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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

    þ     Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended February 29, 2012

 

    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 þ   No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company as defined by Rule 12b-2 of the Exchange Act:

Large accelerated filer o   Accelerated filer o   Non-accelerated filer o  Smaller reporting company þ

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o  No þ         

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. The number of shares outstanding of the issuer’s common stock, $0.0001 par value (the only class of voting stock), at April 16, 2012, was 60,766,525.

1


 

 

 

TABLE OF CONTENTS

PART 1- FINANCIAL INFORMATION

Item1.  

Financial Statements:

3

 

Condensed Consolidated Balance Sheets for the period ended

February 29,2012 (unaudited)  and May 31, 2011

4

 

Unaudited Condensed Consolidated Statements of Operations for the

Three month and nine months ended February 29, 2012 and 2011, and cumulative amounts from development stage activities (June 27, 2600 (Inception) through February 29, 2012)

5

 

Unaudited Consolidated Condensed Statements of Cash Flows for the

nine months ended February 29, 2012 and 2011, and cumulative amounts from development stage activities (June 27, 2006 (inception) through February 29, 2012)

6

 

Condensed Notes to Consolidated Financial Statements (Unaudited)

8

Item 2. 

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

31

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

45

Item 4. 

Controls and Procedures

45

 

 

 

PART II-OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

46

Item 1A.  

Risk Factors

46

Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

50

Item 3.

 Defaults Upon Senior Securities

53

Item 4.

(Removed and Reserved)

53

Item 5.  

Other Information

53

Item 6. 

Exhibits

53

 

Signatures

54

 

Index to Exhibits

55

 

 

 

2


 

PART I – FINANCIAL INFORMATION

 

ITEM 1.          FINANCIAL STATEMENTS

 

As used herein, the terms “we,” “our,” and “us” refer to Abakan Inc., a Nevada corporation, and its consolidated subsidiaries, unless otherwise indicated.  In the opinion of management, the accompanying financial statements included in this Form 10-Q reflect all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations for the periods presented.  The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year.

 

3


 

ABAKAN INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED CONSOLIDATED BALANCE SHEETS

February 29,

May 31,

2012

2011

(unaudited)

ASSETS

Current assets

    Cash and cash equivalents

$

          464,504

$

                   -  

    Accounts receivable

            23,492

                     -  

    Note receivable - related parties

             4,500

                4,500

    Prepaid expenses

          131,086

              16,200

    Prepaid expenses - related parties

                     -  

                1,485

        Total current assets

          623,582

              22,185

Noncurrent assets

    Property, plant and equipment, net (Note 4)

       2,596,600

                4,630

    Patents and licenses, net (Note 5)

       1,896,703

                     -  

    Assignment agreement - MesoCoat

          250,000

            250,000

    Investment deposit on MesoCoat investment

                     -  

         2,050,000

    Investment - MesoCoat (Note 6)

                      -  

            858,418

    Investment - Powdermet (Note 6)

       1,791,401

         1,721,656

  Goodwill

       4,335,646

                     -  

    Finance fees, net

              2,439

                     -  

        Total Assets

$

     11,496,371

$

       4,906,889

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities

    Accounts payable

$

          550,365

$

         202,017

    Accounts payable - related parties

            92,707

              79,214

    Capital leases - current portion

            13,904

                     -  

    Loans payable, net of discount of $65,149 (Note 8)

          527,088

              70,600

    Accrued interest - loans payable (Note 8)

          214,836

              41,532

    Loan payable- related parties (Note 11)

            19,500

                       -

    Accrued interest - related parties (Note 11)

                 378

                       -

    Accrued liabilities

          304,237

            139,689

        Total current liabilities

       1,723,015

            533,052

Noncurrent liabilities

    Loans payable, net of discounts of $718,246 (Note 8)

       3,765,015

         1,400,914

    Capital leases - noncurrent portion

            48,294

                     -  

        Total liabilities

       5,536,324

         1,933,966

Commitments and contingencies (Note 13)

Stockholders' equity (Note 9)

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

      authorized, none issued and outstanding

                      -

                       -

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

      authorized, 60,139,025 issued and outstanding - February 29, 2012,

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

              6,013

                5,924

    Paid-in capital

     10,912,354

         8,330,530

    Subscription receivable

                      -

         (165,465)

    Contributed capital

              5,050

                5,050

    Accumulated deficit during the development stage

    (6,458,332)

      (5,203,116)

       4,465,085

         2,972,923

    Non-controlling interest

       1,494,962

                     -  

        Total stockholders' equity

       5,960,047

         2,972,923

        Total liabilities and stockholders' equity

$

     11,496,371

$

       4,906,889

 

See accompanying notes to consolidated financial statements.

 

 

4


 

ABAKAN INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

Cumulative

 amounts from

development stage

 For the three months ended

For the nine months ended

activities                  June 27, 2006

February 29,

February 29,

(Inception) to

2012

 

2011

2012

 

2011

February 29, 2012

Revenues

Commercial

$

       15,998

$

             -  

$

      47,513

$

                  -  

$

         47,513

Contract and grants

   577,645

                 -  

 1,267,413

                 -  

    1,267,413

Other income

    733,583

                  -  

    909,565

                -  

       911,161

1,327,226  

                 -  

2,224,491

                 -  

     2,226,087

Cost of Revenues

   313,130

                  -  

    704,161

                 -  

        704,161

Gross profit

 1,014,096

                  -  

1,520,330 

                 -  

1,521,926 

Expenses

    General and administrative

General and administrative

 186,568

        47,259

    403,871

     146,013

       673,837

Professional fees

48,142 

        51,435

204,685

143,839

       527,743

Professional fees – related parties             

       15,000

 15,000

45,000

45,000

150,000

Consulting

197,449 

     259,571

582,238

559,974 

1,358,084

Consulting – related parties

      76,500

        47,100

229,577

265,700 

1,162,977

Payroll and benefits expense

214,181 

        89,423

567,230

 133,444 

824,099 

Depreciation and amortization

      46,791

           1,386

        213,021

          4,150

       242,247

Research and development

 248,528 

                -  

521,740 

                 -

      521,740

Impairment of asset

               -  

                -  

                   -

                  -

 180,000 

    Stock expense on note conversion

     12,648

        23,400

         12,648

       60,733

       350,308

    Stock options expense

350,336 

     347,449

1,142,192

746,177 

2,419,944

        Total expenses

1,396,143  

     882,023

3,922,202

    2,105,030

8,410,979

Loss from operations

 (382,047)

  (882,023)

  (2,401,872)

 (2,105,030)

  (6,889,053)

Other (expense) income

    Interest expense:

Interest - loans

 (125,879)

        (2,480)

     (204,419)

     (14,497)

     (257,047)

Interest - related parties

        (801)

         (811)

            (934)

         (811)

        (6,376)

Liquidated damages

              -  

  (150,000)

                   -

  (250,000)

     (250,000)

         Amortization of discount on debt

 (171,681)

              -  

   (451,003)

                -

     (588,493)

        Total interest expense

 (298,361)

  (153,291)

     (656,356)

   (265,308)

  (1,101,916)

    Interest income

              5

                -  

               226

          2,125

          4,355

    Loss on debt settlement

               -  

        (1,583)

                   -  

       (1,583)

         (5,257)

    Gain on debt settlement

   40,043

                -  

          40,043

                 -  

       240,752

    Unrealized gain on MesoCoat acquisition

                 -  

                -  

1,764,345 

                -  

1,764,345 

    Equity in Powdermet income/ (loss)

      48,471

                -  

          69,745

                -  

      141,401

    Equity in MesoCoat loss

                 -  

     (29,383)

       (44,408)

   (331,414)

     (586,020)

  Total Other (expense) income

 (209,842)

  (184,257)

   1,173,595

   (596,180)

       457,660

Net profit/ (loss) before non-controlling interest

    (591,889)

1,066,280

   (1,228,277)

 (2,701,210)

  (6,431,393)

   Non-controlling interest in MesoCoat Loss

    (150,806) 

                  -  

         (26,939)

                   -  

       (26,939)

Net profit/ (loss) attributable to Abakan Inc.

    (742,695)

(1,066,280)

  (1,255,216)

 (2,701,210)

  (6,458,332)

    Provision for income taxes

                   -  

 

                  -  

                      -  

                  -  

                   -  

Net profit/ (loss)

$

    (742,695)

(1,066,280)

$

    (1,255,216)

$

(2,701,210)

$

  (6,458,332)

Net profit/ (loss) per share - basic

$

          (0.01)

$

       (0.02)

$

             (0.02)

$

          (0.05)

Net profit/ (loss) per share - diluted

$

          (0.01)

$

       (0.02)

$

             (0.02)

$

         (0.05)

Weighted average number of common

  shares outstanding - basic

  59,462,401

58,209,667

    59,389,880

 56,546,209

Weighted average number of common

  shares outstanding - diluted

   59,462,401

58,209,667

     59,389,880

 56,546,209

 

See accompanying notes to consolidated financial statements.

5


 

ABAKAN, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Cumulative

 amounts from

development stage

activities

For the nine months ended

June 27, 2006

February 29,

(Inception) to

2012

2011

February 29, 2012

CASH FLOWS FROM DEVELOPMENT STAGE ACTIVITIES

         Net profit/ (loss) before non-controlling interest

$

(1,228,277)

$

 2,701,210)

$

    (6,431,393)

        Adjustments to reconcile net profit/ (loss) to net

             cash provided by (used in) development stage activities:

Depreciation and amortization

       213,021

          4,150

           242,247

Amortization of discount on debt

       451,003

                  -

           588,493

Amortization of deferred financing fees

           1,168

                  -

               1,168

Stock options expense

    1,142,192

      746,177

        2,419,944

Stock expense from note conversion

         12,648

        60,733

           350,308

Stock issued for services

       119,600

      213,600

           641,001

Equity in investee loss

         44,408

      331,414

           514,365

Equity in investee profit

       (69,745)

                  -

            (69,745)

Unrealized gain on MesoCoat acquisition

  (1,764,345)

                  -

       (1,764,345)

        Changes in operating assets and liabilities:

Accounts receivable

       147,964

                  -

           147,964

Notes receivable - related parties

                  -

          4,000

              (4,500)

Prepaid expenses

     (114,886)

        38,058

          (145,239)

Prepaid expenses - related parties

           1,485

                  -

             14,152

Accounts payable

       139,318

     455,855

           479,804

Accounts payable - related parties

         13,493

      102,469

           175,438

Accrued interest - related parties

                  -

                  -

               2,664

Accrued interest - loans payable

       137,007

        14,343

           191,450

Accrued liabilities

         99,003

                  -

           171,431

Waste to Energy Group Inc.

                  -

                  -

           180,000

        Total adjustments

       573,336

   1,970,799

        4,136,602

NET CASH PROVIDED BY/ (USED IN) DEVELOPMENT STAGE ACTIVITIES

     (654,941)

      (730,411)

       (2,294,791)

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of property, plant, equipment and website

     (684,839)

       (1,018)

          (718,695)

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

       307,650

 (1,260,000)

       (3,142,380)

Powdermet - minority interest

                  -

      (500,000)

       (1,650,000)

Capitalized patents and licenses

       (90,327)

                    -

          (190,327)

Waste to Energy Group Inc.

                  -

                    -

          (180,000)

NET CASH USED IN INVESTING ACTIVITIES

     (467,516)

   (1,761,018)

       (5,881,402)

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from sale of common stock

       545,465

     1,833,000

        4,721,606

Proceeds from loans payable

    1,158,106

        545,769

        3,929,908

Payments on loans payable

     (136,995)

                    -

          (136,995)

Proceeds from loans payable - related parties

         39,626

          75,760

           119,306

Payments on loans payable - related parties

                  -

                    -

             21,063

Repayments of capital leases

       (19,241)

                    -

            (19,241)

Proceeds from capital contributed

                  -

                    -

               5,050

NET CASH PROVIDED BY FINANCING ACTIVITIES

    1,586,961

     2,454,529

        8,640,697

      

NET INCREASE (DECREASE)  IN CASH AND CASH EQUIVALENTS

       464,504

        (36,900)

           464,504

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

                -  

          40,564

                       -

CASH AND CASH EQUIVALENTS, END OF PERIOD

$

    464,504

$

         3,664

$

         464,504

 

See accompanying notes to consolidated financial statements.

 

6


 

 

ABAKAN, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Cumulative

 amounts from

development stage

activities

For the nine months ended

June 27, 2006

February 29,

(Inception) to

2012

2011

February 29, 2012

 

Continued

Supplemental Non-cash Disclosures:

      Notes and accounts payable converted to stock

Accounts payable - related parties

$

     (48,523)

$

                  -

$

       (254,494)

Loans payable

   (334,777)

   (462,228)

       (984,946)

Accrued interest

      (7,056)

       (2,272)

         (11,387)

Notes payable - related parties

    (30,625)

                  -  

       (130,140)

Accrued interest - related parties

          (619)

                  -  

         (10,344)

Common stock

     421,600

      467,500

      1,396,060

Subscription payable

                -  

       (3,000)

           (3,000)

Subscription receivable

                -  

                  -  

           (1,750)

$

              -  

$

                -  

$

                   -  

      Stock issued for assignment agreement - MesoCoat

Assignment agreement - MesoCoat

$

             -  

$

                -  

$

       (150,000)

Common stock

                -  

                  -  

           150,000

$

             -  

$

                -  

$

                   -  

     Capital lease equipment acquired

Property, plant and equipment

$

       38,532

$

                -  

$

          38,532

Capital lease payable

       (38,532)

                  -  

            (38,532)

$

              -  

$

                -  

$

                   -  

      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

Non-controlling 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 consolidated financial statements.

7


 

 

ABAKAN INC.

 (A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 29, 2012 and 2011

 

 

NOTE 1 – BUSINESS

 

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

 

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 global consumer markets.

 

8


 

 

ABAKAN INC.

 (A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 29, 2012 and 2011

 

 

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 February 29, 2012 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 February 29, 2012, and the results of its operations and cash flows for the three and nine months ended February 29, 2012, have been made.  Operating results for the nine months ended February 29, 2012 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 Form 10-K/A.

 

Reclassifications

 

Certain amounts in the nine months ended February 29, 2011 financial statements have been reclassified to conform to the current nine months ended February 29, 2012 presentation.

 

 

 

9


 

 

ABAKAN INC.

 (A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 29, 2012 and 2011

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Non-Controlling Interest

 

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

 

Development Stage Enterprise

At February 29, 2012, Abakan’s business operations had not fully developed and Abakan 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 February 29, 2012 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 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

 

 

 

 

10


 

 

ABAKAN INC.

 (A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 29, 2012 and 2011

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

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.

 

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 $521,740 and none for the nine months ended February 29, 2012 and 2011, respectively.

 

Advertising Expenses

 

Advertising costs are expensed as incurred. Advertising expenses are included in general and administrative expense in the accompanying statement of operations. Total advertising expenses were $1,490 and $37,450 for the nine months ended February 29, 2012 and 2011, respectively.

 

Shipping and Handling Costs

 

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

 

 

 

 

 

 

 

 

11


 

 

ABAKAN INC.

 (A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 29, 2012 and 2011

 

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

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.

 

 

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 February 29, 2012, of $6,458,332, and a working capital deficit of $1,099,433.  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:

 

 

February 29, 2012

May 31, 2011

 

 

 

Machinery and equipment

$                  337,666

$                        -

Construction in progress- assets

2,270,901

-

Computer equipment and office furniture

35,369

12,856

Leasehold Improvements

53,818

-

 

2,697,754

12,856

Less accumulated depreciation and amortization

 

(101,154)

 

(8,266)

 

      $             2,596,600

        $              4,630

 

Depreciation and amortization expense was $31,000 and $4,150 for the nine months ended February 29, 2012 and 2011, 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, and accumulated depreciation of $61,928.

 

 

 

 

 

12

12


 

ABAKAN INC.

 (A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 29, 2012 and 2011

 

NOTE 5 - PATENTS AND LICENSES

 

Patents and licenses consist of the following:

 

 

 

y February 29, 2012

 

 

 

 

 

Patents

$

    215,901

 

Licenses

 

1,926,481

 

 

 

2,142,382

 

Less accumulated amortization

 

 (245.679)

 

$

1,896,703

 

Amortization expense was $182,021 for the nine months ended February 29, 2012. In the nine months ended February 29, 2012, we have capitalized an additional $90,327 on patents and licenses, and have begun amortizing those according to our policy.

 

Future amortization patents and licenses are presented in the table below:

 

For the years ended May 31,

 

2012

$      77,700

2013

310,800

2014

310,800

2015

310,800

2016 and beyond

886,603

 

$   1,896,703

 

 

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.

 

 

 

 

 

 

 

 

13


 

 

ABAKAN INC.

 (A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 29, 2012 and 2011

 

 

NOTE 6 - INVESTMENT IN NON-CONTROLLING INTEREST - continued

 

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

 

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 nine months ended February 28, 2011

Equity Percentage

34%

 

34%

Condensed income statement information:

 

 

 

Total revenues

 $         245,389

 

 $        1,339,046

Total cost of revenues

           229,641

 

           1,435,271

Gross margin

         15,748

 

         (96,226)

Total expenses

         146,359

 

         878,520

Net loss

 $      (130,611)

 

 $     (974,746)

Abakan's equity in net loss

 $        (44,408)

 

 $     (331,414)

 

 

 

 

 

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 was completed our 41% minority interest investment gave us significant influence over Powdermet’s business actions, board of directors, and its management, and therefore we account for our investment using the Equity Method. The table below reconciles our investment amount and equity method amounts to the amount on the accompanying balance sheet.

 

 

 

 

14


 

 

ABAKAN INC.

 (A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 29, 2012 and 2011

 

 

NOTE 6 - INVESTMENT IN NON-CONTROLLING INTEREST - continued

 

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 February 29, 2012

          69,745

Investment balance, February 29, 2012

 $   1,791,401

 

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

 

Powdermet Inc. (Unaudited)

 

 

For the nine months ended February 29, 2012

For the year ended

May 31, 2011

Equity Percentage

41%

41%

Condensed income statement information:

 

 

Total revenues

 $         1,601,810

 

Total cost of revenues

           540,461

 

Gross margin

           1,061,349

 

Total expenses

          891,240

 

Net profit

 $        170,109

 

Abakan's equity in net profit

 $          69,745

 

Condensed balance sheet information:

 

 

Total current assets

 $         613,307

 $         438,869

Total non-current assets

           793,797

           857,866

Total assets

 $      1,407,104

 $      1,296,735

Total current liabilities

 $         265,018

 $         648,351

Total non-current liabilities

           1,069,191

           745,599

Total equity

            72,895 

            (97,215)

Total liabilities and equity

 $      1,407,104

 $      1,296,735

 

 

NOTE 7 - MATERIAL BUSINESS COMBINATION

 

On December 10, 2009, Abakan acquired 34% of the outstanding common shares of 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.

 

 

15


 

 

ABAKAN INC.

 (A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 29, 2012 and 2011

 

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 MesocCoat

(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 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, a private company, was estimated by applying the negotiated share price per share and apply 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 remeasuring to fair value its 34% equity interest in MesoCoat held before the business combination. The gain is included in other income in Abakan’s statement of operations for the period ended February 29, 2012.

 

The following (unaudited) pro forma consolidated results of operations have been prepared as if the acquisition of MesoCoat had occurred at June 1, 2010:

 

 

 

16


 

 

ABAKAN INC.

 (A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 29, 2012 and 2011

 

 

NOTE 7 - MATERIAL BUSINESS COMBINATION – continued

 

UNAUDITED PROFORMA CONSOLIDATED

CONDENSED STATEMENTS OF OPERATIONS

For the nine month period ended

June 1 - February 29,

2012

 

2011

Revenues

Commercial

$           60,195

$               41,226

Contract and grants

1,371,782

1,278,550

Other income

1,037,904

22,317

 Total revenues

2,469,881

1,342,093

Cost of Revenues

933,802

1,184,197

Gross profit

1,536,079

157,896

Expenses

    General and administrative

General and administrative

472,361

587,246

Professional fees

204,685

143,839

Professional fees - related parties

45,000

45,000

Consulting

609,513

670,410

Consulting - related parties

229,577

265,700

Payroll and benefits expense

606,441

403,298

Depreciation and amortization

217,644

31,058

    Research and development

521,740

262,043

    Stock expense on note conversion

-

60,733

    Stock options expense

1,142,192

746,177

        Total expenses

4,049,153

3,215,504

Loss from operations

(2,513,074)

(3,057,608)

Other (expense) income

    Interest expense:

Interest - loans

(192,853)

(32,906)

           Liquidated damages

-

(250,000)

          Amortization of discount on debt

(455,452)

(40,044)

        Total interest expense

(648,305)

(322,950)

    Interest income

226

2,125

    Unrealized gain on MesoCoat acquisition

1,764,345

-

    Equity in Powdermet income

69,745

-

    Equity in MesoCoat loss

(44,408)

(331,414)

    Non-controlling interest in MesoCoat loss

(26,939)

-

Loss before provision for income taxes

(1,398,410)

(3,709,847)

    Provision for income taxes

-

-

Net profit/ (loss)

$      (1,398,410)

$        (3,709,847)

Net profit/ (loss) per share - basic

 $               (0.02)

 $                 (0.07)

Net profit/ (loss) per share - diluted

 $               (0.02)

 $                 (0.07)

 

 

17


 

 

ABAKAN INC.

 (A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 29, 2012 and 2011

 

 

NOTE 7 - MATERIAL BUSINESS COMBINATION – continued

 

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.

 

NOTE 8 – NOTES PAYABLE

 

As of February 29, 2012 and May 31, 2011, the loans payable balance comprised of:

Description

February 29, 2012

 

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 $106,561 attributable to the beneficial conversion feature.

 $      393,439

 

 $       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 $291,179 attributable to the beneficial conversion feature.

  1,208,821

 

      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 $68,768 attributable to the beneficial conversion feature.

  131,232

 

              -  

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 $223,043 attributable to the beneficial conversion feature.

  276,957

 

              -  

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

           73,586 

 

            600  

Uncollateralized demand note to an unrelated entity bearing 8% interest per annum

           10,993 

 

-  

Uncollateralized demand note to an unrelated entity bearing 8% interest per annum

19,350           

 

            -  

Uncollateralized demand note to an unrelated entity bearing 8% interest per annum

20,000            

 

            -  

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 $65,149 attributable to the beneficial conversion feature.

  333,159

 

              -  

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 $28,695 attributable to the beneficial conversion feature.

  71,660

 

              -  

Capital leases payable to various vendors expiring in various years through September 2016; collateralized by certain equipment with a cost of $109,659.

62,198

 

-

Uncollateralized demand note to an unrelated entity for royalties

           1,682,906 

 

            -  

 

 $   4,354,301

 

 $   1,471,514

Less current liabilities

         540,992

 

       70,600

Total long term liabilities

$   3,813,307

 

$   1,400,914

18


 

 

ABAKAN INC.

 (A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 29, 2012 and 2011

 

 

NOTE 8 – NOTES PAYABLE - continued

 

We also owed $202,573 and $41,532 in accrued interest for the above notes as of February 29, 2012 and May 31, 2011, respectively.

 

As of February 29, 2012 and May 31, 2011, we 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

$      193,929

2013

2,000,000

2014

2,781,214

2015

-

2016 and beyond

100,355

 

$   5,075,498

 

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 February 29, 2012, 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.

 

On February 20, 2012, we converted $146,665 of the above debentures into shares of our common stock as part of the private placements completed in the period ended February 29, 2012 (Note 9). As part of this conversion the note holder also converted $3,748 of accrued interest, and expensed the remaining amount of $56,735 from the related discount on debt.

 

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 using the Black-Scholes method and have arrived at an aggregate total $505,873, of relative fair value and 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%

 

 

19


 

 

ABAKAN INC.

 (A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 29, 2012 and 2011

 

 

NOTE 8 – NOTES PAYABLE - continued

 

In accordance with FASB ASC 835-30-35-2, we are amortizing discounts of debt on the straight-line method over the life of the notes payable of 24 months. For the nine months ended February 29, 2012, we have recorded $451,003 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 $783,595 will be amortized over the remaining life of the notes.

 

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 nine months ended February 29, 2012, 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.

 

On February 20, 2012, we closed a private placement for $300,000, or 300,000 units consisting of one share of our restricted common stock and one common stock warrant to purchase shares of our common stock, with a purchase price of $1.25 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 $300,000.

 

 

 

 

 

 

20


 

 

ABAKAN INC.

 (A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 29, 2012 and 2011

 

 

NOTE 9 – STOCKHOLDERS' EQUITY - continued

 

Conversion of debt to shares

 

On February 20, 2012, we converted several debt obligations for $418,798, or 406,600 units consisting of one share of our restricted common stock and one common stock warrant to purchase shares of our common stock, with a purchase price of $1.25 per share and an expiration date of two years from the closing. In connection with this placement we incurred stock expense on conversion of $12,198.

 

On February 20, 2012, we also converted accounts payable for $15,450, or 15,000 shares of our restricted common stock. In connection with this placement we incurred stock expense on conversion of $450.

 

Share based compensation

 

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

 

On December 2, 2011, we issued 20,000 shares of our common stock for services performed valued at $23,600.

 

On February 20, 2012, we issued 20,000 shares of our common stock for services performed valued at $20,000.

 

Common Stock Warrants

 

In connection with the above private placements we valued the common stock warrants granted during the nine months ended February 29, 2012, using the Black-Scholes model with the following assumptions

 

 

June 6, 2011

June 10, 2011

July 6, 2011

February 20, 2012

Expected volatility (based on historical volatility)

170.29%

170.29%

170.29%

162.25%

Expected dividends

0.00

0.00

0.00

0.00

Expected term in years

10

2.00

2.00

2.00

Risk-free rate

0.39%

0.41%

0.43%

0.39%

 

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

 

 

 

 

 

21


 

 

ABAKAN INC.

 (A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 29, 2012 and 2011

 

 

NOTE 9 – STOCKHOLDERS' EQUITY - continued

 

A summary of the common stock warrants granted during the nine months ended February 29, 2012 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

746,600

 

Granted

370,233

Exercised

-

 

Exercised

-

Forfeited or Expired

-

 

Forfeited or Expired

-

Balance at February 29, 2012

3,416,833

 

Balance at May 31, 2011

2,670,233

Exercisable at February 29, 2012

3,416,833

 

Exercisable at May 31, 2011

2,670,233

 

 

NOTE 10 – EARNINGS-PER-SHARE CALCULATION

 

Basic earnings per common share for the three and nine months ended February 29, 2012 and 2011 are calculated by dividing net income by weighted-average common shares outstanding during the period. Diluted earnings per common share for the three and nine months ended February 29, 2012 and 2011 are calculated by dividing net income by weighted-average common shares outstanding during the period plus dilutive potential common shares, which are determined as follows:

 

For the three months ended February 29, 2012

For the three months ended February 29, 2011

Net earnings from operations

$  (728,839)

$  (1,066,282)

Weighted-average common shares

      59,462,401

      58,209,667

Effect of dilutive securities:

Warrants

         -

-

Options to purchase common stock

-

-

Dilutive potential common shares

59,462,401

58,209,667

Net earnings per share from operations:

 

 

         Basic

$   (0.01)

$   (0.02)

         Diluted

$   (0.01)

$   (0.02)

 

 

 

 

 

 

 

 

 

 

 

22


 

 

ABAKAN INC.

 (A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 29, 2012 and 2011

 

 

NOTE 10 – EARNINGS-PER-SHARE CALCULATION - continued

 

For the nine months ended February 29, 2012

For the nine months ended February 29, 2011

Net earnings from operations

$  (1,241,360)

$  (2,701,212)

Weighted-average common shares

      59,353,818

      56,546,209


Effect of dilutive securities:

Warrants

         -

-

Options to purchase common stock

-

-

Dilutive potential common shares

59,353,818

56,546,209

 

 

 

Net earnings per share from operations:

 

 

         Basic

$   (0.02)

$   (0.05)

         Diluted

$   (0.02)

$   (0.05)

 

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

 

In periods where losses are reported the weighted-average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.

These securities below were excluded from the calculations above because to include them would be anti-dilutive:

 

 

For the three months ended February 29, 2012

For the three months ended February 29, 2011

Common Stock Equivalents:

 

 

Warrants

3,416,833

2,380,000

Options to purchase common stock

5,545,000

5,500,000

Total of Common Stock Equivalents:

8,255,233

7,880,000

 

 

For the nine months ended February 29, 2012

For the nine months ended February 29, 2011

Common Stock Equivalents:

 

 

Warrants

3,416,833

2,380,000

Options to purchase common stock

5,545,000

5,500,000

Total of Common Stock Equivalents:

8,255,233

7,880,000

 

 

 

23


 

 

ABAKAN INC.

 (A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 29, 2012 and 2011

 

 

NOTE 11 – RELATED PARTY TRANSACTIONS

 

Because of 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 the below agreements and transactions:

 

Consulting Agreements

 

On June 1, 2011, we entered into a consulting agreement commencing June 1, 2011, with a related individual to provide business consulting. The terms of the consulting agreement are the consultant will be paid $10,000 per month. We also agreed to reimburse the consultant for all reasonable business expenses incurred by him in the performance of his duties, and will be in effect until June 1, 2012.

 

Notes Payable – Related Party

 

For the nine months February 29, 2012, we entered into two uncollateralized demand notes with Prosper Financial, an entity controlled by our Chief Executive Officer’s spouse, bearing 8% interest per annum for an aggregate total of $9,000. We also owed $315 in accrued interest for the above notes as of February 29, 2012.

 

On February 2, 2012, we entered into an uncollateralized demand note to a related individual, bearing 8% interest per annum for an aggregate total of $10,500. We also owed $63 in accrued interest for the above note as of February 29, 2012.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24


 

 

ABAKAN INC.

 (A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 29, 2012 and 2011

 

 

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. On October 24, 2011, we granted 100,000 stock options to our former Chief Financial Officer in connection with his Separation Agreement at an exercise price of $1.20 per share, and these options will expire five years from the grant date, and will vest immediately. On January 2, 2012, we granted 100,000 stock options to a consultant at an exercise price of $1.00 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. On January 5, 2012, we granted 150,000 stock options to a consultant at an exercise price of $1.00 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. On February 1, 2012, we granted 70,000 stock options to a consultant at an exercise price of $1.07 per share, and these options will expire ten years from the grant date, and will vest in equal one half parts on the six month anniversary of the option grant date, and another one half part on the twelve month anniversary of the

option grant date. On February 15, 2012, we granted 50,000 stock options to a consultant at an exercise price of $1.03 per share, and these options will expire four 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 3,985,000 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. 

 

 

25


 

 

ABAKAN INC.

 (A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 29, 2012 and 2011

 

 

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 nine months ended February 29, 2012 was estimated using the Black-Scholes model with the following assumptions: 

 

 

August 15, 2011

October 24, 2011

January 1, 15, and February 1, 2012

February 15, 2012

Expected volatility (based on historical volatility)

170.29%

166.66%

162.25%

162.25%

Expected dividends

0.00

0.00

0.00

0.00

Expected term in years

10

5

10

4

Risk-free rate

2.29%

1.10%

1.10%

1.10%

 

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 Abakan’s employee stock options. The dividend yield assumption is based on our history and expectation of dividend payments.

 

A summary of the options granted to employees and non-employees under the plan and changes during the years ended May 31, 2011 and the nine months ended February 29, 2012 is presented below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26


 

 

ABAKAN INC.

 (A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 29, 2012 and 2011

 

 

NOTE 12 – STOCK – BASED COMPENSATION - continued

 

2009 Stock Option Plan (continued)

 

 

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

495,000

 

1.06

 

 

 

Exercised

-

 

-

 

 

 

Forfeited or expired

-

 

-

 

 

 

Balance at February 29, 2012

5,915,000

$

0.77

 

9.00 years

$

185,000

Exercisable at February 29, 2012

1,083,240

$

0.67

 

9.00 years

$

--

Weighted average fair value of

options granted during the period ended February 29, 2012

 

$

1.06

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27


 

 

 

ABAKAN INC.

 (A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 29, 2012 and 2011

 

NOTE 12 – STOCK – BASED COMPENSATION - continued

 

2009 Stock Option Plan (continued)

 

The following table summarizes information about employee stock options under the 2009 Plan outstanding at February 29, 2012:

 

Options Outstanding

Options Exercisable

 

Range of Exercise Price

 

Number Outstanding at February 29,  2012

 

Weighted Average Remaining Contractual Life

 

Weighted Average Exercise Price

 

Intrinsic Value

Number Exercisable at February 29, 2012

 

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

$

--

$

1.00

 

250,000

 

10.00 Years

$

1.00

$

--

--

$

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

$

--

$

1.03

 

50,000

 

4.00 Years

$

1.03

$

--

--

$

0.00

$

--

$

1.05

 

270,000

 

10.0 Years

$

1.05

$

--

50,000

$

1.01

$

--

$

1.07

 

70,000

 

10.00 Years

$

1.07

$

--

--

$

0.00

$

--

$

1.20

 

100,000

 

5.0 Years

$

1.20

$

--

100,000

$

1.20

$

--

$

1.25

 

50,000

 

10.0 Years

$

1.25

$

--

--

$

0.00

$

--

$

1.30

 

250,000

 

10.0 Years

$

1.30

$

--

--

$

0.00

$

--

 

 

 

5,915,000

 

9.0 Years

$

0.77

$

185,000

1,083,240

$

0.67

$

--

 

The total value of employee and non-employee stock options granted during the nine months ended February 29, 2012 and 2011, was $518,484 and $2,092,266, respectively. During nine months ended February 29, 2012 and 2011 Abakan recorded $1,142,192 and $746,177, respectively, in stock-based compensation expense relating to stock option grants.

 

At February 29, 2012 and 2011 there was $2,134,260 and $3,031,815, respectively, of total unrecognized compensation cost related to stock options granted under the plan.  That cost is expected to be recognized pro-rata through February 15, 2015. The following table represents the stock options expense for the each of the next four fiscal years ended May 31:

 

For years ended May 31,

 

Expense

2012

 

 $   347,869

2013

 

      1,233,821

2014

 

        490,399

2015

 

62,171

 

 

 $   2,134,260

 

 

 

 

28


 

 

 

ABAKAN INC.

 (A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 29, 2012 and 2011

 

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, in Ohio, from Powdermet, a related party. The cost of the sub-lease to MesoCoat is $6,700 per month that expires on May 31, 2020.

 

MesoCoat also leases machinery and equipment under various capital lease arrangements, which expires through September 2016. These leases are included in long-term and short-term debt and the related assets have been capitalized.

 

Total expense related to the operating leases was $49,075 for the period of July 13 through February 29, 2012. Interest expense for the leases for the period of July 13 through February 29, 2012 was $2,593.

 

Minimum annual rental commitments are as follows at February 29, 2012:

 

For the years ended May 31,

Capital Leases

Operating Leases

 

 

 

2012

$                       16,066

$                         41,390

2013

                         30,898

                           80,400

2014

                           7,706

                           80,400

2015

                           7,706

                           80,400

2016 and thereafter

                           1,927

                         402,000

Total minimum lease payment

                       $64,303

$                       684,590

 

 

 

Less amount representing interest

                           2,105

 

Present value of net minimum capital lease payments

                        62,198

 

Less current maturities

                        13,904

 

Long-term obligations under capital leases

$                      48,294

 

 

 

NOTE 14 – 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 our company.

 

 

 

 

 

 

 

 

 

29


 

ABAKAN INC.

 (A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 29, 2012 and 2011

 

NOTE 15– SUBSEQUENT EVENTS

 

Management has evaluated subsequent events after the balance sheet date, through the issuance of the financial statements, for appropriate accounting and disclosure. Abakan has determined that there were no such events that warrant disclosure or recognition in the financial statements, except for the below:

 

On March 20, 2012, we issued 27,500 shares of our common stock to two vendors providing investor awareness and promotion for an aggregate value of $36,525, representing the initial payments for consulting agreements for each of them.

 

On March 31, 2012, we closed a private placement for $600,000, or 600,000 units consisting of one share of our restricted common stock and one common stock warrant to purchase shares of our common stock, with a purchase price of $1.25 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 $600,000.

 

30


 

 

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

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

 

Abakan

 

Abakan is dedicated to becoming a market leader in the next generation of surface modification technologies, which protect critical infrastructure, industrial equipment and operating components from corrosion and wear, by assembling controlling interests in next-generation materials science technology firms that have exceptional commercial potential.

 

We have to date acquired a 71% controlling interest in MesoCoat, Inc. (“MesoCoat”), a provider of advanced nanotechnology-based ceramic metallic (cermet) thermal spray coatings and high speed cladding solutions and a 41% non-controlling interest in Powdermet, Inc. (“Powdermet”), a synergistic business producing proprietary metal formulations including hierarchically structured syntactic metal and ceramics composites used by MesoCoat’s cladding and coating processes. Since Powdermet owns 49% of MesoCoat, Abakan’s interest in Powdermet represents a 20% indirect interest in MesoCoat.

 

Operations

 

MesoCoat’s Business

 

MesoCoat, founded in 2007 as a spin out of Powdermet, has positioned itself to become a world leader in metal protection and repair through its high speed metallurgical cladding technologies and long-life cermets intended to address specific industry needs related to conventional oil and gas, oil sands, mining, aerospace, defense, infrastructure, and shipbuilding. The exclusively licensed and developed proprietary metal cladding application process as well as the advanced nano-composite coating materials owned by MesoCoat combine corrosion and wear resistant alloys, and nano-engineered cermet materials with proprietary high-speed application systems. The result is protective cladding applications that unite high strength, hardness, fracture toughness, and a low coefficient of friction into one product structure that can be offered on a competitive basis with existing market solutions.

 

The MesoCoat solutions have already been the recipient of four prestigious R&D 100 awards, a Technology Innovation Program Award (TIP) for 100 year life coatings by the National Institute of Standards and Technology (NIST), and the NorTech Innovation Award for high performance environmentally friendly coatings. Over $35 million has been previously invested in the development of these technologies by various government entities like NASA, the US Departments of Defense, Energy and Transportation, Fortune 100 sponsors and private investment firms.

 

MesoCoat’s two primary solutions are CermaClad™ (large area cladding process) and PComP™ (advanced corrosion and wear coatings).

 

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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 a 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.

 

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

 

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

 

 

 

 

 

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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.

 

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:

 

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Product

Production Scale

Time (months)

PComP™ T

Market Entry

3

PComP™ W

Market Entry

   INITIATED

PComP™ S

Market Entry

8

CermaCladCR

Full Production

7

CermaCladWR

Market Entry

4

CermaCladWR

Full Production

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CermaClad™

 

Each of the four CermaClad™ product lines targets different industry segments. Abakan has targeted the oil and gas (CermaClad™-CRA) and oil sands (CermaClad™-WR) industry sectors as two primary sectors on which to focus our sales efforts. MesoCoat signed a $1.7M phased collaborative agreement with Petrobras on January 7, 2011 to develop new process specifications for cladding the interior diameter of seamless pipe with corrosion resistant alloys. In July, MesoCoat successfully passed Phase 1 qualification for Petrobras and is now awaiting notification to start Phase 2. Given the success of this first joint development agreement (JDA), MesoCoat is currently engaged in discussions with several offshore parties that have expressed interest in signing JDA’s for two of the other three CermaClad™ product lines. Although the CermaClad™ process is still considered late-stage R&D, an estimated six months away from market, business development efforts have focused on relationship building with other leading OEM’s, including Exxon-Mobil Corporation, Chevron, Shell, Saudi Aramco and others, to understand both their buying process and the extensive network of EPIC firms they use to install pipeline for conventional oil & gas exploration and production. The oil sands industry, a part of the unconventional oil & gas exploration and production business, presents another great opportunity as pipes are replaced every six months due to extreme wear. Maintenance of existing pipelines is another huge market that might benefit from MesoCoat’s products.

 

PComP™

 

Recognizing the need for capital to open application shops and increase powder manufacturing capability,

management implemented a focused strategy six months ago to target PComP™-T sales to one industry, concentrated in one geographic market, Houston, Texas. As a result, the PComP™-T product line has already developed a marketing pipeline of over 50 major clients. Several are currently validating the coating technology with their internal testing teams. The purchasing departments at several others have already initiated a vendor approval process based on MesoCoat’s internal wear testing results. The pipeline list of billion dollar corporations includes marquee industry-leading oil service companies as well as oil & gas OEMs -- any one of whom could keep one new plant fully utilized. Based on the counsel of three dominant industry firms, MesoCoat has also focused business development efforts to build additional delivery capability by selecting and qualifying a limited number of prestige Houston-based thermal spray application shops to license its patent-protected technology. Similar sales approaches will be established for the aerospace industry in the Northwest once PComP™-S receives final Joint Test Protocol Component approvals.

 

 

 

 

 

 

 

 

 

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MesoCoat Marketing

 

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.

 

Abakan has directed most of its attention to supporting the strategic growth of MesoCoat. Aggressive marketing has been implemented for both product lines, including sponsorship of industry events. We have also participated in “‘invited speaker” roles at major trade shows targeting cladding, corrosion and wear, in addition to industry-supported tradeshows like Aeromat (aerospace). Development of Department of Defense relationships, along with aggressive government lobbying efforts, has been paramount in gaining traction in defense proposal opportunities. Additionally, an active publishing campaign has resulted in product coverage in multiple top trade journals. As a result, many companies have cold-called MesoCoat for product demonstrations.

 

Powdermet’s Business

 

While MesoCoat’s product focus is on developing advanced cladding and coating solutions to address the corrosion and wear coating needs of clients, Powdermet’s product differentiation is based on its ability to build advanced nano-structured metal formulations (nanocomposites used in cladding and coatings, among other uses) to address life cycle cost reduction needs and energy efficiency. Technologies developed by Powdermet 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.

 

Founded in 2006 Powderment is nationally recognized as a nanotechnology and advanced materials R&D organization with a history of successfully funding innovation by winning over 80 governmental and Small Business Innovation Research Grants. All of the products being produced or developed at Powdermet are based on value-creation gained through nano-scale distribution of metal and/or ceramic phases in a structure. Since 2009 Powdermet has deemphasized exploratory research and development placing more emphasis on engineered solutions and product commercialization.

 

Powdermet has four materials solution families under development:

 

·         SComP™ - A family of syntactic metal composites known for their light weight properties and ability to absorb more 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.

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·         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™.

 

Powdermet Marketing

 

Powdermet does not have an active sales force so most of its market facing activity involves business development efforts to identify companies that will jointly develop one of their R&D stage products. Powdermet has signed a JDA with a major vehicle supplier to further advance the SComP ™ powders and won $3,000,000 in grants last fiscal year to continue product development. Powdermet has several exciting developments underway and Abakan will take a more active role in its development once

MesoCoat’s products are introduced to commercial distribution channels.

 

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 joint venture agreements with additional major oil corporations and service providers by the second quarter 2012.

o   Execute on our 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 February 29, 2012:

 

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

 

During the nine month period ended February 29, 2012, 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 in 2013; the plant is anticipated to be able to produce 10,000 square meters (20km’s) of CermaClad™ clad pipe 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 February 29, 2012, Abakan incurred net losses of $6,458,332. Net losses for the three month period ending February 29, 2012 were $742,695 compared to a net loss of $1,066,280 for the three month period ending February 28, 2011, a decrease of 30%. Net losses for the nine month period ended February 29, 2012 were $1,255,216 compared to a net loss of $2,701,210 for the nine month period ended February 28, 2011, a decrease of 53%.

 

The decrease in net losses over the comparative three month periods can be primarily attributed to the revenue generated by MesoCoat and decreases in consulting expenses offset by increases in general and administrative expenses, related consulting fees, payroll and benefits expense, research and development costs, depreciation and amortization and stock option expenses, which changes reflect the consolidation of MesoCoat’s operations with those of Abakan.

 

The decrease in net losses over the comparative nine month periods can be attributed primarily to the revenue generated by MesoCoat offset by increases in general and administrative expenses, professional fees, consulting expenses, payroll and benefits expense, research and development costs, depreciation and amortization and stock option expenses, which changes reflect the consolidation of MesoCoat’s operations with those of Abakan.

 

We expect net losses to continue to decrease as anticipated commercialization efforts are realized over the next twelve months.

 

Revenues

 

For the period from inception until February 29, 2012, Abakan realized revenues of $2,226,087. Revenues for the three month period ended February 29, 2012 were $1,327,226 as compared to $0 for the three month period ended February 28, 2011. Revenues for the nine month period ended February 29, 2012 were $2,226,087 as compared to $0 for the nine month period ended February 28, 2011. Revenues in the current three and nine month periods can be wholly attributed to the operations of MesoCoat.

 

Revenue in the current three month period was derived from commercial revenues of $15,998, contract and grant revenues of $577,645, and other income of $733,583 comprised of amounts paid by Petrobras under the terms and conditions of the Cooperation Agreement. Revenue in the current nine month period was derived from commercial revenues of $47,513, contract and grant revenues of $1,267,413, and other income of $909,565.

 

We expect revenue growth over the next twelve months as MesoCoat’s new commercial and government sponsored contracts that commenced in the last part of 2011 are completed and new products under development are brought on line for commercial sales.

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Gross Profit

 

For the period from inception until February 29, 2012, Abakan realized a gross profit of $1,521,926. Gross profit for the three month period ended February 29, 2012 was $1,014,096 compared to $0 for the three month period ended February 28, 2011. Gross profit for the nine month period ended February 29, 2012 was $1,520,330 compared to $0 for the nine month period ended February 28, 2011. Gross profits in the current three and nine month periods can be wholly attributed to the operations of MesoCoat.

 

The calculation of gross profit in the current three month period offset revenue of $1,327,226 against cost of revenue of $313,130. The calculation of gross profit in the current nine month period offset revenue of $2,224,491 against cost of revenue of $704,161.

 

We expect gross profits to vary in line with the unique nature of each of contracts in progress. However, once the commercialization of our products is established to scale, we believe that production costs will be more consistent and that gross profits will grow.

 

Expenses

 

For the period from inception until February 29, 2012, Abakan realized expenses of $8,410,979. Expenses for the three month period ended February 29, 2012 were $1,396,143 as compared to $882,023 for the three month period ended February 28, 2011, an increase of 58%. Expenses for the nine month period ended February 29, 2012 were $3,922,202 as compared to $2,105,030 for the nine month period ended February 28, 2011, an increase of 86%.

 

The increase in expenses over the comparative three month periods can be attributed to increases in general and administrative costs to $186,568 from $47,259, related party consulting to $76,500 from $47,100, payroll and benefit costs that increased to $214,181 from $89,423, research and development costs that increased to $248,528 from $0, depreciation and amortization expenses that increased to $46,791 from $1,386 and stock option expenses that increased to $350,336 from $347,449.  The increases can be mainly attributed to the consolidation of Abakan’s operations with that of MesoCoat.

 

The increase in expenses over the comparative nine month periods can be attributed to increases in general and administrative costs to $403,871 from $146,013, professional fees that increased to $204,685 from $143,839, consulting fees that increased to $582,238 from $559,974, payroll and benefit costs that increased to $567,230 from $133,444, depreciation and amortization that increased to $213,021 from $4,150 and research and development fees that increased to $521,740 from $0. The increases can be mainly attributed to the consolidation of Abakan’s operations with that of MesoCoat.

 

We expect that expenses will continue to increase over the next twelve months as Abakan intends to expand research and development, manufacturing capacity, management and marketing resources in pursuit of its growth strategy.

 

Other Income/Expense

 

For the period from inception until February 29, 2012, Abakan realized other income of $457,660. Other expenses for the three month ended February 29, 2012 were $209,842 as compared to $184,257 for the three month period ended February 28, 2011, an increase of 14%. Other income for the nine month period ended February 29, 2012 was $1,173,595 as compared to other expense of $596,180 for the nine month period ended February 28, 2011. Other income can be primarily attributed to an unrealized gain of $1,764,345 on reconciling to fair value our 34% equity interest in MesoCoat prior to consolidation.

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The increase in other expense over the comparative three month periods can be attributed to the accrual of interest on loans and the amortization of discount on debt.

 

The transition to other income from other expense over the comparative nine month periods can be primarily attributed to the recognition of an unrealized gain of $1,764,354 on reconciling to fair value our 34% interest in MesoCoat prior to the consolidation, a gain on debt settlement and an equity amount credited for our interest in Powdermet in the current nine month period. 

 

We expect to continue to incur other expense in future periods based on 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 February 29, 2012.

 

Capital Expenditures

 

Abakan, through its majority interest in MesoCoat, has spent $2,697,754 on property, plant and equipment for the period from inception to February 29, 2012.

 

Liquidity and Capital Resources

 

Abakan has been in the development stage since inception.

 

As of February 29, 2012 Abakan had a working capital deficit of $1,099,433, current assets of $623,582 consisting of cash and cash equivalents of $464,504, accounts receivable of $23,492, a note receivable from a related party of $4,500, and prepaid expenses of $131,086. Abakan had total assets of $11,496,371 consisting of current assets, property, plant and equipment of $2,596,600, patents and licenses of $1,896,703, an assignment agreement of $250,000, an investment in Powdermet of $1,791,401, goodwill of $4,335,646, and finance fees of $2,439.

 

As of February 29, 2012 Abakan had current liabilities of $1,723,015, consisting of accounts payable of $550,365, accounts payable to related parties of $92,707, capital leases of $13,904, loans payable of $527,088, accrued interest of $214,836, loan payable to related parties of $19,500 accrued interest to a related party of $378 and accrued liabilities of $304,237. Abakan had total liabilities of $5,536,324 consisting of current liabilities, loans payable of $3,765,015 and capital leases of $48,294.

 

Stockholders equity, including controlling and non-controlling interests was $5,960,047 as of February 29, 2012.

 

 

 

 

 

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For the period from inception until February 29, 2012, cash flow used in operating activities was $2,294,791.  Cash flow used in operating activities for the nine month period ended February 29, 2012, was $654,941 compared to cash flow used in operating activities of $730,411 for the nine month period ending February 29, 2011. Cash flow used in operating activities during the current period can be primarily attributed to the unrealized gain on the consolidation with MesoCoat of $1,764,345, equity in investee profit of $69,745 and pre-paid expenses of $114,886 offset by depreciation and amortization of $213,021, the amortization of a discount on debt of $451,003, a stock option expense of $1,142,192, stock issued for services of $119,600, equity in an investee loss of $44,408, accounts receivable of $147,964, accounts payable of $139,318, accrued interest on loans payable of $137,007 and accrued liabilities of $99,003.

 

We expect to continue to use additional cash flow in operating activities over the next twelve months as net losses are anticipated in the near term as products are introduced to market and fiscal operational responsibilities are met.

 

For the period from inception until February 29, 2012, cash flow used in investing activities was $5,881,402. Cash flow used in investing activities for the nine month period ending February 29, 2012, was $467,516 compared to $1,761,018 for the nine month period ending February 28, 2011. Cash flow used in investing activities during the current period can be primarily attributed to the purchase of property, plant, and equipment in the amount of $84,839 and the capitalization of patents and licenses in the amount of $90,327 offset by cash assumed on consolidation with MesoCoat in the amount of $307,650.

 

We expect to use additional cash flow in investing activities over the next twelve months in additional plant, machinery and equipment as anticipated manufacturing facilities are brought into service.

 

Specifically, 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 together with 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 $2,270,901 had been allocated to construction in progress including $ 80,915 in accruals as of February 29, 2012.  MesoCoat will require approximately an additional $4.6 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 February 29, 2012, cash flow provided by financing activities was $8,640,697. Cash flow provided by financing activities for the nine month period ending February 29, 2012 was $1,586,961 as compared to $2,454,529 for the nine month period ending February 29, 2011. Cash flow provided by financing activities in the current period is attributable to proceeds from the sale of common stock of $545,465, proceeds from loans payable of $1,158,106 and proceeds from a related party loan of $39,626 offset by payments on loans payable of $136,995.

 

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 expand its business.

 

42


 

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 February 29, 2012 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 Abakan 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, our 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.

 

Off Balance Sheet Arrangements

 

As of February 29, 2012, 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 net income from the operations of MesoCoat; (iii) realizing a net gain from its interest in Powdermet; (iv) converting debt to equity and (v) obtaining loans and grants from financial or government institutions. Management believes that it will be able to obtain funding to allow Abakan to remain a going concern through the methods discussed above, though there can be no assurances that such methods will prove successful.

 

 

 

43


 

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.

 

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 -2 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

 

 

 

44


 

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

 

Recent Accounting Pronouncements

 

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

 

ITEM 3.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not required.

 

ITEM 4.          CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

In connection with the preparation of this quarterly report, an evaluation was carried out by Abakan’s management, with the participation of the chief executive officer and the chief financial officer, of the effectiveness of Abakan’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)) as of February 29, 2012. 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

 

There have been no changes in internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the period ended February 29, 2012, that materially affected, or are reasonably likely to materially affect, Abakan’s internal control over financial reporting.

 

 

 

 

 

 

 

 

 

45


 

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 $6,458,332 for the period from June 27, 2006 (inception) to February 29, 2012. Since we have been without significant revenue since inception and have only recently transitioned to producing limited revenue, as a result of the business combination with MesoCoat, historical losses may continue into the future.

 

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

 

Abakan’s audits for the periods ended May 31, 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.

46


 

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

 

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

 

MesoCoat and Powdermet compete with larger and better financed corporations.

 

Competition within the industrial coatings industry and other high technology industries is intense. While each of MesoCoat and Powdermet’s products are distinguished by next-generation innovations that are more sophisticated and cost effective than many competitive products currently in the market place, a number of entities and new competitors may enter the market in the future. Some of MesoCoat’s and Powdermet’s existing and potential competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than we do, including well known multi-national corporations. Accordingly, MesoCoat’s and Powdermet’s products could become obsolete at any time. Competitors could develop products similar to or better than our own, finish development of new technologies in advance of either MesoCoat’s or Powdermet’s research and development, or be more successful at marketing new products, any of which factors may hurt our prospects for success.

 

Market acceptance of the products and processes produced by MesoCoat and Powdermet is critical to our growth.

 

We expect to generate revenue and realize a gain on our interest in Powdermet from the development and sale of products and processes produced by MesoCoat and Powdermet. Market acceptance of those products is therefore critical to our growth. If our customers do not accept or purchase those products or processes produced by MesoCoat and Powdermet, then our revenue, cash flow and operating results will be negatively impacted.

 

General economic conditions will affect our operations.

 

Changes in the general domestic and international climate may adversely affect the financial performance of Abakan, MesoCoat and Powdermet. Factors that may contribute to a change in the general economic climate include industrial disputes, interest rates, inflation, international currency fluctuations and political and social reform. Further, the delayed revival of the global economy is not conducive to rapid growth, particularly of technology companies with newly commercialized products.

 

MesoCoat and Powdermet rely upon patents and other intellectual property.

 

MesoCoat and Powdermet rely on a combination of patent applications, trade secrets, trademarks, copyrights and licenses, together with non-disclosure and confidentiality agreements, to establish and protect proprietary rights to technologies they develop. Should either of MesoCoat or Powdermet be unable to adequately protect their intellectual property rights or become subject to a claim of infringement, their businesses and that of Abakan may be materially adversely affected.

 

 

47


 

MesoCoat and Powdermet expect to prepare patent applications in accordance with their respective worldwide intellectual property strategies on acquiring new technologies. However, neither they nor Abakan can be certain that any patents will be issued with respect to future patents pending or future patent applications. Further, neither they nor Abakan know whether any future patents will be upheld as valid, proven enforceable against alleged infringers or be effective in preventing the development of competitive patents. Abakan believes that MesoCoat and Powdermet have each implemented a sophisticated internal intellectual property management system to promote effective identification and protection of their products and know-how in connection with the technologies they have developed and may develop in the future

 

We may not be able to effectively manage our growth.

 

We expect considerable future growth in our business. Such growth will come from the addition of new plants, the increase in global personnel, and the commercialization of new products. Additionally, our products should have an impact on the cladding industry; as companies learn that they can receive materials with a short lead time at a higher quality and lower price, market demand should grow, expanding the overall market itself. To achieve growth in an efficient and timely manner, we will have to maintain strict controls over our internal management, technical, accounting, marketing, and research and development departments. We believe that we have retained sufficient quality personnel to manage our anticipated future growth though we are still striving to improve financial accounting oversight to ensure that adequate reporting and control systems in place. Should we be unable to successfully manage our anticipated future growth by adherence to these strictures, costs may increase, growth could be impaired and our ability to keep pace with technological advances may be impaired which failures could result in a loss of future customers.

 

Environmental laws and other governmental legislation may affect our business.

 

Should the technologies which each of MesoCoat and Powdermet have under development not comply with applicable environmental laws then Abakan’s business and financial results could be seriously harmed. Furthermore, changes in legislation and governmental policy could also negatively impact us. Although we are currently unaware of any introduced or proposed bills, or policy, that might cause us to make specific changes to our operations, no assurance can be given that if new legislation is passed we will be able to make the changes to comport our technologies with future regulatory requirements.

 

Abakan and those 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.
 

48


 

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.

 

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

49


 

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

 

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

 

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

 

On March 31, 2012 Abakan authorized the issuance of 600,000 restricted common shares and 600,000 share purchase warrants, each warrant convertible into an additional share at an exercise price of $1.25 for a two year period from the date of issue, for cash and other valuable consideration of $600,000 in reliance upon the exemptions from registration provided by Section 4(2), Regulation D and Regulation S of the Securities Act of 1933, as amended (“Securities Act”) as follows:

 

Name

Consideration

Basis

Shares

Warrants

Exemption

 

 

 

 

 

 

Stratton SA

$450,000

Subscription

450,000

450,000

Sec. 4(2)/Reg S

River Fish Holdings Ltd.

$100,000

Subscription

100,000

100,000

Sec. 4(2)/Reg S

Costas Takkas

$50,000

Services

50,000

50,000

Sec. 4(2)/Reg D

 

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

 

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

 

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 was outside the United States at the time of the offering, and ensuring that the offerees to whom the restricted common shares and warrants were offered and authorized were non-U.S. offerees with addresses in a foreign country.

 

 

 

 

 

50


 

 

On March 20, 2012 Abakan authorized the issuance of 37,500 restricted common shares for services rendered pursuant to the terms and conditions of their respective agreements in reliance upon the exemptions from registration provided by Section 4(2), and Regulation D of the Securities Act as follows:

 

Name

Basis

Shares

Exemption

 

 

 

 

Financial Insights

Services

12,500

Sec. 4(2)/Reg D

Livingstone Securities

Services

15,000

Sec. 4(2)/Reg D

 

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

 

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

 

On February 20, 2012 Abakan authorized the issuance of 741,600 restricted common shares and 706,600 share purchase warrants, each warrant convertible into an additional share at an exercise price of $1.25 for a two year period from the date of issue, for cash and other valuable consideration of $741,600 in reliance upon the exemptions from registration provided by Section 4(2), Regulation D and Regulation S of the Securities Act of 1933 as follows:

 

Name

Consideration

Basis

Shares

Warrants

Exemption

 

 

 

 

 

 

Stratton SA

$330,000

Subscription

330,000

330,000

Sec. 4(2)/Reg S

Ammon & Associates, Inc.

$300,000

Subscription

300,000

300,000

Sec. 4(2)/Reg D

Theodore Sarniak III

$31,600

Subscription

31,600

31,600

Sec. 4(2)/Reg D

Orsa & Company

$25,000

Services

25,000

25,000

Sec. 4(2)/Reg D

Hermann Buschor

$20,000

Services

20,000

20,000

Sec. 4(2)/Reg D

Crystal Research Associates, LLC.

$20,000

Services

20,000

 

Sec. 4(2)/Reg D

Vladimir Chernyakov

$15,000

Services

15,000

 

Sec. 4(2)/Reg S

 

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