishing operations.

 

MesoCoat’s engineers have also been able to build an increased ductility into the PComP™ product structure combined with a lower stiffness than traditional carbides, imparting and ability to resist coating failure and spallation under heavy loads. Hard and brittle coatings often crack and flake off metals when stressed.  PComP™ has been designed to have increased ductility and strain tolerance. Products coated with PComP™ are extremely wear resistant and can sustain very high loads without cracking and flaking, making it suitable for use in highly loaded components such as oilfield equipment like mandrels, plungers, drill bits, hydraulics, and others used in highly turbulent offshore oil production.

 

The PComP ™ product line was specifically designed to meet the needs of two large markets: hard chrome plating and tungsten carbide coating replacement. The PComP™ family of nanocomposite coatings consists of five products, all of which have shown, in testing by third parties, to provide better wear, corrosion and mechanical properties at a lower life cycle cost than most of today’s alternatives.

 

 

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MesoCoat intends to sell these products through different channels. Commercial sector accounts will have access to these advanced coatings by buying thermal spray application services from MesoCoat. Large OEM’s and Government agencies like the U.S. Air Force would procure raw powders as they are vertically integrated to do their own thermal spray applications using dedicated maintenance and repair depots. Recently, several defense organizations have been given congressional mandates to make better use of their existing equipment (planes, helicopters, jets, tanks and other armored vehicles, etc.) as budgets for the purchase of new equipment will be limited over the next few years. MesoCoat’s low-cost, long-life coating materials should appeal to government buyers striving to meet budgetary restrictions.  Finally, to achieve more rapid penetration of a territorial (geographic) market, MesoCoat is actively qualifying preferred provider partners in certain territories (Houston and Los Angeles as two examples) to provide services in territories it is not currently able to service.

 

Stage of Development

 

None of MesoCoat’s materials are currently produced on a full-scale commercial production basis even though some materials have been produced on a small scale. Even though some of the materials are in limited release, certain of MesoCoat’s materials are expected to be ready for commercial market entry and production within the next twelve months. The following table indicates our estimated timeline for the commercial introduction of those products that are most imminent:

 

Product

Production Scale

Time (months)

PComP™ T

Market Entry

6

PComP™ W

Market Entry

6

PComP™ S

Market Entry

12

CermaCladCR

Full Production

9

CermaCladWR

Market Entry

3

CermaCladWR

Full Production

15

 

Powdermet’s Business

 

Powdermet was formed in 1996 and has since developed a product platform of advanced materials solutions derived from nano-engineered particle agglomerate technology and derived hierarchically structured materials. These advanced materials include energy absorbing ultra-lightweight syntactic- and nano-composite metals in addition to the PComP™ nanocomposite cermets exclusively licensed to MesoCoat. The business has historically financed itself through corporate engineering consulting fees, government contracts and grants (over 90), and recently through partnerships with prime contractors and systems integrators. Powdermet now expects to transition from an engineered nano-powder R&D lab and toll powder manufacturer into a commercial sector company.

 

While MesoCoat’s product focus is on developing advanced cermets to address corrosion and wear coating needs, Powdermet’s product differentiation is based on its ability to build advanced nano-structured metal formulations to address energy efficiency, reduction in hazardous materials, and life cycle cost reduction. Powdermet’s technologies are particularly useful in crash and ballistic energy management markets since they offer weight reduction and the ability to dissipate substantially more impact energy than the aluminum alloys and foamed metals currently available.

 

Powdermet has four materials solution families under development:

 

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·         SComP™ - A family of syntactic metal composites known for their light weight properties and ability to absorb more energy than any other known material. SComP™ can provide weight savings over cast aluminum and magnesium without magnesium’s corrosion and wear limitations.

·         MComP™ - A family of hierarchically structured, rare earth free, nanocomposite metal and metal matrix composites meant to enable higher strength and temperature capability compared to traditional light metals. They have been designed to be a market replacement for beryllium, aluminum and magnesium in structural applications, without relying on scare and expensive rare earths to produce high strength and thermal stability.

·         EnComP™ - A diverse family of engineered microstructure energy based solutions includes substitutes for rocket fuel, hydrogen storage and obscuring products with a primary product now being final tested by the U.S. Army to replace red phosphorous in munitions equipment. 

·         SynFoam™ - A family of structural, thermally insulating syntactic ceramic composites combining strength, high temperature functionality and low thermal conductivity into one multifunctional material.

 

Powdermet’s two products closest to commercialization are SComP™ and EnComP™.

 

AMP Distributors Inc.

 

AMP Distributors Inc. (“AMP”) was formed by Abakan in June of 2011 as a Cayman Island company for the primary purpose of negotiating, executing and administrating international sales of MesoCoat's products. AMP is also tasked with acquiring equipment and coating materials for Abakan’s international transactions.  AMP has appointed a managing director with over 15 years of experience in the offshore financial services industry and retained Kariola Limited, a consultancy organization, to assist it with technical advice and entry into Asian markets.

 

Future Acquisition Targets

 

Abakan utilizes multiple resources to identify future acquisition targets including a professional network of senior management, relationships with national labs such as the Oak Ridge National Lab, and a broad spectrum of other methods in the search for innovative technologies and companies.

 

Every future opportunity will be evaluated based on several criteria. Prospective companies must have individual market solutions intended to solve critical industry problems and have the potential to generate at least a $100 million in revenue within five years of Abakan’s involvement. Most companies that are ultimately acquired by Abakan will offer more than one market solution. We are therefore restricted to firms that have established R&D programs, with a preference for firms that have solutions in final stages of R&D or in pilot-scale production. Abakan is directing its attention to owners that are willing to accept a multi-phased investment option while guaranteeing operational control. We plan to support these technology-centric R&D opportunities and investments with our own corporate strategy, market development, licensing and contracted support.

 

 

 

 

 

 

 

 

 

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Plan of Operation

 

Abakan’s plan of operation for the coming year is to position itself to succeed in commercialization efforts focused on MesoCoat’s CermaClad™ and PComP™ products. To achieve this success Abakan aims to:

 

·         Establish overseas subsidiaries and plants while supporting their management teams.

·         Gain market entry by creating awareness and establishing relationships with key investors.

·         Increase interests in previously acquired companies.

·         Target existing coating companies to qualify and use powders produced by MesoCoat and Powdermet.

·         Assist MesoCoat in achieving the following objectives:

 

o   Becoming American Petroleum Institute (API) compliant for CermaClad™ corrosion and wear resistant alloys products through a joint development agreement with Petrobras and ongoing development work.

o   Gaining another joint venture agreement with one or two other major oil corporations by second quarter 2012.

o   Continuing a plan of constructing CermaClad™ and PComP™ operating plants in strategic market locations (Houston, Alberta, Brazil and the Far East).

o   Continuing the formation of strategic partnerships and a pipeline of potential clients for the CermaClad™ and PComP™ product lines.

 

Growth Strategy


Abakan intends to help MesoCoat grow over the next five years through the use of project and investor financing that involves two growth strategies: i) a conservative or “organic” strategy that requires a further $16,000,000 and ii) a moderate strategy which requires early market acceptance and $45,000,000 to $50,000,000 (dependent on the level of cash flow achieved and the level of project debt financing secured). On realizing sufficient financing, Abakan plans to assist MesoCoat in opening between six and fifteen operating plants worldwide. Given the wide range of the scenario assumptions, the growth strategy depends largely upon the successful execution of the marketing plans for both CermaClad™ and PComP™. Given our strategy of targeting strategic global regions with multiple potential clients, it is feasible for us to meet our plan. However, Abakan will carefully monitor the risks associated with achieving the goals in each scenario to ensure MesoCoat can meet our expectations.

 

Plant locations for MesoCoat depend upon first securing client purchase orders sufficient to finance the construction of the plants. Another key component of plant location lies within strategic global positioning. We prefer to finance and build plants in locations with multiple organizations that can become potential clients for our products, hence the focus on locations in Houston, Alberta, Brazil and Asia. However, we are aware of the inherent political and currency risks that may exist due to working in offshore markets and intend to appropriately address such risks as we move forward with our construction plans.

 

 

 

 

 

 

 

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Operational Logistics

 

CermaClad™, PComP™ SComP™, MComP™ and ENComP™ are platform technologies with extensive product potential in multiple large market verticals. Abakan and related operations will play a major role in six distinct product segments of the value chain: raw materials/consumables, application equipment, coating (cladding) services, casting, fabrication, and maintenance & repair of existing assets. By playing a major role in these six segments of the value chain, Abakan and its partners may prove to be an influential player in defining market prices and trends in the structural composites, steel plate, sheet, bar, and tubular products industries. Our vision is to form partnerships, and set up captive or regional facilities with the power players in the target industry. Most of these large manufacturers have project management and installation capabilities besides fabrication, and thus partnerships with these companies would help us build one-stop-shops for customers, where the customers define the specifications/requirements and we, and our value chain partners would take care of the steel fabrication, coating/cladding operations, casting, assembly integration, and inspection activities.

 

We intend to partner with a major suppliers or end users within geographic regions. Depending on the amount of financing available, we are considering three approaches to this market:

 

·         High Capital Intensity:  Abakan will self-finance and act as owner-operator.

·         Medium Capital Intensity: Abakan will enter into joint venture partnerships, with it being the operator at 51% ownership and a partner at 49% ownership.

·         Low Capital Intensity: Abakan will joint venture with supply chain partners which will act as operators and financiers with 51% ownership and it will act as technology supplier at 49% ownership. Within these arrangements we do not intend to be a licensor but rather participate in the operations and service end of the businesses.

 

Additional Funding

 

MesoCoat will require additional funding over the next twelve months. Not all of the funding sought is currently available though MesoCoat expects to receive additional funding from Abakan on the prospective exercise of the second option under the Investment Agreement. Should MesoCoat be unable to secure additional financing from outside sources or Abakan, it will most likely be unable to meet its milestones and may need to scale back operations. Any shortfall in minimum funding will adversely affect MesoCoat’s ability to grow or even continue operations.

 

Results of Operations

 

During the three month period ended August 31, 2011:

 

·         Abakan increased its interest in MesoCoat to 51% on a fully-diluted basis.

·         Abakan continued its search to identify prospective business opportunities for merger or acquisition.

 

During the three month period ended August 31, 2011, Abakan assisted MesoCoat with the following developments:

 

·         Redefining its marketing strategy.

·         Improving its branding.

·         Beginning communication with several new potential joint commercialization partners.

·         Accelerating R&D schedules by negotiating favorable engineering contracts with third parties.

 

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·         Constructing a new 11,000 sq. ft. manufacturing plant in Euclid, Ohio; full-scale production from the plant is expected to begin early in 2012; the plant is able to produce 10,000 square meters of CermaClad™ tubing per year and is able to fabricate PComP™ products for application in the aerospace, oil and gas, mining and chemical processing industries. MesoCoat began producing work samples for certification and approval by potential clients, with work split 60%/40% between samples and commercial sales.

·         Working toward certain milestones of the Cooperation Agreement with Petroleo Brasiliero S.A. (“Petrobras”) to develop and qualify the CermaClad™ process for the application of CRA (corrosion resistant alloys) to the internal and external surfaces of pipes using proprietary High Density InfraRed (HDIR) lamp technology; Petrobras is a leading integrated oil and gas company headquartered in Rio de Janeiro, Brazil, and is the largest company in Latin America.

 

Net Profit/Loss

 

For the period from June 27, 2006 (inception) until August 31, 2011, the Abakan incurred net losses of $4,553,248. Net profit for the three month period ending August 31, 2011 was $649,368 compared to a net loss of $645,113 for the three month period ending August 31, 2010. The transition to a net profit over the comparative periods can be primarily attributed to an unrealized gain of $1,764,345 recognized as a result of reconciling to fair value its 34% equity interest in MesoCoat held before the completion of the business combination with Abakan.

 

We expect net losses to continue until such time as anticipated commercialization efforts are fully realized over the next twelve months.

 

Revenues

 

For the period from inception until August 31, 2011, Abakan realized revenues of $349,984. Revenues for the three month period ended August 31, 2011 were $348,388 compared to $0 for the three month period ended August 31, 2010. Revenues in the current three month period can be wholly attributed to the operations of MesoCoat from commercial revenues of $6,177, contract and grant revenues of $298,114, and other income of $44,097.

 

We expect revenue growth over the next twelve months as new MesoCoat products are offered for sale in the commercial marketplace.

 

Gross Profit

 

For the period from inception until August 31, 2011, Abakan realized a gross profit of $46,652. Gross profit for the three month period ended August 31, 2011 was $45,056 compared to $0 for the three month period ended August 31, 2010. Gross product in the current three month period can be wholly attributed to the operations of MesoCoat. The calculation of gross profit in the current period offset revenue of $348,388 against cost of revenue of $303,332.

 

We expect gross profits to increase over the next twelve months in line with revenue growth from the anticipated commercialization of MesoCoat’s products.

 

 

 

 

 

 

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Expenses

 

For the period from inception until August 31, 2011, Abakan incurred expenses of $5,544,910. Expenses for the three month period ended August 31, 2011 were $1,056,133 as compared to $519,953 for the three month period ended August 31, 2010, an increase of 103%. The increase in expenses over the comparative periods can be attributed to increases in general and administrative to $106,239 from $29,458 including professional fees that increased to $74,761 from $58,891 due to added accounting costs and legal expenses incurred in connection with acquiring our interests in MesoCoat and Powdermet, consulting costs that increased to $225,372 from $105,045 due to the addition of three new consultants engaged to expand the operations and marketability of the Company over the prior period, payroll and benefits expenses that increased to $137,607 from $24,557 due to the engagement of two new employees and hiring incentives; depreciation and amortization expenses that increased to $82,059 from $1,378 due to our interest in MesoCoat; and stock option expenses which increased to $338,517 from $169,024 due to new stock option grants to new personnel.

 

We expect that expenses will continue to increase over the next twelve months as Abakan follows a growth strategy that will cause it to incur additional costs.

 

Other Income (Expense)

 

For the period from inception until August 31, 2011, Abakan incurred interest expenses of $604,675. Interest expenses for the three month period ended August 31, 2011 were $159,115 as compared to $4,006 for the three month period ended August 31, 2010, an increase of 3,872%. The increase in interest expenses over the comparative periods can be attributed to increases in interest on loans to $35,580 from $4,006 due to costs related to certain convertible debt instruments and the amortization of discount on debt due to the beneficial conversion feature associated with detachable warrants.  

 

We expect to continue incur interest expenses in future periods as the result of carrying convertible debt and the prospect that additional debt may be sought over the next twelve months.

 

Income Tax Expense (Benefit)

 

Abakan may have a prospective income tax benefit resulting from a net operating loss carry-forward and start up costs that will offset any future operating profit.

 

Impact of Inflation

 

Abakan believes that inflation has not had a material effect on operations for the period from June 27, 2006 (inception) to August 31, 2011.

 

Capital Expenditures

 

Abakan, through its majority interest in MesoCoat, has spent $1,964,735 dollars on property and equipment for the period from inception to August 31, 2011.

 

 

 

 

 

 

 

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Liquidity and Capital Resources

 

Abakan has been in the development stage since inception.

 

As of August 31, 2011 Abakan had a working capital deficit of $483,707, current assets of $907,977 consisting of cash and cash equivalents of $770,682, accounts receivable of $126,618, a note receivable from a related party of $4,500, and prepaid expenses of $6,177. Abakan had total assets of $11,548,392 consisting of current assets, property, plant and equipment of $2,186,124, patents and licenses of $2,097,625, an assignment agreement of $250,000, an investment in Powdermet of $1,767,705, goodwill of $4,365,640, and finance fees of $3,315.

 

As of August 31, 2011 Abakan had current liabilities of $1,391,684, consisting of accounts payable of $515,860, accounts payable to related parties of $116,768, capital leases of $13,222, loans payable of $379,328, accrued interest of $121,407 and accrued liabilities of $245,099. Abakan had total liabilities of $5,345,615 consisting of current liabilities, loans payable of $3,927,633 and capital leases of $26,298.

 

Stockholders equity, including controlling and non-controlling interests was $6,202,777 as of August 31, 2011.

 

For the period from inception until August 31, 2011, cash flow used in operating activities was $1,974,374.  Cash flow used in operating activities for the three month period ended August 31, 2011, was $334,524 compared to cash flow used in operating activities of $285,983 for the three month period ending August 31, 2010. Cash flow provided by operating activities during the current period can be primarily attributed to net profits from development stage activities of $649,808, depreciation and amortization of $82,059, the amortization of a discount on debt of $123,535, an unrealized gain on Abakan’s investment in MesoCoat of $1,764,345, accounts receivable of $44,839, accounts payable of $45,447, accrued interest payable of $35,525 and accrued liabilities of $39,865.

 

We do not expect to realize cash flow provided by operating activities over the next twelve months as net losses are anticipated in the near term and an unrealized gain on investment is not anticipated going forward.

 

For the period from inception until August 31, 2011, cash flow used in investing activities was $8,925,768. Cash flow used in investing activities for the three month period ending August 31, 2011, was $3,511,882 compared to $917 for the three month period ending August 31, 2010. Cash flow used in investing activities during the current period can be primarily attributed to the business combination with MesoCoat which recognized $2,470,684 in net assets, the investment of $750,000 in MesoCoat against the purchase of an additional equity interest, and the realization of property, plant and equipment and a website valued $288,993 again in connection with the business combination with MesoCoat.

 

We expect to use additional cash flow in investing activities over the next twelve months in order to increase Abakan’s equity position in MesoCoat.

 

 

 

 

 

 

 

 

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Additionally, MesoCoat expects to continue to use cash flow in investing activities in connection with financing the construction of a new 11,000 sq. ft. manufacturing plant in Euclid, Ohio in addition to the purchase of machinery and equipment that will be needed to put the plant into operation. We estimate that $6.8 million will be required to fund the construction and equipment required of which $562,737 had been allocated to construction in progress including $125,804 in accruals as of February 28, 2011.  MesoCoat will require approximately an additional $6.24 million to complete the project which funding is yet to be committed to the facility. Should MesoCoat be unable to secure sufficient funds to complete the project in Euclid, Ohio on a timely basis, the commercialization timetable for certain of its products and certain contracts that it expects to be fulfilled at the new plant will be delayed until such time as sufficient funds are obtained and the project completed. Smaller contracts and grant work being carried out at MesoCoat’s existing facilities and at third party locations will not be impacted by the delay though its operating results will be negatively affected on a prospective basis by a delay or abandonment of the project.”

 

For the period from inception until August 31, 2011, cash flow provided by financing activities was $8,142,480. Cash flow provided by financing activities for the three month period ending August 31, 2011 was $1,088,744 as compared to $460,769 for the three month period ending August 31, 2010. Cash flow provided by financing activities in the current period is attributable to proceeds from the sale of common stock of $245,465 and proceeds from loans payable of $846,665.

 

We expect to continue to have cash flow provided by financing activities as Abakan intends to pursue new rounds of financing over the next twelve months as it seeks to fulfill its plan of operation.

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 debt or equity financing. We had no commitments or arrangements for such financing at August 31, 2011 though we are pursuing a number of prospective sources that include shareholder loans, the sale of equity, the procurement of long term debt or the settlement of additional debt for equity. We face certain financial obstacles to attracting new financing due to our historical and current record of net losses and working capital deficits. Therefore, despite our efforts we can provide no assurance that we will be able to obtain the financing required to meet our 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 and contractual commitments with all of its officers and directors.

 

Abakan has plans for significant purchases of plant and equipment in connection with the operations of MesoCoat, which include the construction of a new manufacturing facility in Euclid, Ohio. We and Powdermet, as shareholders of MesoCoat, are committed to sourcing the capital requisite to fund the construction and purchase of equipment to the extent that MesoCoat is not able to do so through the normal course of business. Should the Company be called upon to assist MesoCoat to source the capital requisite to fund the construction and purchase of equipment for the Euclid, Ohio manufacturing facility it would rely on its own ability to realize financing through debt or equity offerings in addition to coordinating efforts with Powdermet to secure access to prospective third party lending institutions or prospective joint venture partners. Should MesoCoat be unsuccessful in procuring the capital requisite to fund the construction of the Euclid manufacturing facility and the related purchase of equipment on a timely basis or at all, The Company’s operating results will be negatively affected on a prospective basis by any potential delay or abandonment of the project.

 

Abakan plans to increase the number of employees engaged by MesoCoat on completion of the new manufacturing facility.

 

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Off Balance Sheet Arrangements

 

As of August 31, 2011, Abakan had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to stockholders.

 

Going Concern

 

Abakan's auditors expressed an opinion as to its ability to continue as a going concern as a result of net losses of $5,203,116 and a working capital deficit of $510,868 as of May 31, 2011. Our ability to continue as a going concern is dependent on realizing a profit from operations and gains on investment or obtaining funding from outside sources. 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) realizing a gain from its interests in MesoCoat and Powdermet; (iii) converting debt to equity and (iv) obtaining loans and grants from financial or government institutions. Management believes that it will be able to obtain funding to allow Abakan to remain a going concern through the methods discussed above, though there can be no assurances that such methods will prove successful.

 

Forward Looking Statements and Factors That May Affect Future Results and Financial Condition

 

The statements contained in the section titled Results of Operations and Description of Business, with the exception of historical facts, are forward looking statements. We are ineligible to rely on the safe-harbor provision of the Private Litigation Reform Act of 1995 for forward looking statements made in this quarterly report. Forward looking statements reflect our current expectations and beliefs regarding our future results of operations, performance, and achievements. These statements are subject to risks and uncertainties and are based upon assumptions and beliefs that may or may not materialize. These statements include, but are not limited to, statements concerning:

 

·         our anticipated financial performance;

·         uncertainties related to the commercialization of proprietary technologies held by entities in which we have an investment interest;

·         our ability to generate 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.

 

 

 

 

 

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Critical Accounting Policies

 

The notes to the audited financial statements for Abakan for the years ended May 31, 2011 and 2010, included in Abakan's Form 10-K/A filed with the Commission, discusses those accounting policies that are considered to be significant in determining the results of operations and financial position. Our management believes that their accounting principles conform to accounting principles generally (GAAP) accepted in the United States of America.

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. The more significant areas requiring the use of estimates include asset impairment, stock-based compensation, beneficial conversion features on debt instruments, and future income tax amounts. Management bases its estimates on historical experience and on other assumptions considered to be reasonable under the circumstances. Actual results may differ from the estimates.

 

Stock-Based Compensation

 

 

We have adopted Accounting Standards Codification Topic (“ASC”) 718, which addresses the accounting for stock-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. We have adopted Accounting Standards Codification Topic (“ASC”) 718, Share-Based Payment, which addresses the accounting for stock-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. 

 

We account for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with ASC 505. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services.

 

Recent Accounting Pronouncements

 

We have examined all recent accounting pronouncements and believe that none of them will have a material impact on our financial statements.

 

ITEM 3.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not required.

 

 

 

 

 

 

 

 

 

 

 

 

 

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ITEM 4.          CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

In connection with the preparation of this quarterly report, an evaluation was carried out by Abakan’s management, with the participation of the chief executive officer and the chief financial officer, of the effectiveness of Abakan’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)) as of August 31, 2011. 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

 

During the three month period ended August 31, 2011, there has been no change in internal control over financial reporting that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

ITEM 1.          LEGAL PROCEEDINGS

 

None.

 

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 $4,553,248 for the period from June 27, 2006 (inception) to August 31, 2011. Since we have been without significant revenue since inception and have only recently transitioned to producing limited revenue as a result of the business combination with MesoCoat, historical losses may continue into the future.

 

 

 

 

 

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Abakan has a history of uncertainty about continuing as a going concern.

 

Abakan’s audits for the periods ended May 31, 2011 and 2010 expressed an opinion as to its ability to continue as a going concern as a result of net losses of $5,203,116 and a working capital deficit of $510,868 as of May 31, 2011. Unless Abakan is able to become profitable over successive future periods its ability to continue as a going concern will be in jeopardy.

 

Abakan’s success is dependent on its ability to assist MesoCoat and Powdermet to commercialize proprietary technologies to the point of generating sufficient revenues to sustain and expand operations.

Abakan’s near term future operation is dependent on its ability to assist MesoCoat and Powdermet in the commercial application of proprietary technologies to produce sufficient revenue to sustain and expand operations. The same successful efforts criteria will be required for any additional targets that are acquired by Abakan. The success of these endeavors will require that sufficient funding be available to assist in the development of its business interests. Currently, Abakan’s financial resources are limited, which limitation may slow the pace at which proprietary technologies can be commercialized and deter the prospect of additional acquisitions. Should we be unable to improve our financial condition through debt or equity offerings, our ability to successfully advance our business plan will be severely limited.

 

We face significant commercialization risks related to technological businesses.

 

The industries in which MesoCoat and Powdermet operate and plan to operate are characterized by the continual search for higher performance at lower cost. Our growth and future financial performance will depend on the ability of MesoCoat and Powdermet to develop and market products that keep pace with technological developments and evolving industry requirements. Further, the research and development involved in commercializing products requires significant investment and innovation to keep pace with technological developments. Should we be unable to keep pace with outside technological developments, respond adequately to technological developments or experience significant delays in product development, our products might become obsolete. Should these risks overcome our ability to keep pace there is a significant likelihood that our ability to successfully advance our business will be severely limited.

 

The coatings industry is likely to undergo technological change so our products and processes could become obsolete at any time.

 

Evolving technology, updated industry standards, and frequent new product and process introductions are likely to characterize the coatings industry going forward so our products or processes could become obsolete at any time. Competitors could develop products or processes similar to or better than our own, finish development of new technologies in advance of our research and development, or be more successful at marketing new products or processes, any of which factors may hurt our prospects for success.

 

 

 

 

 

 

 

 

 

 

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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.

 

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

 

 

 

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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 subsidiaries in which it holds an interest may face liability claims on future products.

 

Although MesoCoat and Powdermet intend to implement exhaustive testing programs to identify potential material defects in technology they develop, any undetected defects could harm their reputation and that of Abakan, diminish their customer base, shrink revenues and expose themselves and us to product liability claims. Any imposition of liability that is not covered by insurance or is in excess of insurance coverage could have a material adverse effect on our business, results of operations and financial condition.

 

The market for our stock is limited and our stock price may be volatile.


The market for our common stock has been limited due to low trading volume and the small number of brokerage firms acting as market makers. Due to the limitations of our market and the volatility in the market price of our stock, investors may face difficulties in selling shares at attractive prices when they want to sell. The average daily trading volume for our stock has varied significantly from week to week and from month to month, and the trading volume often varies widely from day to day.
 

We incur significant expenses as a result of the Sarbanes-Oxley Act of 2002, which expenses may continue to negatively impact our financial performance.

 

We incur significant legal, accounting and other expenses as a result of the Sarbanes-Oxley Act of 2002, as well as related rules implemented by the Commission, which control the corporate governance practices of public companies. Compliance with these laws, rules and regulations, including compliance with Section 404 of the Sarbanes-Oxley Act of 2002, has substantially increased our expenses, including legal and accounting costs, and made some activities more time-consuming and costly.

 

 

 

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Abakan’s common stock is currently deemed to be “penny stock”, which makes it more difficult for investors to sell their shares.

 

Abakan’s common stock is and will be subject to the “penny stock” rules adopted under section 15(g) of the Exchange Act. The penny stock rules apply to companies whose common stock is not listed on the NASDAQ Stock Market or other national securities exchange and trades at less than $5.00 per share or that have tangible net worth of less than $5,000,000 ($2,000,000 if the company has been operating for three or more years). These rules require, among other things, that brokers who trade penny stock to persons other than “established customers” complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. Many brokers have decided not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. If Abakan remains subject to the penny stock rules for any significant period, it could have an adverse effect on the market, if any, for our securities. If the Abakan’s securities are subject to the penny stock rules, investors will find it more difficult to dispose of our securities.

 

Since internal controls over financial reporting are not considered effective our conclusion may result in a loss of investor confidence and in turn have an adverse effect on our stock price.

 

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 we are required to furnish a report by our management on our internal controls over financial reporting. Such report must contain, among other matters, an assessment of the effectiveness of our internal controls over financial reporting as of the end of the year, including a statement as to whether or not our internal controls over financial reporting are effective. This assessment must include disclosure of any material weaknesses in our internal controls over financial reporting identified by management. Since we are unable to assert that our internal controls are effective, our investors may lose confidence in the accuracy and completeness of our financial reports, which in turn could cause our stock price to decline.

 

The elimination of monetary liability against Abakan’s directors, officers and employees under Nevada law and the existence of indemnification rights to our directors, officers and employees may result in substantial expenditures by Abakan and may discourage lawsuits against our directors, officers and employees.

 

Abakan’s certificate of incorporation contains a specific provision that eliminates the liability of directors for monetary damages to us and our stockholders; further, Abakan is prepared to give such indemnification to its directors and officers to the extent provided by Nevada law. Abakan may also have contractual indemnification obligations under its employment agreements with its executive officers. The foregoing indemnification obligations could result in our incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers, which Abakan may be unable to recoup. These provisions and resultant costs may also discourage us from bringing a lawsuit against directors and officers for breaches of their fiduciary duties and may similarly discourage the filing of derivative litigation by our stockholders against the Abakan’s directors and officers even though such actions, if successful, might otherwise benefit the us and our stockholders.

 

 

 

 

 

 

 

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ITEM 2.          UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

On June 7, 2011 Abakan’s board of directors authorized the issuance of a convertible debenture to Sonoro Invest SA for $200,000 in reliance upon the exemptions from registration provided by Section 4(2) and/or Regulation S of the Securities Act. The convertible debenture bears interest of 5% per annum and is convertible into conversion units at $1.00 per unit. A unit consists of one share of common stock and a one-half share purchase warrant to purchase shares of common stock for $1.50 per share with an expiration date of two years from the conversion date. The convertible debenture matures on June 7, 2013.

 

Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the following factors: (1) the issuance was an isolated private transactions by Abakan which did not involve a public offering; (2) the offeree had access to the kind of information which registration would disclose; and (3) the offeree is financially sophisticated.

 

Regulation S provides generally that any offer or sale that occurs outside of the United States is exempt from the registration requirements of the Securities Act, provided that certain conditions are met. Regulation S has two safe harbors. One safe harbor applies to offers and sales by issuers, securities professionals involved in the distribution process pursuant to contract, their respective affiliates, and persons acting on behalf of any of the foregoing (the “issuer safe harbor”), and the other applies to resales by persons other than the issuer, securities professionals involved in the distribution process pursuant to contract, their respective affiliates (except certain officers and directors), and persons acting on behalf of any of the forgoing (the “resale safe harbor”). An offer, sale or resale of securities that satisfies all conditions of the applicable safe harbor is deemed to be outside the United States as required by Regulation S.

 

Abakan complied with the exemption requirements of Regulation S by having directed no offering efforts in the United States, by offering common shares only to an offeree who was outside the United States at the time of the offering, and ensuring that the offeree to whom the convertible debenture was offered and authorized was a non-U.S. offeree with an address in a foreign country.

 

On July 14, 2011 Abakan’s board of directors authorized the issuance of a convertible debenture to Joe T. Eberhard for $500,000 in reliance upon the exemptions from registration provided by Section 4(2) and/or Regulation S of the Securities Act. The convertible debenture bears interest of 5% per annum and is convertible into conversion units at $1.00 per unit. A unit consists of one share of common stock and a one-half share purchase warrant to purchase shares of common stock for $1.50 per share with an expiration date of two years from the conversion date. The convertible debenture matures on July 14, 2013.

 

Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the following factors: (1) the issuance was an isolated private transactions by Abakan which did not involve a public offering; (2) the offeree had access to the kind of information which registration would disclose; and (3) the offeree is financially sophisticated.

 

Abakan complied with the exemption requirements of Regulation S by having directed no offering efforts in the United States, by offering common shares only to an offeree who was outside the United States at the time of the offering, and ensuring that the offeree to whom the convertible debenture was offered and authorized was a non-U.S. offeree with an address in a foreign country.

 

 

 

48


 

On July 15, 2011 Abakan’s board of directors authorized the issuance of 80,000 shares of its common stock and 80,000 half-share warrants, with each whole warrant convertible into an additional share at an exercise price of $1.50 until July 15, 2013, to the following entities and individuals for $1.00 each, or an aggregate of $80,000, in reliance upon the exemptions from registration provided by Section 4(2), Regulation D and Regulation S of the Securities Act:

 

Name

Consideration

Shares

Warrants

Exemption

Lynn Foster

$30,000

30,000

15,000

Reg D/Sec 4(2)

Phillip Xinos

$20,000

20,000

10,000

Reg. S/Sec 4(2)

Syndicate Consulting Inc

$30,000

30,000

15,000

Reg S/Sec. 4(2)

 

Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the following factors: (1) the issuances and grants were isolated private transactions by Abakan which did not involve a public offering; (2) the offerees have access to the kind of information which registration would disclose; and (3) the offerees are financially sophisticated.

 

Abakan complied with the requirements of Rule 506 of Regulation D of the Securities Act by: (i) foregoing any general solicitation or advertising to market the securities; (ii) selling only to accredited offerees; (iii) having not violated antifraud prohibitions with the information provided to the offerees; (iv) being available to answer questions by the offerees; and (v) issuing restricted securities to the offerees.

 

Abakan complied with the exemption requirements of Regulation S by having directed no offering efforts in the United States, by offering common shares only to offerees who were outside the United States at the time of the offering, and ensuring that the offerees to whom the common shares and warrants were offered and authorized were non-U.S. offerees with addresses in foreign countries.

 

On August 29, 2011 Abakan’s the board of directors authorized the issuance of a convertible debenture to Stratton SA for $146,665 in reliance upon the exemptions from registration provided by Section 4(2) and/or Regulation S of the Securities Act. The convertible debenture bears interest of 6% per annum and is convertible into conversion shares at $1.75 per conversion share at any time prior to maturity on August 28, 2014.

 

Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the following factors: (1) the issuance was an isolated private transactions by Abakan which did not involve a public offering; (2) the offeree had access to the kind of information which registration would disclose; and (3) the offeree is financially sophisticated.

 

Abakan complied with the exemption requirements of Regulation S by having directed no offering efforts in the United States, by offering common shares only to an offeree who was outside the United States at the time of the offering, and ensuring that the offeree to whom the convertible debenture was offered and authorized was a non-U.S. offeree with an address in a foreign country.

 

ITEM 3.          DEFAULTS ON SENIOR SECURITIES

 

None.

 

ITEM 4.          (REMOVED AND RESERVED)

 

Removed and reserved.

 

 

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ITEM 5.          OTHER INFORMATION

 

On October 24, 2011 Abakan’s board of directors accepted the resignation of Mark Sullivan as chief financial officer and principal accounting officer. Mr. Sullivan concurrently resigned as a director of MesoCoat.

 

On October 24, 2011 Abakan’s board of directors appointed Robert H. Miller as chief financial officer and principal accounting officer. Mr. Miller currently serves as Abakan’s chief executive officer and as a director.

 

From 2007 until the present Mr. Miller has been a director (and was an early investor) of Lifespan Biosciences Inc., a company commercializing proprietary antibodies, providing immune histochemistry services and developing localization databases. From 2002 to present, Mr. Miller has been a consultant to Prosper Financial, Inc., a management company that provides financial and corporate consulting services to start-up companies. Between 1998 and 2000 he was a director and financier of Zmax Corporation, a "y2k" company. From 1997 to 2002 Mr. Miller was the president of Stamford International whose principal subsidiary, Nanovation Technologies Inc., was a developer of nano-sized fiber-optic products and he served as director of Nanovation between 1998 and 2001. In 1992 Mr. Miller was the founder and president of Crystallex International Corporation and he served as this company’s chairman between 1992 and 1996. Between 1988 and 1992 he was the principal financier and consultant to Asiamerica Equities Inc., a NASDAQ listed merchant bank.

 

Mr. Miller has been an officer and director of Sonnen Corporation since 2009.

 

Mr. Miller has an existing employment agreement with Abakan.

 

Mr. Miller is not related to any members of Abakan’s board of directors.

 

ITEM 6.          EXHIBITS

 

Exhibits required to be attached by Item 601 of Regulation S-K are listed in the Index to Exhibits on page 52 of this Form 10-Q/A, and are incorporated herein by this reference.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Abakan Inc.

Date

 

 

/s/ Robert H. Miller    ____---

By: Robert H. Miller

Its: Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer and Director

 

 

November 14, 2011

 

 

 

 

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INDEX TO EXHIBITS

 

 

Exhibit No.     Exhibit Description

 

3.1*                 Certificate of Incorporation of the Company and Certificate of Amendment, incorporated hereto by reference to the Form SB-2, filed with the Commission on June 19, 2007.

3.2*                 Bylaws of the Company, 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*               Articles of Merger dated November 9, 2009, incorporated hereto by reference to the Form 8-K filed with the Commission on December 9, 2009.

10.3*               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.

10.4*               Consulting agreement dated December 1, 2009, between the Company and Mr. Greenbaum, incorporated hereto by reference to the Form 8-K filed with the Commission on May 28, 2010.

10.5*               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.

10.6*               Consulting agreement date December 1, 2009 between the Company and Prosper Financial Inc., incorporated hereto by reference to the Form 10-K filed with the Commission on September 13, 2011.

10.7*               Consulting agreement dated December 8, 2009 between the Company and Robert Miller, incorporated hereto by reference to the Form 10-K filed with the Commission on September 13, 2011.

10.8*               Investment Agreement dated December 9, 2009, between the Company, MesoCoat and Powdermet, incorporated hereto by reference to the Form 8-K filed with the Commission on December 17, 2009.

10.9*               Agreement date March 17, 2010 between the Company and Sonnen Corporation, incorporated hereto by reference to the Form 10-K filed with the Commission on September 13, 2011.

10.10*             Agreement dated April 30, 2010 between the Company and Mr. Buschor, incorporated hereto by reference to the Form 8-K filed with the Commission on May 11, 2010.

10.11*             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.

10.12*             Stock Purchase Agreement dated June 29, 2010 between the Company and Kennametal, incorporated hereto by reference to the Form 8-K filed with the Commission on September 15, 2010.

10.13*             Employment agreement dated August 20, 2010, between the Company and Mr. Takkas, incorporated hereto by reference to the Form 8-K filed with the Commission on August 26, 2010.

10.14*             Amendment No. 1 to Stock Purchase Agreement between the Company and Kennametal dated September 7, 2010, incorporated hereto by reference to the Form 8-K filed with the Commission on September 15, 2010.

10.15*             Amendment to the Investment Agreement dated December 8, 2010, between the Company, MesoCoat and Powdermet, incorporated hereto by reference to the Form 10-Q filed with the Commission on January 19, 2011.

10.16*             Amendment No. 2 to Stock Purchase Agreement between the Company and Kennametal dated January 19, 2011, incorporated hereto by reference to the Form 8-K filed with the Commission on July 13, 2011.

10.17*             Accord and Satisfaction Agreement dated March 21, 2011 between the Company and Kennametal, Inc., incorporated hereto by reference to the Form 8-K filed with the Commission on March 25, 2011.

10.18*             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.

21*                  Subsidiaries of the Company, incorporated hereto by reference to the Form 10-K on September 13, 2011 filed with the Commission on March 25, 2011.

31                    Certification of the Chief Executive Officer and 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 hereto.

32                    Certification of the Chief Executive Officer and 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 hereto.

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.

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