Attached files
file | filename |
---|---|
EXCEL - IDEA: XBRL DOCUMENT - ABAKAN, INC | Financial_Report.xls |
EX-31.1 - ABAKAN EXHIBIT - ABAKAN, INC | exhibit311.htm |
EX-31.2 - ABAKAN EXHIBIT - ABAKAN, INC | exhibit312.htm |
EX-32.2 - ABAKAN EXHIBIT - ABAKAN, INC | exhibit322.htm |
EX-32.1 - ABAKAN EXHIBIT - ABAKAN, INC | exhibit321.htm |
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 November 30, 2013.
o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the
transition period from
to
.
Commission file number: 000-52784
ABAKAN INC.
(Exact name of registrant as specified in its charter)
Nevada
98-0507522
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
2665 S. Bayshore Drive, Suite 450, Miami, Florida 33133
(Address of principal executive offices) (Zip Code)
(786) 206-5368
(Registrants 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 þ Non-accelerated filer o Smaller reporting company o
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 issuers classes of common stock, as of the latest
practicable date. The number of shares outstanding of the issuers common stock, $0.0001 par value (the
only class of voting stock), at January 8, 2014 was 64,472,598.
1
TABLE OF CONTENTS
PART 1- FINANCIAL INFORMATION
Item1.
Financial Statements:
3
Condensed Consolidated Balance Sheets for the period ended
4
November 30, 2013 (unaudited) and May 31, 2013
Unaudited Condensed Consolidated Statements of Operations for the
5
Three and six months ended November 30, 2013 and 2012, and cumulative
amounts from development stage activities (June 27, 2006 (Inception) through
November 30, 2013)
Unaudited Condensed Consolidated Statements of Cash Flows for the
6
six months ended November 30, 2013 and 2012, and cumulative amounts from
development stage activities (June 27, 2006 (inception) through November 30,
2013)
Condensed Notes to Consolidated Financial Statements (Unaudited)
7
Management's Discussion and Analysis of Financial Condition and Results of
16
Operations
Quantitative and Qualitative Disclosures about Market Risk
26
Controls and Procedures
26
PART II-OTHER INFORMATION
Legal Proceedings
27
Risk Factors
27
Unregistered Sales of Equity Securities and Use of Proceeds
33
Defaults Upon Senior Securities
33
Mine Safety Disclosures
33
Other Information
33
Exhibits
33
34
35
2
PART I FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
As used herein, the terms Abakan, we, our, and us refer to Abakan Inc., a Nevada corporation,
and its consolidated subsidiaries, unless otherwise indicated. In the opinion of management, the
accompanying financial statements included in this Form 10-Q reflect all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation of the results of operations for the periods
presented. The results of operations for the periods presented are not necessarily indicative of the results
to be expected for the full year.
3
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
November
30,
May 31,
2013
2013
(unaudited)
ASSETS
Current assets
Cash and cash equivalents
$
91,368 $
233,040
Accounts receivable
140,367
105,523
Note receivable - related parties
4,500
4,500
Prepaid expenses
56,310
117,028
Other current assets
8,164
15,799
Total current assets
300,709
475,890
Non-current assets
Property, plant and equipment, net
5,671,188
5,595,007
Patents and licenses, net
6,214,659
7,545,163
Assignment agreement - MesoCoat
190,792
210,528
Investment - Powdermet (Note 3)
2,226,742
2,449,312
Goodwill
364,384
364,384
Total Assets
$
14,968,474 $
16,640,284
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable
$
1,463,302 $
890,791
Accounts payable - related parties
446,947
251,004
Capital leases - current portion (Note 4)
29,300
28,006
Loans payable, net of discounts of $0 and $160,472 (Note 4)
4,365,773
965,555
Accrued interest - loans payable
182,153
153,825
Loan payable- related parties (Note 4)
18,530
30,000
Deferred revenue
293,433
-
Accrued interest related parties
62
1,987
Accrued liabilities
834,391
377,392
Total current liabilities
7,633,891
2,698,560
Non-current liabilities
Loans payable (Note 4)
1,131,250
4,241,278
Capital leases - non-current portion (Note 4)
59,466
63,875
Total liabilities
8,824,607
7,003,713
Commitments and contingencies
Stockholders' equity
Preferred stock, $0.0001 par value, 50,000,000 shares
authorized, none issued and outstanding
-
-
Common stock, par value $0.0001, 2,500,000,000 shares
64,412,598 issued and outstanding November 30, 2013,
64,284,855 issued and outstanding - May 31, 2013
6,443
6,430
Subscription receivable
-
(76,244)
Paid-in capital
21,786,794
20,833,426
Contributed capital
5,050
5,050
Accumulated deficit during the development stage
(17,108,232)
(13,545,788)
4,690,055
7,222,874
Non-controlling interest
1,453,812
2,413,697
Total stockholders' equity
6,143,867
9,636,571
Total liabilities and stockholders' equity
$
14,968,474 $
16,640,284
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
4
ABAKAN INC.
(A DEVELOPMENT STATE ENTERPRISE)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended
For the six months ended
June 27, 2006
November 30,
November 30,
(inception) to
Revenues
2013
2012
2013
2012
November 30, 2013
Commercial
$
112,140 $
50,781 $
137,387 $
70,081 $
405,140
Contract and grants
71,625
777,502
135,028
1,324,829
3,890,282
Other income
10,094
(268,756)
10,094
-
774,973
193,859
559,527
282,509
1,394,910
5,070,395
Cost of revenues
106,640
205,227
187,172
542,001
1,975,443
Gross profit
87,219
354,300
95,337
852,909
3,094,952
Expenses
General and administrative
General and administrative
192,750
176,990
379,110
338,677
2,105,764
Professional fees
139,213
136,933
459,535
257,237
1,542,404
Professional fees - related parties
15,000
15,000
33,028
30,000
258,028
Consulting
245,658
259,085
519,467
623,017
3,606,246
Consulting - related parties
40,500
123,250
119,000
222,677
1,800,230
Payroll and benefits expense
306,051
160,701
840,036
343,677
2,687,139
Depreciation and amortization
193,646
108,432
392,065
193,932
1,141,221
Research and development
341,331
242,586
829,948
536,194
2,914,454
Impairment of asset
-
-
-
-
180,000
Stock expense on note conversion
-
37,223
-
37,223
730,097
Stock options expense
301,185
439,427
619,665
899,211
5,035,945
Total expenses
1,775,334
1,699,627
4,191,854
3,481,845
22,001,528
Loss from operations
(1,688,115)
(1,345,327)
(4,096,517)
(2,628,936)
(18,906,576)
Other (expense) income
Interest expense:
Interest loans
(60,365)
(119,244)
(99,280)
(223,012)
(647,159)
Interest - related parties
(500)
(773)
(1,113)
(773)
(8,446)
Liquidated damages
-
-
-
-
(250,000)
Amortization of discount on debt
-
(215,957)
(137,364)
(397,085)
(1,588,517)
Total interest expense
(60,865)
(335,974)
(237,757)
(620,870)
(2,494,122)
Interest income
4
62
7
3,755
8,172
Creditor Fee
-
-
-
-
(241,051)
Gain on debt settlement
-
-
-
-
274,967
Gain on sale of assets
-
-
-
-
428,796
Unrealized gain on MesoCoat acquisition
-
-
-
-
1,764,345
Equity in Powdermet income/ (loss)
(77,738)
(100,276)
(222,570)
(59,101)
576,742
Equity in MesoCoat loss
-
-
-
(586,020)
Total Other (expense) income
(138,599)
(436,188)
(460,320)
(676,216)
(268,171)
Net profit/ (loss) before non-controlling
interest
(1,826,714)
(1,781,515)
(4,556,837)
(3,305,152)
(19,174,747)
Non-controlling interest in MesoCoat Loss
403,073
209,062
994,393
325,316
2,066,515
Net profit/ (loss) attributable to Abakan
(1,403,641)
(1,572,453)
(3,562,444)
(2,979,836)
(17,108,232)
Provision for income taxes
-
-
-
-
-
Net profit/ (loss)
$ (1,423,641) $ (1,572,453) $ (3,562,444) $
(2,979,836) $
(17,108,232)
Net profit/ (loss) per share basic
$
(0.02) $
(0.03) $
(0.06) $
(0.05)
Net profit/ (loss) per share diluted
$
(0.02) $
(0.03) $
(0.06) $
(0.05)
Weighted average number of common
shares outstanding basic
64,332,583
61,999,242
64,308,589
61,806,104
Weighted average number of common
shares outstanding diluted
64,332,583
61,999,242
64,308,589
61,806,104
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended
June 27, 2006
November 30,
(Inception) to
2013
2012
November 30, 2013
NET CASH (USED IN) DEVELOPMENT STAGE
ACTIVITIES
$
(1,349,762)
(893,513)
(7,249,079)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant, equipment and website
(434,087)
(1,214,142)
(4,216,289)
Proceeds from sale of capital assets
470,921
MesoCoat - minority interest, net of cash assumed in
business combination
(2,390,266)
Investment in MesoCoat
(750,070)
Powdermet - minority interest
(1,650,000)
Assignment agreement MesoCoat
(100,000)
Capitalized patents and licenses
(20,200)
(22,451)
(163,468)
Waste to Energy Group Inc.
(180,000)
NET CASH USED IN INVESTING ACTIVITIES
(454,287)
(1,236,593)
(8,979,172)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock
76,244
1,091,101
9,300,514
Proceeds from loans payable
1,610,000
1,037,580
7,568,579
Payments on loans payable
(20,752)
(138,974)
(604,219)
Proceeds from loans payable - related parties
-
66,200
145,880
Payments on loans payable related parties
-
(36,253)
(15,137)
Repayments of capital leases
(3,115)
(18,023)
(81,048)
Stock Issuable
(15,500)
-
Proceeds from capital contributed
-
-
5,050
NET CASH PROVIDED BY FINANCING
ACTIVITIES
1,662,377
1,986,131
16,319,619
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
(141,672)
(143,975)
91,368
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD
233,040
859,566
-
CASH AND CASH EQUIVALENTS, END OF
PERIOD
$
91,368 $
715,591 $
91,368
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2013 and 2012
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
In the opinion of management, the accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States of
America (GAAP) for interim financial information and with the instructions to Form 10-Q. Accordingly,
they do not include all of the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of Abakans financial position as of November 30, 2013, and
the results of its operations and cash flows for the six months ended November 30, 2013, have been made.
Operating results for the six months ended November 30, 2013 are not necessarily indicative of the results
for the year.
These condensed consolidated financial statements should be read in conjunction with the financial
statements and notes for the year ended May 31, 2013 contained in Abakans Form 10-K.
Consolidation Policy
The accompanying November 30, 2013 financial statements include Abakans accounts and the accounts of
its subsidiaries. All significant intercompany transactions and balances have been eliminated in
consolidation. Abakans ownership of its subsidiaries as of November 30, 2013 is as follows:
Name of Subsidiary
Percentage of Ownership
AMP SEZC (Cayman)
100.0%
AMP Distributors (Florida)
100.0%
MesoCoat, Inc.
52.5%
MesoCoat, Inc. (MesoCoat) formed a wholly-owned subsidiary, MesoCoat Coating Services, Inc. on
June 13, 2013. There was no financial activity during the quarter ending November 30, 2013.
Non-Controlling Interest
Non-controlling interest represents the 47.5% minority shareholders proportionate share of the equity of
MesoCoat. Abakans 52.5% controlling interest in MesoCoat requires that its operations be included in
its consolidated financial statements. The equity interest of MesoCoat that is not owned by Abakan is
shown as a non-controlling interest in the consolidated financial statements.
Abakans 41% minority interest share of Powdermet, Inc.s (Powdermet) income or loss is shown as
Equity share of Powdermet income (loss) in the statement of operations of the consolidated financial
statements. On June 13, 2013, Powdermet formed a wholly owned subsidiary, Terves Inc.
Development Stage Enterprise
At November 30, 2013, Abakans business operations had not fully developed and are dependent upon
funding and therefore Abakan is considered a development stage enterprise.
7
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2013 and 2012
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Accounts Receivable
Accounts receivable are stated at face value, less an allowance for doubtful accounts. Abakan provides an
allowance for doubtful accounts based on management's periodic review of accounts, including the
delinquency of account balances. Accounts are considered delinquent when payments have not been
received within the agreed upon terms, and are written off when management determines that collection is
not probable. As of November 30, 2013 management has determined that no allowance for doubtful
accounts is required.
Deferred Revenue
Deferred revenue represents revenues collected but not earned as of the reporting date.
Subsequent Events
In accordance with ASC 855-10 Subsequent Events, Abakan has evaluated subsequent events and
transactions for potential recognition or disclosure in the financial statements through the date the
financial statements were issued (Note 9).
2. GOING CONCERN
The accompanying financial statements have been prepared assuming that Abakan will continue as a
going concern. Abakan had net losses for the period from June 27, 2006 (inception) to the period ended
November 30, 2013, of $17,108,232 and a working capital deficit of $7,333,182. These conditions raise
substantial doubt about Abakans ability to continue as a going concern. Abakans continuation as a
going concern is dependent on its ability to develop additional sources of capital, and/or achieve
profitable operations and positive cash flows. Since inception Abakan has funded its operations through
the issuance of common stock, debt financing, related party loans and advances. Abakan is committed to
aggressively pursuing its present business plan and, and will seek additional debt and or equity
financing as required to meet its objectives. The accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
8
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2013 and 2012
3. INVESTMENT IN NON-CONTROLLING INTEREST
Powdermet, Inc.
Abakan owns a forty one percent (41%) interest in Powdermet. Powdermet owns 47.5% of MesoCoat as
of November 30, 2013. Abakans 41% ownership of Powdermet, results in indirect ownership of the
shares of MesoCoat that Powdermet owns. On June 13, 2013, Powdermet formed a wholly owned
subsidiary, Terves Inc. There was minimal financial activity during the quarter ending November 30,
2013, for Terves. The results for Terves Inc. have been consolidated in the results of Powdermet.
We have analyzed our investment in accordance of Investments Equity Method and Joint Ventures
(ASC 323), and concluded that the acquisition of our 41% minority interest gives us significant influence
over Powdermets business actions, board of directors, and its management, and therefore we account for
our investment using the Equity Method. The table below reconciles our investment amount and equity
method amounts to the amount on the accompanying balance sheet.
Investment balance, May 31, 2013
$
2,449,312
Equity in loss for six months ended November 30, 2013
(222,570)
Investment balance, November 30, 2013
$
2,226,742
Below is a table with summary financial results of operations and financial position of Powdermet:
Powdermet Inc.
For the six months ended
For the six months ended
November 30, 2013
November 30, 2012
Equity Percentage
41%
41%
Condensed income statement information:
Total revenues
$
1,017,706 $
1,238,694
Total cost of revenues
291,113
492,708
Gross margin
726,593
745,986
Total expenses
(593,871)
(583,669)
Minority interest loss in MesoCoat
(994,394)
(306,465)
Provision for income tax benefit
318,818
-
Net profit/ (loss)
$
(542,854) $
(144,148)
Abakans equity in net profit/(loss): 41%
$
(222,570) $
(59,101)
Condensed balance sheet information:
November 30, 2013
May 31, 2013
Total current assets
$
1,206,111 $
536,111
Total non-current assets
2,061,569
3,077,305
Total assets
$
3,267,680 $
3,613,416
Total current liabilities
$
605,293 $
260,897
Total non-current liabilities
1,529,185
1,676,463
Total liabilities
2,134,478
1,937,360
Total equity
1,133,202
1,676,056
Total liabilities and equity
$
3,267,680 $
3,613,416
9
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2013 and 2012
4. LOANS PAYABLE
As of November 30, 2013, and May 31, 2013, the loans payable balance was comprised of:
Description
November
May 31, 2013
30, 2013
Convertible demand note to an unrelated entity bearing 5% interest per annum
$
1,500,000 $
1,500,000
which matures on September 15, 2014. The note is shown net of a discount of $-0-
and $-0-, respectively, attributable to the beneficial conversion feature, and an
effective interest rate of 31% due the attached warrants.
Convertible demand note to an unrelated entity bearing 5% interest per annum
200,000
175,163
which matures on September 15, 2014. The note is shown net of a discount of $-0-
and $24,837, respectively, attributable to the beneficial conversion feature, and an
effective interest rate of 176% due to the attached warrants.
Convertible demand note to an unrelated entity bearing 5% interest per annum
500,000
387,473
which matures on July 14, 2014. The note is shown net of a discount of $-0- and
$112,527, respectively, attributable to the beneficial conversion feature, and an
effective interest rate of 143% due to the attached warrants.
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum
70,000
70,000
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum
3,850
3,850
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum
19,350
19,350
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum
20,000
20,000
Collateralized term note to an unrelated entity bearing 5% interest per annum
689,000
-
which matures on April 29, 2014
Collateralized term note to an unrelated entity bearing 5% interest per annum
80,000
-
which matures on April 29, 2014
Collateralized term note to an unrelated entity bearing 5% interest per annum
180,000
-
which matures on April 29, 2014
Uncollateralized demand notes to an unrelated entity bearing 5% interest per
500,000
-
annum
Uncollateralized demand notes to an unrelated entity bearing 5% interest per
50,000
-
annum
Uncollateralized demand notes to an unrelated entity bearing 5% interest per
70,000
-
annum
Uncollateralized demand notes to an unrelated entity bearing 6% interest per
20,000
annum
Collateralized note to an unrelated entity bearing 1% interest for the first year and
1,000,000
1,000,000
then 7% per annum for years two seven.
Uncollateralized demand note to a related entity bearing 8% interest per annum
18,530
30,000
Convertible demand note to an unrelated entity bearing 7.5% imputed interest per
44,216
48,228
annum which matures on July 10, 2018.
Uncollateralized notes to an unrelated entity bearing 8% interest per annum,
405,000
405,877
matures on September 15, 2014
Capital leases payable to various vendors expiring in various years through
88,766
91,881
September 2016; collateralized by certain equipment with a cost of $205,157.
Collateralized 5 year term note to an unrelated entity bearing 5.15% interest
145,607
-
Uncollateralized demand note to an unrelated entity for royalties shown net of
-
1,576,892
discount of $23,108
$
5,604,319 $
5,328,714
Less current liabilities
4,413,603
1,023,561
Total long term liabilities
$
1,190,716 $
4,305,153
10
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2013 and 2012
4. LOANS PAYABLE - CONTINUED
On October 30, 2013, Abakan and MesoCoat entered into an agreement with an unrelated entity in which
$680,000 of uncollateralized demand notes and $9,000 in accrued interest were exchanged for a
$689,000, 5% secured promissory note maturing on April 29, 2014. The agreement also includes the
commitment by the unrelated entity to loan MesoCoat $80,000 on closing and three loans of $180,000
loans on November 11, 2013, December 10, 2013 and January 10, 2014 under the same terms of the
$689,000 note.
5. STOCKHOLDERS' EQUITY
Common Stock Issuances
For the six months ended November 30, 2013, Abakan issued the following shares for services and
compensation:
On October 25, 2013, we issued 19,802 shares of our common stock for services performed valued at
$60,000.
On October 25, 2013, we issued 25,000 shares of our common stock for services performed valued at
$73,500.
On October 25, 2013, we issued 57,242 shares of our common stock to the MesoCoat Inc. Supplemental
Discretionary Tax-Qualified Profit Sharing Plan and Trust valued at $72,728.
On October 25, 2013, we issued 25,699 shares of our common stock to the Powdermet, Inc. Supplemental
Discretionary Tax-Qualified Profit Sharing Plan and Trust valued at $72,728.
A summary of the common stock warrants granted, forfeited or expired during the six months ended
November 30, 2013 and the year ended May 31, 2013 is presented below:
Weighted
Weighted
Average
Average
Remaining
Number of
Exercise
Contractual
Warrants
Price
Terms (In Years)
Balance at June 1, 2012
2,066,296
$
1.64
2.00 years
Granted
1,186,934
2.35
Exercised
(270,233)
1.50
Forfeited or expired
(140,005)
1.50
Balance at May 31, 2013
2,842,992
$
1.80
1.18 years
Granted
-
-
Exercised
-
-
Forfeited or expired
-
-
Balance at November 30, 2013
2,842,992
$
1.80
.67 years
Exercisable at November 30, 2013
2,842,992
$
1.80
.67 years
Weighted average fair value of
options granted during the six months
ended November 30, 2013
$
NA
11
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2013 and 2012
5. STOCKHOLDERS' EQUITY - CONTINUED
The following table summarizes information about the common stock warrants outstanding at
November 30, 2013:
Warrants Exercisable
Weighted
Weighted
Weighted
Range of
Average
Average
Average
Exercise
Number
Remaining
Exercise
Number
Exercise
Price
Outstanding
Contractual Life
Price
Exercisable
Price
$
1.25
1,306,595
.30 Years
$
1.25
$
1,306,595 $
1.25
$
1.50
250,000
1.40 Years
$
1.50
$
250,000 $
1.50
$
2.00
574,463
.54 Years
$
2.00
$
574,463 $
2.00
$
2.70
576,272
1.14 Years
$
2.70
$
576,272 $
2.70
$
3.00
135,662
1.39 Years
$
3.00
$
135,662 $
3.00
2,842,992
.67 Years
$
1.80
$
2,842,992 $
1.80
6. EARNINGS-PER-SHARE CALCULATION
Basic earnings per common share for the three and six months ended November 30, 2013 and 2012 are
calculated by dividing net income by weighted-average common shares outstanding during the period.
Diluted earnings per common share for the three and six months ended November 30, 2013 and 2012 are
calculated by dividing net income by weighted-average common shares outstanding during the period
plus dilutive potential common shares, which are determined as follows:
For the three months
For the three months
ended November 30,
ended November 30,
2013
2012
Net earnings (loss) from operations
$
(1,423,641)
$ (1,572,453)
Weighted-average common shares
64,332,583
61,999,242
Effect of dilutive securities:
Warrants
-
-
Options to purchase common stock
-
-
Dilutive potential common shares
64,332,583
61,999,242
Net earnings per share from operations:
Basic
$
(0.02)
$ (0.03)
Diluted
$
(0.02)
$ (0.03)
12
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2013 and 2012
6. EARNINGS-PER-SHARE CALCULATION - CONTINUED
For the six months ended For the six months ended
November 30, 2013
November 30, 2012
Net earnings (loss) from operations
$
(3,562,444)
$ (2,979,836)
Weighted-average common shares
64,308,589
61,806,104
Effect of dilutive securities:
Warrants
-
-
Options to purchase common stock
-
-
Dilutive potential common shares
64,308,589
61,806,104
Net earnings per share from operations:
Basic
$
(0.06)
$ (0.05)
Diluted
$
(0.06)
$ (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.
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
For the three months
November 30, 2013
ended November 30, 2012
Common Stock Equivalents:
Warrants
2,842,992
2,403,796
Options to purchase common stock
3,716,667
5,860,000
Total of Common Stock Equivalents:
6,559,659
8,263,796
For the six months ended
For the six months ended
November 30, 2013
November 30, 2012
Common Stock Equivalents:
Warrants
2,842,992
2,403,796
Options to purchase common stock
3,716,667
5,860,000
Total of Common Stock Equivalents:
6,559,659
8,263,796
13
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2013 and 2012
7. STOCK BASED COMPENSATION
2009 Stock Option Plan Abakan
Our board of directors adopted and approved our 2009 Stock option Plan (Plan) on December 14, 2009,
as amended on June 14, 2012, which provides for the granting and issuance of up to 10 million shares of
our common stock.
The total value of employee and non-employee stock options granted during the six months ended
November 30, 2013 and 2012, was $234,271 and $1,315,619, respectively.
For the six months ended November 30, 2013, Abakan granted 80,000 stock options to an officer of
MesoCoat on June 14, 2013. The officer is not longer employed with the company and the options were
not vested and no longer outstanding.
A summary of the options granted to employees and non-employees under the plan and changes during
the six months ended November 30, 2013 year ending May 31, 2013 is presented below:
Weighted
Weighted
Average
Average
Remaining
Aggregate
Number of
Exercise
Contractual
Intrinsic
Options
Price
Terms(In Years)
Value
Balance at June 1, 2012
5,160,000
$
0.77
9.00 years
$
185,000
Granted
1,135,000
2.39
Exercised
-
-
Forfeited or expired
(2,495,000)
$
0.69
Balance at May 31, 2013
3,800,000
$
1.26
7.78 years
$
108,750
Granted
80,000
2.94
Exercised
-
-
Forfeited or expired
(163,333)
$
2.10
(16,754)
Balance at November 30, 2013
3,716,667
$
1.26
7.27 years
$
91,996
Exercisable at November 30, 2013
2,654,997
$
0.92
7.27 years
$
--
Weighted average fair value of
options granted during the six
months ending November 30, 2013
$
2.94
8. COMMITMENTS
There were no new commitments for the six months period ending November 30, 2013.
14
ABAKAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2013 and 2012
9. SUBSEQUENT EVENTS
Management has evaluated subsequent events after the balance sheet date, through the issuance of the
financial statements, for appropriate accounting and disclosure. Abakan has determined that there were no
such events that warrant disclosure or recognition in the financial statements, except for the following:
Abakan issued stock options to key employees and consultants as follows:
We granted 100,000 stock options to an employee of MesoCoat on December 5, 2013, at an exercise price
of $1.25 per share, that expire ten years from the grant date, and vest in equal one third parts on each
anniversary of the option grant date.
We granted 100,000 stock options to an employee of MesoCoat on December 5, 2013,at an exercise price
of $1.25 per share, that expire ten years from the grant date, and vest in equal one third parts on each
anniversary of the option grant date.
We granted 200,000 stock options to a consultant of Abakan on December 5, 2013, at an exercise price of
$1.25 per share, that expire ten years from the grant date, and vest in equal one third parts on each
anniversary of the option grant date.
We granted 50,000 stock options to a legal advisor of Abakan on December 5, 2013, at an exercise price
of $1.25 per share, that expire ten years from the grant date, and vest in equal one third parts on each
anniversary of the option grant date.
We granted 50,000 stock options to a consultant of Abakan on December 5, 2013, at an exercise price of
$1.25 per share, that expire ten years from the grant date, and vest in equal halves on December 5, 2013,
and the first anniversary of the option grant date.
Other Business:
On December 10, 2013, MesoCoat received $180,000 in cash in exchange for a collateralized term note to
an unrelated entity bearing 5% interest per annum which matures on April 29, 2014.
15
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Managements Discussion and Analysis of Financial Condition and Results of Operations and other
parts of this quarterly report contain forward-looking statements that involve risks and uncertainties.
Forward-looking statements can also be identified by words such as anticipates, expects, believes,
plans, predicts, and similar terms. Forward-looking statements are not guarantees of future
performance and our actual results may differ significantly from the results discussed in the forward-
looking statements. Factors that might cause such differences include but are not limited to those
discussed in the subsection entitled Forward-Looking Statements and Factors That May Affect Future
Results and Financial Condition below.
The following discussion should be read in conjunction with our financial statements and notes thereto
included in this quarterly report and with the financial statements, notes and the Management
Discussion and Analysis of Financial Conditions and Results of Operations section for the year ended
May 31, 2013, contained in Abakans Form 10-K. Our fiscal year end is May 31.
Abakan
Abakan, through its subsidiaries, designs, develops, manufactures, and markets advanced nano-composite
materials, innovative fabricated metal products, highly engineered metal composites, and engineered
reactive materials for applications in the oil and gas, petrochemical, mining, aerospace and defense,
energy, infrastructure and processing industries. Our technology portfolio currently includes high-speed,
large-area metal cladding technology, long-life nano-composite anti-corrosion and-wear coating
materials, high-strength, lightweight metal composites, and energetic materials. Operations are conducted
through our subsidiary, MesoCoat, Inc. (MesoCoat) and our affiliate, Powdermet, Inc. (Powdermet).
Abakan holds a 52.5% controlling interest in MesoCoat and a 41% non-controlling interest in Powdermet.
Powdermet directly owns the remaining 47.5% of MesoCoat. Abakans interest in Powdermet represents
an additional 19.5% indirect interest in MesoCoat. The combined direct and indirect interest equals a
total 72.0% ownership of MesoCoat by Abakan.
MesoCoat
MesoCoats Business
MesoCoat is an Ohio based materials science company intending to become a technology leader in metal
protection and repair based on its metal coating and metal cladding technologies designed to address
specific industry needs related to conventional oil and gas, oil sands, mining, aerospace, defense,
infrastructure, and shipbuilding. The company was originally formed as a wholly owned subsidiary of
Powdermet, known as Powdermet Coating Technologies, Inc., to focus on the further development and
commercialization of Powdermets nano-composite coatings technologies. The company was renamed as
MesoCoat in March of 2008. Thereafter, in July of 2008, the coatings and cladding assets of Powdermet
were conveyed to MesoCoat through an asset transfer, an IP license, and a technology transfer and
manufacturing support agreement. MesoCoat has exclusively licensed and further developed advanced
nano-composite coating materials as well as a proprietary high speed metal cladding process. MesoCoat
is focused on combining corrosion and wear resistant alloys and nano-engineered cermet materials with
proprietary high-speed coating or cladding application systems, which will improve the performance life
of any coated product at a better value proposition than current alternatives.
16
MesoCoats commercial revenues are comprised of sales of PComP powders. Additional revenue is
realized from grants and commercial development contracts for product development and customer-
specific solutions. The provision of thermal spray application services will generate commercial revenue
within our next reporting period.
PComP nano-composite cermet coating solutions unite high wear, corrosion resistance, and toughness,
with a low friction coefficient into one product structure using patented microstructural engineering
techniques. MesoCoats Cermaclad cladding solutions offer improved metallurgy and higher
application rates compared to other hardfacing and weld cladding alternatives. Three of MesoCoats
PComP wear products, PComP-W333, PComP W104, and PComP-T48 are utilized by original
equipment manufacturers (OEMs) and are being sold commercially . PComP-M nano-composite metal
boride solutions for molten metal corrosion resistance are undergoing extended field testing in preparation
for market launch.
MesoCoats CermaClad CRA solutions, primarily alloy 625 claddings, are in the process of extensive
internal and external evaluation, certification, and qualification to API (American Petrochemical Institute)
and major oil company standards to ensure compliance with rigorous industry requirements.
Cermaclad WRA (wear resistant alloys), including tungsten carbine, nano-composite chromium
carbide, and structurally amorphous metal (SAM) alloy claddings are also undergoing advanced testing
and qualification for use in the construction equipment, mining, and oil sands extraction industries.
MesoCoat is working to increase PComP powder production and coating services to meet current and
projected demand.
PComP
PComP is a family of nano-composite cermet coatings that are used to impart wear and corrosion
resistance, and to restore the dimensions of metal components, in an environmentally acceptable manner.
Our product competes against chrome and nickel plating, and tungsten carbide thermal spray coatings in
the multibillion dollar inorganic metal finishing market. Competing materials like hexavalent chrome,
carbides and tungsten carbide cobalt have become major headaches for industrial producers in the metal
finishing industry since these materials are on the EPAs hazardous materials watch list and many are
banned in a number of countries. While businesses grapple with the need to transition away from these
harmful products, PComP has become a performance leading solutions platform which has shown
order of magnitude improvements in head to head wear and corrosion performance testing while being
recognized as one of the few economically viable industry replacement solutions for hard chrome and
carbides due to the product lines advanced corrosion, friction, wear and thermal barrier properties.
The PComP portfolio of products utilize nano-structural engineering within a patented family of
corrosion resistant coating solutions that combine extreme wear resistance, fracture toughness
(resiliency), and a low friction coefficient in one product. Conventional materials science normally causes
toughness to decrease as hardness and wear resistance increase. Our combination of nano-level structure
control and advanced ductile phase toughening materials science with engineered nitride, carbide, and
boride ceramic materials, has developed patented coating systems that are both very tough and very wear
resistant. These materials are tailored for specific environments and applications such as molten metal
processing, oil and gas pumping and flow control, and aerospace hydraulics. The unique nano-structure of
the PComP coatings also result in decreased friction properties similar to those of diamond-like carbon
films and solid lubricants that can be used structurally and applied to large components at a fraction of the
cost of coatings such as diamond-like carbon. Low friction reduces wear, improves energy efficiency and
extends the life of sliding components, such as drilling rotors, plungers, mandrels, ball and gate valves,
and metal processing equipment.
17
Equally important, the unique nano-structural design and material combinations of the PComP coating
solutions results in coatings can be applied and machined much faster than a product based on traditional
carbide or other ceramic coating. The higher speeds associated with PComP coating applications, and
the final machining, results in higher productivity and reduced costs in metal finishing operations, while
meeting the highest performance requirements of targeted applications.
The PComP product lines are being positioned to compete with two dominant product alternatives:
hard chrome plating and tungsten carbide thermal spray coatings. Our family of nano-composite coatings
consists of five products, all of which have shown, in testing by third parties, to provide better wear,
corrosion and mechanical properties at a lower life cycle cost than most of todays alternatives. PComP
product lines are expected to provide a high degree of product differentiation and a sustainable
competitive advantage in the $10 billion inorganic metal finishing markets, which include original
equipment manufacturer (OEM) components and the maintenance, repair, and overhaul of industrial
assets and machinery in the components and coatings segment of our business.
MesoCoat is selling PComP coating materials through different channels appropriate to each specific market. OEMs and government agencies like the U.S. Air Force procure PComP raw powders, being vertically integrated, have applied our powders using their own thermal spray and coating application processes. MesoCoat plans to offer coating application services on a regional basis to prospective customers that do not have the capacity to coat their own products. An effort to expand geographically our reach into the higher margin market for coating services is underway. MesoCoat is in the process of qualifying regional application partners in Houston, Alberta, Canada, and Los Angeles to provide thermal spray coating services, and identifying regional metal finishing suppliers for the possibility of future acquisition. The realization of an expansion of our ability to service the need for coating application services is expected to support the economies of scale required for powder production in order to meet product cost targets.
CermaClad
CermaClad is MesoCoats cladding process, exclusively licensed from Oak Ridge National Laboratory,
which utilizes a high power plasma arc lamp, to melt, fuse, and metallurgically bond metals, corrosion
resistant alloys and/or cermets onto metal substrates, such as plate, pipe, or large components to protect
against harsh operating environments. Our metallurgically bonded clad steel solution is optimized to
manage the consequences of wear and corrosion damage that can lead to the failure of large oil and gas
assets. Oil and gas risers, flowlines, refinery/chemical processing towers and transfer lines, power plant
heat exchanger tubes, ships, and bridges all suffer from wear and corrosion damage over time. Within
corrosive environments, including seawater, road salt, mining slurry transport lines, unprocessed oil
containing water, hydrogen sulfide, carbon dioxide, chemical processing and transportation equipment,
metals production, and other large industrial applications, asset owners or operators either need to
continually maintain and periodically replace major assets, or fabricate assets using expensive, corrosion
resistant alloy (CRA) materials.
CermaClad will offer a competing, lower overall cost solution to expensive alloys that combines lower
cost carbon steel clad with a corrosion resistant alloy. A clad steel solution such as CermaClad is
typically less than half the cost of solid alloy alternatives and in some applications, can save up to three
quarters of the capital investment cost, with maintenance free corrosion lifetimes equal to the projected
life of any given asset which may range from 30 to 200 years. Management believes that the
CermaClad process and related equipment offers the lowest capital cost per unit production, and is
scalable to large volumes with low to modest capital investment in plant requirements.
18
CermaCladTM clad products are being developed and qualified for cladding the inside of full length pipe
for use within the oil and gas industries. Clad metals are widely accepted in oil and gas exploration and
production, marine transportation, mining, petrochemical processing and refining, nuclear, paper and
pulp, desalination, and power generation industries. Each industry sector has slightly different needs and
requirements. For instance, to meet growing global energy demands, oil companies continue to extend
their offshore drilling efforts into deeper seas. The higher temperatures and corrosivity (carbon dioxide
and hydrogen sulfide content) of these deeper reserves, as well as the greater difficulty and expense to
inspect, maintain, and replace damaged assets, eliminate plastics and other competing material solutions
from consideration, have significantly increased the use of corrosion resistant alloys and lower cost clad
pipe alternatives.
MesoCoat has made significant progress in quality control and the reliability of the pipe cladding process,
including the development of correlations between control variables, dependant variables, and cladding
quality. Our work has generated detailed analytical models of the fusion process that enable us to predict,
measure, control, and understand the fusion cladding process, and how that process relates to cladding
and base metal quality and performance. Most recently, these efforts have enabled the controlled
production of fully clad short sections of pipe with strong metallurgical bond, uniform quality, and good
surface finish. Subject to the completion of additional internal testing, clad sections of pipe are soon
expected to be released to Petrobras and others for initial qualification.
Mattson Exclusivity Agreement
Due to ongoing supply and support issues with our arc lamp component supplier, Mattson Technology
Inc. (Mattson), MesoCoat elected to exit the mutual exclusivity agreement with Mattson and initiated
projects to solve the supply and reliability issues associated with the use of full scale production
equipment that have been hindering and limiting commercialization efforts. Management has been evaluating the assets acquired from Mattson in order to determine to what extent the assets have been impaired
LIMO Agreement
The Company has entered into an agreement with Lissotschenko Mikrooptic GmbH (LIMO) to support
Cermaclad-LT (low thickness) product commercialization, and to extend the application of our cladding
technology to smaller diameter pipes. The LIMO technology creates a new type of thermal micro-climate that delivers superior performance in accuracy and process control compared to the plasma arc lamp for thinner coatings . The highly efficient semiconductor laser technology extends Abakan´s capabilities by more portable systems covering smaller diameter pipes while still providing significant productivity. These new systems are
ideally suited to thinner claddings and smaller diameters that represent large potential markets.
Sales Agency Agreement for Mexico and Central America
Abakan announced on September 16, 2013, entry into the Mexican and Central American markets on
signing an exclusive sales agent agreement with Metallurgic Solutions, S.A. de CV (MetalSol) to
introduce MesoCoats products into Mexico, Guatemala, El Salvador, Honduras, Nicaragua, Costa Rica,
and Panama. MetalSol is assisting MesoCoats investigation to establish production and service
operations in Mexico for its PComP long-life metal coatings, CermaClad clad steel, and future
products that may be developed.
19
Anticipated Product Development Timeline
The anticipated product development timeline detailed below is based on managements estimate of the
time requisite to bring the respective products to market, all of which products are subject to uncertainties
surrounding the actual completion date of any number of items as is normal in product development.
Note, certain of the anticipated commercial timelines presented have not advanced since the end of our
last periodic reporting period. Unless otherwise explained below in respect to specific products, the
unanticipated delays are attributed, in large part, to ongoing supply and support issues with our arc lamp
component supplier, Mattson.
PRODUCT
COMMERCIAL TIMELINE
TIME (MONTHS)
As of 11/30/13
PComP W
Growth and expansion
Current
PComP T
Partner sales
Current
PComP M
Market entry
Current
PComP S
Qualification
Delayed
ZComP
Development
24
CermaClad CRA
Full scale product API qualification
10
CermaClad WR
Development
14
CermaClad LT
Development
24
CermaClad HT
Incubation
36
PComP M has moved into market entry, with the receipt of initial trial orders from two primary metal
producers. Subject to successful delivery and performance matching prior test results, we expect these
initial orders will turn into recurring business. Producing an industry-leading solution will also provide a
base from which MesoCoat coating solutions may be able to leverage customer relationships to include
routine component repair services.
Market entry of PComP S, specifically developed for military transport applications, as well as
ZComP turbine engine life extension materials has been delayed due to sequestration cuts and the
reassessment of priorities in the defense sector. Our expectation, with recent budget agreements, is that
this ongoing delay will be resolved and that our progress into penetrating these target markets will
resume.
Interest in WR continues to be high, but market entry has been postponed pending the realization of a
major partnership for a dedicated facility in Alberta, Canada. The facility is subject to financing
commitments that have been delayed due to a change in the government minister responsible for
economic development in the western Canadian provinces. Despite the delay, we are optimistic that
financing commitment issues have been resolved. Otherwise, Abakan y continues to pursue a multi-
prong strategy, working with potential channel and industrial partners, government agencies, and end-
users to transition the laboratory performance demonstrated with WR materials into a commercial
product.
20
Product Commercial Anticipated Expansion Timeline
Our intermediate term plan is to expand the presence of our products into the Asia-Pacific and Brazil
markets. We remain in the process of negotiating the terms of a build to suit agreement through our
Asian subsidiary, PT MesoCoat Indonesia, to construct a manufacturing plant on the island of Batam,
Indonesia. Due to ongoing concerns surrounding negotiations to construct a build to suit facility in
Recife, Brazil we have broadened our search for a prospective site and possibly a local partnership that
may be a more favorable way to pave market entry into Brazil. The expected time-frames for either
expansion are yet to be finalized.
Results of Operations
(000)
For the three months ended
For the six months ended
November 30,
Change
November 30,
Change
Revenues
2013
2012
$
%
2013
2012
$
%
Commercial
$
112 $
51 $
61
121
$
137 $
70 $
67
96
Contract and grants
72
778
(706)
(91)
135
1,325
(1,190))
(90)
Other income
10
(269)
279
10
-
10
-
194
560
(366)
(65)
282
1,395
(1,113)
(80)
Gross profit
87
354
(267)
(75)
95
853
(758)
(89)
General and administrative
1,474
1,260
214
17
3,572
2,583
989
38
Stock options expense
301
440
(139)
(31)
620
899
(279)
(31)
Operation Loss
(1,688)
(1,346)
(342)
88
(4,097)
(2,629)
(1,468)
56
Interest exp & amortization
of discount on debt
(61)
(335)
(274)
(82)
(237)
(621)
(384)
(62)
Other income (expense)
(78)
(100)
(22)
(22)
(222)
(55)
167
302
Loss before non-
controlling interest
(1,827)
(1,781)
(46)
3
(4,556)
(3,305)
(1,251)
38
Non-Controlling interest in
MesoCoat loss
403
209
194
93
994
325
669
206
Loss before income taxes
(1,424)
(1,572)
148
(9)
(3,562)
(2,980)
(582)
20
Income taxes
-
-
-
-
-
-
Net Income
(1,424)
(1,572)
148
(9)
(3,562)
(2,980)
(582)
20
Revenues
The increase in commercial revenue for both the three and six month periods ending November 30, 2013,
over the prior comparative periods is the result of the commercialization of PComP powders. The
decrease in contract and grant revenue in the three and six month periods ending November 30, 2013,
over the prior comparative periods, is due to a reduction in grant applications, as MesoCoat has focused
on commercializing PComP powders while continuing ongoing development efforts related to its
products. The negative amount designated Other income in the prior three month comparative period
ended November 30, 2012, was a result of a reclassification of other revenue to grant revenue.
We expect grant revenue to continue to decrease over the next six months as government sponsored
contracts that commenced late last year are completed. However, we do expect to offset a decrease in
grant revenue with a significant increase in commercial revenue over the next six months as an increase in
PComP powder production capacity is brought online. During the current six month period, MesoCoat
began to purchase and install the larger scale manufacturing equipment required to expand PComP
production. Qualifying process changes due to larger batch sizes and the necessary downtime required to
install the new equipment temporarily impacted PComP production during the period. We remain
focused on the development of new products while continuing to commercialize existing product lines.
21
Gross Profit
Gross profits in both periods can be wholly attributed to the operations of MesoCoat. The $267,000 and
$758,000 decrease in gross profit in the three and six month periods ending November 30, 2013, over the
prior comparative periods is the result of a decrease in grant revenue. The change in focus from grants to
commercial revenue has caused MesoCoat to reallocate employees to research and development work
from grant work.
We expect overall gross profit to remain consistent over the next six months and to increase over the
following six months. Gross profit realized from grant revenue is expected to continue to decrease as
result of the reduction in grant applications, which reduction is expected to be offset by an increase in our
profit margin throughout the next calendar year as MesoCoat expands sales of the PComP product line.
Net Losses
We do not expect to realize net income in the near term as anticipated operational expenses associated
most significantly with research and development, consulting, payroll expenses and the depreciation and
amortization of existing assets are expected to increase. The increases are expected to be the direct result
of continued research and development costs associated with the CermaClad product line in addition to
costs anticipated for the building of a manufacturing plant in Batam, Indonesia.
Despite managements focus on ensuring operating efficiencies, we expect to continue to operate at a loss
through fiscal 2014.
Expenses
The $214,000 and $989,000 increase in operating expenses in the three and six month periods ending
November 30, 2013, over the three and six month comparative periods, can be attributed in part to an
increase in payroll and related costs of $146,000 and $496,000 over the three and six month comparative
periods, a portion of which increase can be attributed to the addition of two new employee positions that
were not previously included in prior periods. MesoCoat added a Chief Operating Officer in January
2013, while Abakan employed a new Chief Financial Officer in December 2012. Additional labor costs
were also incurred as a result of Abakan issuing restricted stock, valued at approximately $235,000, into
the MesoCoat and Powdermet retirement plans, which cost and related expense was accrued in the three
month period ending August 31, 2013. Research and development expenses increased by $99,000 and
$294,000 over the three and six month comparative periods, as Abakan continues to develop its products
for commercial applications. Professional fees increased by $203,000 for the six month period as result of
increased legal fees associated with legal representation for the exclusive sales agent agreement with
Metalsol, legal representation in the negotiation and drafting of an agreement with LIMO, and on-going
litigation.
Depreciation and amortization increased by $85,000 and $199,000 over the three and six month
comparative periods due to the commencement of depreciation on the new CermaClad equipment and
leasehold improvements in Euclid, Ohio, offset by the elimination of the amortization expense relating to
the Mattson mutual exclusivity agreement. Stock option expenses decreased as stock options that were
previously granted have started to vested and have already been expensed.
We expect that operating expenses will continue to increase as our aggressive growth strategy over the
next five years will require significant increases in personnel and facilities along with significant research
and development activity to ensure that products nearing commercialization are brought to market as
quickly and as effectively as possible.
22
Interest Expense and Amortization of Discount on Debt
The $275,000 and $384,000 decrease in interest and amortization of discount of debt expenses in the three
and six month periods ending November 30, 2013, over the prior comparative periods, was due to the
prior discounts becoming fully amortized. The future amortization of the discount of debt will further
decrease and be partially offset by a higher interest expense on debt.
Other Expense/Income
The $22,000 decrease and $167,000 increase in other expense / income in the three and six month periods
ending November 30, 2013, versus the prior comparative periods, was due to Abakans share of the
respective decrease and increase in losses associated with its equity interest in Powdermet over the
comparable periods.
We expect to continue to incur other expense in future periods due to interest accruing on convertible debt
and the anticipated increase in interest expense anticipated for new debentures that will be required for
future growth.
Income Tax Expense (Benefit)
Abakan may have a prospective income tax benefit resulting from a net operating loss carry-forward and
start up costs that will offset any future operating profit once taxable income is generated.
Capital Expenditures
Abakan has spent significant amounts of investment activities for the period from June 27, 2006,
(inception) to November 30, 2013, which amounted to $8,979,171. A large portion of these expenditures
are related to plant, property and equipment in the construction of the manufacturing facility in Euclid,
Ohio, and a minority interest in Powdermet.
Liquidity and Capital Resources
Abakan has been in the development stage since inception, and has experienced significant changes in
liquidity, capital resources, and stockholders equity.
Abakan had stockholders equity of $6,143,867 and a working capital deficit of $7,333,182 at November
30, 2013.
Cash flows
Key elements to the Consolidation Statement of Cash Flows for the six months ended
November 30, 2013 and 2012:
|
| For the six months ending |
|
| ||
|
| November 30, |
|
| ||
|
| 2013 |
| 2012 |
| Since Inception |
Net Change in Cash and Cash Equivalents |
|
|
|
|
|
|
Provided by (used in): |
|
|
|
|
|
|
Development Stage activities | $ | (1,349,762) | $ | (893,513) | $ | (7,249,079) |
Investing activities |
| ( 454,287) |
| (1,236,593) |
| (8,979,172) |
Financing activities |
| 1,662,377 |
| 1,986,131 |
| 16,319,619 |
Net Change in cash and cash equivalents | $ | (141,672) | $ | (143,975) | $ | 91,368 |
|
|
|
|
|
|
|
23
Net cash used in development stage activities resulted from current period loss plus certain non-cash
items which included depreciation, amortization of discount on debt, stock issued for services and stock
option expense plus net change accrued liabilities, accounts payable, accrued interest on loans payable,
prepaid expenses and accounts receivable. We expect to continue to generate negative cash flow in
operating activities until such time as net losses transition to net income.
Net cash used in investing activities in the three and six month period ending November 30, 2013, can be
primarily attributed to the purchase of property, plant and equipment, and capitalized patents and licenses.
We expect to continue to generate negative cash flow in investing activities as Abakan increases its
investment in property, plant and equipment through MesoCoat.
Net cash provided by financing activities in the three and six month period ending November 30, 2013, is
attributable to proceeds from loans payable, offset by payments on loans payable and repayments on
capital leases. We expect to continue to generate positive cash flow from financing activities as Abakan
seeks new rounds of financing to build its business.
Our current assets are insufficient to meet our current obligations or to satisfy our cash needs over the
next twelve months and as such Abakan will require additional debt or equity financing. We had no firm
commitments or arrangements for financing at November 30, 2013, except for two $180,000 loans that
are to be borrowed by MesoCoat on December 10, 2013, and January 10, 2014. To date most of
Abakans financings have come from current shareholders that we expect will continue in the immediate
future, as we continue to pursue a number of prospective sources that include engaging an investment
bank, industry and/or strategic partners, sale of additional equity, and the procurement of short and long
term debt. We face certain financial obstacles to attracting new financing due to our status as a technology
company just entering sales with a historical record of net losses and working capital deficits. Therefore,
despite our efforts we can provide no assurance that Abakan will be able to obtain the financing required
to meet its stated objectives or even to continue as a going concern.
Abakan does not expect to pay cash dividends in the foreseeable future.
Abakan has a defined stock option plan titled The Abakan Inc., 2009 Stock Option Plan and contractual
commitments with all of its officers and directors.
MesoCoat has plans for the purchase of plant or equipment in connection with expansion of the PComP powder production commercial line and has obtained verbal commitments for future capital expenditures from Abakan and Powdermet to fund any shortfalls (including plant and equipment) should it not be able to raise funds in the normal course of business.
Abakan intends to increase the number of employees engaged by MesoCoat on completion of the
PComP product line expansion and upon completion of development and commercialization of the
Cermaclad product at the new Euclid, Ohio manufacturing facility.
Off Balance Sheet Arrangements
As of November 30, 2013, 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.
24
Going Concern
Abakans auditors have expressed an opinion that refers to our ability to continue as a going concern as a
result of net losses of $13,545,788 and a working capital deficit of $2,222,670 as of May 31, 2013. Our
ability to continue as a going concern is dependent on realizing net income from operations, gains on
investment, obtaining funding from outside sources or realizing some combination of these objectives.
Managements plan to address Abakans ability to continue as a going concern includes: (i) obtaining
funding from the private placement of debt or equity; (ii) revenue from operations; (iii) converting debt to
equity; and (iv) obtaining loans and grants from financial or government institutions. Management
believes that it will be able to obtain funding to allow Abakan to remain a going concern through the
methods discussed above, though there can be no assurances that such methods will prove successful.
Forward Looking Statements and Factors That May Affect Future Results and Financial Condition
The statements contained in the section titled Results of Operations and Description of Business, with the
exception of historical facts, are forward looking statements. We are ineligible to rely on the safe-harbor
provision of the Private Litigation Reform Act of 1995 for forward looking statements made in this
quarterly report. Forward looking statements reflect our current expectations and beliefs regarding our
future results of operations, performance, and achievements. These statements are subject to risks and
uncertainties and are based upon assumptions and beliefs that may or may not materialize. These
statements include, but are not limited to, statements concerning:
§ our anticipated financial performance;
§ uncertainties related to the commercialization of proprietary technologies held by entities in which
we have an investment interest;
§ our ability to generate net revenue from operations or gains on investments;
§ our ability to raise additional capital to fund cash requirements for operations;
§ the volatility of the stock market; and
§ general economic conditions.
We wish to caution readers that our operating results are subject to various risks and uncertainties that
could cause our actual results to differ materially from those discussed or anticipated including the factors
set forth in the section entitled Risk Factors included elsewhere in this report.
We also wish to advise readers not to place any undue reliance on the forward looking statements
contained in this report, which reflect our beliefs and expectations only as of the date of this report. We
assume no obligation to update or revise these forward looking statements to reflect new events or
circumstances or any changes in our beliefs or expectations, other that is required by law.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivative Instruments
Interest Rate Risk
Our exposure to interest rate risk primarily relates to the interest income generated by excess cash
deposited in interest bearing accounts. The cash and cash equivalents are held for working capital
purposes. We have not used derivative financial instruments. We have not been exposed nor do we
anticipate being exposed to material risks due to changes in market interest rates. Declines in interest
rates, however, will reduce future investment income, at our current balance levels the change in our
interest income will not be material, assuming consistent balance levels
.
25
Interest rate risk also refers to our exposure to movements in interest rates associated with our interest
bearing liabilities. The interest bearing liabilities are denominated in U.S. dollars and the interest expense
is based on the market rates of interest. If the credit markets in the United States changed significantly it
could cause a material change in our interest expense and our costs of borrowing.
Credit Risk
Credit risk refers to our exposures to financial institutions, suppliers and customers that have in the past
and may in the future experience financial difficulty, particularly in light of recent conditions in the credit
markets and the global economy. As of November 30, 2013, our cash and cash equivalents are held in
deposits with maturities of three months or less with banks and other financial institutions having credit
ratings of BBB or above. We generally monitor the financial performance of our suppliers and customers,
as well as other factors that may affect their access to capital and liquidity. Presently, we believe that we
will not incur material losses due to our exposures to such credit risk.
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 Abakans management, with the participation of the chief executive officer and the chief financial officer, of the effectiveness of Abakans disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934 (Exchange Act)) as of November 30, 2013. 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 Commissions 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, Abakans management concluded, as of the end of the period covered by this report, that Abakans disclosure controls and procedures were effective in recording, processing, summarizing, and reporting information required to be disclosed, within the time periods specified in the Commissions rules and forms, and such information was accumulated and communicated to management, including the chief executive officer and the chief financial officer, to allow timely decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
Since the end of the prior reporting period, there have been no changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, Abakans internal control over financial reporting.
26
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Uptick Capital, LLC.
Abakan initiated legal proceedings against Uptick Capital, LLC. (Uptick) on November 7, 2012, in the
United States District Court for the Southern District of New York Superior Court. The claim is based on
Upticks alleged failure to perform according to the terms of a consulting agreement dated November 1,
2010, pursuant to which Uptick was to identify and introduce suitable investors to Abakan in exchange
for certain consideration including 60,000 shares. Abakan seeks the return of the 60,000 shares delivered
which were subsequently sold or in the alternative for a judgment in an amount to be ascertained in excess
of $1,000,000 for damages in addition to reasonable attorneys fees and court costs. The parties are
currently in the process of exchanging document disclosure and depositions. Abakan believes that is will
be successful in the pursuit of its claims.
Paloma Capital Group Ltd.
Abakan initiated legal proceedings against Paloma Capital Group Ltd (Paloma) on July 2, 2013, in the
Circuit Court in and for Miami-Dade County. The claim is based on Palomas failure to perform
according to the terms of a consulting agreement dated May 2, 2011, pursuant to which Paloma was to
introduce suitable investors to Abakan in exchange for certain consideration including 50,000 shares of
Abakan and 150,000 stock options to purchase shares of Abakan. The suit demands the return of the
Abakan shares and the cancellation of the stock options. Paloma is yet to be served with the complaint.
Abakan believes it will be successful in the pursuit of its claims.
ITEM 1A.
RISK FACTORS
Abakans operations and securities are subject to a number of risks. Below we have identified and
discussed the material risks that we are likely to face. Should any of the following risks occur, they will
adversely affect our business, financial condition, and/or results of operations as well as the future trading
price and/or the value of our securities.
Abakan has a history of significant operating losses and such losses may continue in the future.
Abakan has incurred net losses of $17,108,232 for the period from June 27, 2006 (inception) to
November 30, 2013. 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.
Abakans audits for the periods ended May 31, 2013 and 2012 expressed an opinion as to its ability to
continue as a going concern as a result of net losses of $13,545,788 since inception and a working capital
deficit of $2,222,670 as of May 31, 2013. Unless Abakan is able to produce net income over successive
future periods its ability to continue as a going concern will be in jeopardy.
27
Abakan requires additional capital funding.
Abakan requires additional funds, either through equity offerings, debt placements or joint ventures to
develop our operations. Such additional capital will result in dilution to our current shareholders. Our
ability to meet long-term financial commitments will depend on future cash. There can be no assurance
that any future income will generate sufficient funds to enable us to meet our financial commitments.
Abakans success is dependent on its ability to commercialize proprietary technologies to the point of
generating sufficient revenues to sustain and expand operations.
Abakans near term future operation is dependent on its ability to commercialize proprietary technologies
to produce sufficient revenue to sustain and expand operations. The success of these endeavors will
require that sufficient funding be available to assist in the development of its business interests. Currently,
Abakans financial resources are limited, which limitation may slow the pace at which proprietary
technologies can be commercialized. Should the Company be unable to improve its financial condition
through debt or equity offerings, the ability to successfully advance its business plan will be severely
limited.
We face significant commercialization risks related to technological businesses.
The industries in which MesoCoat and Powdermet operate and plan to operate are characterized by the
continual search for higher performance at lower cost. Our growth and future financial performance will
depend on the ability of MesoCoat and Powdermet to develop and market products that keep pace with
technological developments and evolving industry requirements. Further, the research and development
involved in commercializing products requires significant investment and innovation to keep pace with
technological developments. Should we be unable to keep pace with outside technological developments,
respond adequately to technological developments or experience significant delays in product
development, our products might become obsolete. Should these risks overcome our ability to keep pace
there is a significant likelihood that our ability to successfully advance our business will be severely
limited.
The coatings industry is likely to undergo technological change so our products and processes could
become obsolete at any time.
Evolving technology, updated industry standards, and frequent new product and process introductions are
likely to characterize the coatings industry going forward so our products or processes could become
obsolete at any time. Competitors could develop products or processes similar to or better than our own,
finish development of new technologies in advance of our research and development, or be more
successful at marketing new products or processes, any of which factors may hurt our prospects for
success.
28
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 Powdermets 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 MesoCoats and
Powdermets 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, MesoCoats and Powdermets 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 MesoCoats or Powdermets research and
development, or be more successful at marketing new products, any of which factors may hurt our
prospects for success.
Market acceptance of the products and processes produced by MesoCoat and Powdermet is critical to
our growth.
We expect to generate revenue from our interest in MesoCoat and realize a gain on our interest in
Powdermet from the sale of products and processes produced by MesoCoat and Powdermet. Market
acceptance of those products is therefore critical to our growth. If our customers do not accept or purchase
those products or processes produced by MesoCoat and Powdermet, then our revenue, cash flow and
operating results will be negatively impacted.
General economic conditions will affect our operations.
Changes in the general domestic and international climate may adversely affect the financial performance
of Abakan, MesoCoat and Powdermet. Factors that may contribute to a change in the general economic
climate include industrial disputes, interest rates, inflation, international currency fluctuations and
political and social reform. Further, the delayed revival of the global economy is not conducive to rapid
growth, particularly of technology companies with newly commercialized products.
MesoCoat and Powdermet rely upon patents and other intellectual property.
MesoCoat and Powdermet rely on a combination of patent applications, trade secrets, trademarks,
copyrights and licenses, together with non-disclosure and confidentiality agreements, to establish and
protect proprietary rights to technologies they develop. Should either of MesoCoat or Powdermet be
unable to adequately protect their intellectual property rights or become subject to a claim of
infringement, their businesses and that of the Company may be materially adversely affected.
MesoCoat and Powdermet expect to prepare patent applications in accordance with their respective
worldwide intellectual property strategies on acquiring new technologies. However, neither they nor the
Company can be certain that any patents will be issued with respect to future patents pending or future
patent applications. Further, neither they nor Abakan know whether any future patents will be upheld as
valid, proven enforceable against alleged infringers or be effective in preventing the development of
competitive patents. Abakan believes that MesoCoat and Powdermet have each implemented a
sophisticated internal intellectual property management system to promote effective identification and
protection of their products and know-how in connection with the technologies they have developed and
may develop in the future
29
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 Abakans business and financial results could be seriously
harmed. Furthermore, changes in legislation and governmental policy could also negatively impact us.
Although we are currently unaware of any introduced or proposed bills, or policy, that might cause us to
make specific changes to our operations, no assurance can be given that if new legislation is passed we
will be able to make the changes to comport our technologies with future regulatory requirements.
Abakan and those entities in which it holds an interest may face liability claims.
Although MesoCoat and Powdermet intend to implement exhaustive testing programs to identify
potential material defects in technology they develop, any undetected defects could harm their reputation
and that of Abakan, diminish their customer base, shrink revenues and expose themselves and us to
product liability claims. Any imposition of liability that is not covered by insurance or is in excess of
insurance coverage could have a material adverse effect on our business, results of operations and
financial condition.
The market for our stock is limited and our stock price may be volatile.
The market for our common stock has been limited due to low trading volume and the small number of
brokerage firms acting as market makers. Due to the limitations of our market and the volatility in the
market price of our stock, investors may face difficulties in selling shares at attractive prices when they
want to sell. The average daily trading volume for our stock has varied significantly from week to week
and from month to month, and the trading volume often varies widely from day to day.
30
Abakans common stock is currently deemed to be penny stock, which makes it more difficult for
investors to sell their shares.
Abakans 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 Abakans securities are subject to the penny stock rules, investors will find it more
difficult to dispose of our securities.
The elimination of monetary liability against Abakans 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.
Abakans articles of incorporation contains a specific provision that eliminates the liability of directors for
monetary damages to us and our stockholders; further, Abakan is prepared to give such indemnification to
its directors and officers to the extent provided by Nevada law. Abakan may also have contractual
indemnification obligations under its employment agreements with its executive officers. The foregoing
indemnification obligations could result in our incurring substantial expenditures to cover the cost of
settlement or damage awards against directors and officers, which Abakan may be unable to recoup.
These provisions and resultant costs may also discourage us from bringing a lawsuit against directors and
officers for breaches of their fiduciary duties and may similarly discourage the filing of derivative
litigation by our stockholders against the Abakans 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 December 5, 2013, Abakan authorized the grant of 100,000 stock options with an exercise price of
$1.25 per share that expire ten years from the date of grant vesting in equal one-third parts annually
beginning on first anniversary date of the grant to Evelina Vogli for employee services rendered, in
reliance upon the exemption from registration provided by Section 4(2) of the Securities Act.
Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the
following factors: (1) the issuance was an isolated private transactions by Abakan which did not involve a
public offering; (2) the offeree had access to the kind of information which registration would disclose;
and (3) the offeree is financially sophisticated.
On December 5, 2013, Abakan authorized the grant of 200,000 stock options with an exercise price of
$1.25 per share that expire ten years from the date of grant vesting in equal one-third parts annually
beginning on first anniversary date of the grant to Costas M. Takkas for incentive to continue advising
and consultation, in reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act.
31
Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the
following factors: (1) the issuance was an isolated private transactions by Abakan which did not involve a
public offering; (2) the offeree had access to the kind of information which registration would disclose;
and (3) the offeree is financially sophisticated.
On December 5, 2013, Abakan authorized the grant of 50,000 stock options with an exercise price of
$1.25 per share that expire ten years from the date of grant vesting in equal one-third parts annually
beginning on first anniversary date of the grant to Orsa & Company for incentive to continue advising and
consultation, in reliance upon the exemption from registration provided by Section 4(2) of the Securities
Act.
Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the
following factors: (1) the issuance was an isolated private transactions by Abakan which did not involve a
public offering; (2) the offeree had access to the kind of information which registration would disclose;
and (3) the offeree is financially sophisticated.
On December 5, 2013, Abakan authorized the grant of 50,000 stock options with an exercise price of
$1.25 per share that expire ten years from the date of grant vesting one-half on date of the grant and one-
half on the first anniversary date of the grant to Vladmir Chernyakov for incentive to continue advising
and consultation, in reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act.
Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the
following factors: (1) the issuance was an isolated private transactions by Abakan which did not involve a
public offering; (2) the offeree had access to the kind of information which registration would disclose;
and (3) the offeree is financially sophisticated.
On December 4, 2013, Abakan authorized the issuance of 10,000 restricted common shares for services
within 10 days after acceptance of the investor relation agreement valued at $1.25 a share to Surety
Financial Group Inc. in reliance upon the exemption from registration provided by Section 4(2) of
Securities Act. Abakan further authorized the issuance of additional 10,000 shares on June 1, 2014, in the
event the investor relations agreement is not terminated.
Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the
following factors: (1) the issuance was an isolated private transactions by Abakan which did not involve a
public offering; (2) the offeree had access to the kind of information which registration would disclose;
and (3) the offeree is financially sophisticated.
On December 4, 2013, Abakan authorized the grant of 100,000 stock options with an exercise price of
$1.25 per share that expire ten years from the date of grant vesting in equal one-third parts annually
beginning on first anniversary date of the grant to Anupam Ghildyal for employee services rendered, in
reliance upon the exemption from registration provided by Section 4(2) of the Securities Act.
Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the
following factors: (1) the issuance was an isolated private transactions by Abakan which did not involve a
public offering; (2) the offeree had access to the kind of information which registration would disclose;
and (3) the offeree is financially sophisticated.
32
On December 4, 2013, Abakan issued 50,000 restricted shares to Orsa & Company at a price of $.65
pursuant to the exercise of vested stock options that were granted on October 10, 2010, for consulting
services, in reliance upon the exemption from registrations provided by Section 4 (2) of the Securities
Act.
Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the
following factors: (1) the issuance was an isolated private transactions by Abakan which did not involve a
public offering; (2) the offeree had access to the kind of information which registration would disclose;
and (3) the offeree is financially sophisticated.
On October 21, 2013, Abakan authorized the issuance of 127,743 shares of restricted common shares to
the following entities for services and for a profit sharing retirement program, in reliance upon the
exemptions from registration provided by Section 4(2)of the Securities Act:
Name
Consideration
Basis
Shares
Exemption
RedChip Companies, Inc.
$ 60,000 Services
19,802
Sec 4(2)
Financial Insight
$ 73,500 Services
25,000
Sec 4(2)
MesoCoat Inc. Supplemental
$ 161,995 Compensation
57,242
Sec 4(2)
Discretionary
Tax-Qualified
Profit Sharing and Trust
Powdermet Inc. Supplemental
$ 72,728 Compensation
25,699
Sec 4(2)
Discretionary
Tax-Qualified
Profit Sharing and Trust
Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the
following factors: (1) the issuance 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.
ITEM 3.
DEFAULTS ON SENIOR SECURITIES
None.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5.
OTHER INFORMATION
None.
ITEM 6.
Exhibits required to be attached by Item 601 of Regulation S-K are listed in the Index to Exhibits on page
35 of this Form 10-Q, and are incorporated herein by this reference.
33
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Abakan Inc.
Date
/s/ Robert H. Miller
January 9, 2014
By: Robert H. Miller
Its: Chief Executive Officer, and Director
/s/ David G. Charbonneau
January 9, 2014
By: David G. Charbonneau
Its: Chief Financial Officer and Principal Accounting Officer
34
INDEX TO EXHIBITS
Exhibit No.
Exhibit Description
3.1*
Articles of Incorporation and Certificate of Amendment, incorporated hereto by reference to
the Form SB-2, filed with the Commission on June 19, 2007.
3.2*
Bylaws, incorporated hereto by reference to the Form SB-2, filed with the Commission on
June 19, 2007.
10.1*
Lease Agreement between Powdermet and Sherman Properties, LLC dated March 7, 2007,
incorporated hereto by reference to the Form 10-K filed with the Commission on September
13, 2011.
10.2*
License agreement between MesoCoat and Powdermet dated July 22, 2008, incorporated
hereto by reference to the Form 10-K/A-2 filed with the Commission on December 27, 2011.
10.3*
Exclusive license between MesoCoat and UT-Battelle, LLC, dated September 22, 2009,
incorporated hereto by reference to the Form 10-K/A-2 filed with the Commission on
December 27, 2011.
10.4*
Articles of Merger dated November 9, 2009, incorporated hereto by reference to the Form 8-
K filed with the Commission on December 9, 2009.
10.5*
Agreement and Plan of Merger dated November 9, 2009, incorporated hereto by reference to
the Form 8-K filed with the Commission on December 9, 2009.
10.5*
Consulting agreement dated December 1, 2009, between the Company and Mr. Greenbaum,
incorporated hereto by reference to the Form 8-K filed with the Commission on May 28,
2010.
10.7*
Employment agreement dated December 1, 2009, between MesoCoat and Andrew Sherman,
incorporated hereto by reference to the Form 10-K filed with the Commission on September
13, 2011.
10.8*
Consulting agreement date December 1, 2009 between the Company and Prosper Financial
Inc., incorporated hereto by reference to the Form 10-K filed with the Commission on
September 13, 2011.
10.9*
Consulting agreement dated December 8, 2009 between the Company and Robert Miller,
incorporated hereto by reference to the Form 10-K filed with the Commission on September
13, 2011.
10.10*
Investment Agreement dated December 9, 2009, between the Company, MesoCoat and
Powdermet, incorporated hereto by reference to the Form 8-K filed with the Commission on
December 17, 2009.
10.11*
Agreement date March 17, 2010 between the Company and Sonnen Corporation,
incorporated hereto by reference to the Form 10-K filed with the Commission on September
13, 2011.
10.12*
Agreement dated April 30, 2010 between the Company and Mr. Buschor, incorporated hereto
by reference to the Form 8-K filed with the Commission on May 11, 2010.
10.13*
Commercial lease agreement date June 1, 2010, between Powdermet and MesoCoat,
incorporated hereto by reference to the Form 10-K filed with the Commission on September
13, 2011.
10.14*
Stock Purchase Agreement dated June 29, 2010 between the Company and Kennametal,
incorporated hereto by reference to the Form 8-K filed with the Commission on September
15, 2010.
10.15*
Employment agreement dated August 20, 2010, between the Company and Mr. Takkas,
incorporated hereto by reference to the Form 8-K filed with the Commission on August 26,
2010.
35
10.16*
Amendment No. 1 to Stock Purchase Agreement between the Company and Kennametal
dated September 7, 2010, incorporated hereto by reference to the Form 8-K filed with the
Commission on September 15, 2010.
10.17*
Amendment to the Investment Agreement dated December 8, 2010, between the Company,
MesoCoat and Powdermet, incorporated hereto by reference to the Form 10-Q filed with the
Commission on January 19, 2011.
10.18*
Cooperation Agreement between MesoCoat and Petroleo Brasileiro S.A. dated January 11,
2011, incorporated by reference to the Form 8-K/A-3 filed with the Commission on March 6,
2012. (Portions of this exhibit have been omitted pursuant to a request for confidential
treatment.)
10.19*
Amendment No. 2 to Stock Purchase Agreement between the Company and Kennametal
dated January 19, 2011, incorporated hereto by reference to the Form 8-K filed with the
Commission on July 13, 2011.
10.20*
Accord and Satisfaction Agreement dated March 21, 2011 between the Company and
Kennametal, Inc., incorporated hereto by reference to the Form 8-K filed with the
Commission on March 25, 2011.
10.21*
Assignment Agreement dated March 25, 2011 with Polythermics LLC and MesoCoat,
incorporated hereto by reference to the Form 10-Q/A filed with the Commission on
September 27, 2011.
10.22*
Exclusivity Agreement between MesoCoat and Mattson Technology, Inc. dated April 7,
2011, incorporated hereto by reference to the Form 8-K/A-3 filed with the Commission on
March 6, 2012. (Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.)
14*
Code of Business Conduct & Ethics adopted on June 13, 2012, and incorporated hereto by
reference to the Form 10-K filed with the Commission on September 13, 2012.
21*
Subsidiaries of the Company, incorporated hereto by reference to the Form 10-K filed with
the Commission on August 29, 2013.
Certification of the Chief Executive Officer pursuant to Rule 13a-14 of the Exchange Act as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, attached.
Certification of the Chief Financial Officer pursuant to Rule 13a-14 of the Exchange Act as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, attached.
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, attached.
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, attached.
99*
Powdermet audited financial statements for the period ended May 31, 2013, incorporated
hereto by reference to the Form 10-K filed with the Commission on August 29, 2013.
101. INS XBRL Instance Document
101. PRE XBRL Taxonomy Extension Presentation Linkbase
101. LAB XBRL Taxonomy Extension Label Linkbase
101. DEF XBRL Taxonomy Extension Label Linkbase
101. CAL XBRL Taxonomy Extension Label Linkbase
101. SCH XBRL Taxonomy Extension Schema
*
Incorporated by reference to previous filings of the Company.
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed furnished
and not filed or part of a registration statement or prospectus for purposes of Section 11 or
12 of the Securities Act of 1933, or deemed furnished and not filed for purposes of
Section 18 of the Securities and Exchange Act of 1934, and otherwise is not subject to
liability under these sections.
36