ABAKAN, INC - FORM 10-Q - April 14, 2014

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - ABAKAN, INC	Financial_Report.xls
EX-31.1 - CONVERTED BY EDGARWIZ - ABAKAN, INC	exhibit311.htm
EX-32.1 - CONVERTED BY EDGARWIZ - ABAKAN, INC	exhibit321.htm
EX-31.2 - CONVERTED BY EDGARWIZ - ABAKAN, INC	exhibit312.htm
EX-32.2 - CONVERTED BY EDGARWIZ - ABAKAN, INC	exhibit322.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 February 28, 2014.

o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the

transition period from

Commission file number: 000-52784

ABAKAN INC.

(Exact name of registrant as specified in its charter)

Nevada

98-0507522

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

2665 S. Bayshore Drive, Suite 450, Miami, Florida 33133

(Address of principal executive offices) (Zip Code)

(786) 206-5368

(Registrant’s telephone number, including area code)

N/A

(Former name or former address, if changed since last report)

Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or

15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was

required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate

Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of

Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that

the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-

accelerated filer, or a smaller reporting company as defined by Rule 12b-2 of the Exchange Act:

Large accelerated filer o Accelerated filer 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 issuer’s classes of common stock, as of the latest

practicable date. The number of shares outstanding of the issuer’s common stock, $0.0001 par value (the

only class of voting stock), at April 14, 2014, was 64,489,547.

TABLE OF CONTENTS

PART 1- FINANCIAL INFORMATION

Item1.

Financial Statements:

Condensed Consolidated Balance Sheets for the period ended

February 28, 2014 (unaudited) and May 31, 2013

Unaudited Condensed Consolidated Statements of Operations for the

Three and nine months ended February 28, 2014 and 2013, and cumulative

amounts from development stage activities (June 27, 2006 (Inception) through

February 28, 2014)

Unaudited Condensed Consolidated Statements of Cash Flows for the

nine months ended February 28, 2014 and 2013, and cumulative amounts from

development stage activities (June 27, 2006 (inception) through February 28, 2014)

Condensed Notes to Consolidated Financial Statements (Unaudited)

Item 2.

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

Operations

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Item 4.

Controls and Procedures

PART II-OTHER INFORMATION

Item 1.

Legal Proceedings

Item 1A.

Risk Factors

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.

Defaults Upon Senior Securities

Item 4.

Mine Safety Disclosures

Item 5.

Other Information

Item 6.

Exhibits

Signatures

Index to Exhibits

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.

ABAKAN, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED BALANCE SHEETS

February 28,

May 31,

2014

2013

ASSETS

Current assets

Cash and cash equivalents

59,653 $

233,040

Accounts receivable

109,708

105,523

Note receivable - related parties

4,500

Prepaid expenses

189,966

117,028

Deferred finance fees, net

14,070

15,799

Total current assets

377,897

475,890

Noncurrent assets

Property, plant and equipment, net

5,576,232

5,595,007

Patents and licenses, net

6,221,380

7,545,163

Assignment agreement - MesoCoat

180,923

210,528

Investment - Powdermet

2,153,695

2,449,312

Goodwill

364,384

Total Assets

$ 14,874,511 $

16,640,284

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities

Accounts payable

1,773,389 $

890,791

Accounts payable - related parties

568,439

251,004

Capital leases - current portion

29,300

28,006

Loans payable, net of discounts of $0 and $137,364

4,417,948

965,555

Accrued interest - loans payable

241,050

153,825

Loan payable- related parties

18,530

30,000

Accrued interest - related parties

432

1,987

Accrued liabilities

1,200,575

377,392

Total current liabilities

8,249,663

2,698,560

Non-current liabilities

Loans payable

1,482,567

4,241,278

Capital leases – non-current portion

57,864

63,875

Total liabilities

9,790,094

7,003,713

Commitments and contingencies (Note 8)

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

authorized, 64,489,247 issued and outstanding - February 28, 2014,

64,284,855 issued and outstanding - May 31, 2013

6,451

6,430

Paid-in capital

22,186,848

20,833,426

Subscription receivable

(76,244)

Subscription payable

236,000

Contributed capital

5,050

Accumulated deficit during the development stage

(18,479,767)

(13,545,788)

3,954,582

7,222,874

Non-controlling interest

1,129,835

2,413,697

Total stockholders' equity

5,084,417

9,636,571

Total liabilities and stockholders' equity

$ 14,874,511 $

16,640,284

ABAKAN, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED STATEMENTS OF OPERATIONS

Cumulative

amounts from

development

stage activities

For the three months ended

For the nine months ended

June 27, 2006

February 28,

February 28,

(Inception) to

February 28,

2014

2013

2014

2013

2014

Revenues

Commercial

69,120 $

61,125

206,507 $

131,206 $

474,260

Contract and grants

94,400

224,742

229,428

1,549,571

3,984,682

Other income

10,094

774,973

163,520

285,867

446,029

1,680,777

5,233,915

Cost of Revenues

77,824

105,521

264,996

647,522

2,053,267

Gross Profit

85,696

180,346

181,033

1,033,255

3,180,648

Expenses

General and administrative

210,582

254,360

589,692

593,037

2,316,346

Professional fees

99,275

133,195

558,810

390,432

1,641,679

Professional fees - related parties

15,000

48,028

45,000

273,028

Consulting

280,008

342,066

799,475

965,083

3,886,254

Consulting - related parties

61,500

128,504

180,500

351,181

1,861,730

Payroll and benefits expense

230,890

240,452

1,070,926

584,129

2,918,029

Depreciation and amortization

191,859

108,359

583,924

302,291

1,333,080

Research and development

203,623

357,213

1,033,571

893,407

3,118,077

Impairment of asset

180,000

Stock expense on note conversion

37,223

730,097

Stock options expense

352,816

483,365

972,481

1,382,576

5,388,761

Total expenses

1,645,553

2,062,514

5,837,407

5,544,359

23,647,081

Loss from operations

(1 ,559,857)

(1,882,168)

(5,656,374)

(4,511,104)

(20,466,433)

Other (expense) income

Interest expense:

Interest – loans

(79,359)

(90,157)

(178,639)

(313,169)

(726,518)

Interest - related parties

(1,113)

(773)

(8,446)

Liquidated damages

(250,000)

Amortization of discount on debt

(210,265)

(137,364)

(607,350)

(1,588,517)

Total interest expense

(79,359)

(300,422)

(317,116)

(921,292)

(2,573,481)

Interest income

3,787

8,179

Loss on debt settlement

Creditor Fee

(241,051)

Gain on debt settlement

17,715

274,967

Gain (loss) on sale of assets

(510)

428,286

Unrealized gain on MesoCoat acquisition

1,764,345

Equity in Powdermet income/ (loss)

(73,047)

(134,261)

(295,617)

(193,362)

503,695

Equity in MesoCoat loss

(586,020)

Total Other (expense) income

(152,909)

(416,936)

(613,229)

(1,093,152)

(421,080)

Net (loss) before noncontrolling interest

(1,712,766)

(2,299,104)

(6,269,603)

(5,604,256)

(20,887,513)

Non-controlling interest in MesoCoat Loss

341,231

347,246

1,335,624

672,562

2,407,746

Net (loss) attributable to Abakan Inc.

(1,371,535)

(1,951,858)

(4,933,979)

(4,931,694)

(18,479,767)

Provision for income taxes

Net (loss)

(1,373,535) $

(1,951,858) $

(4,933,979) $

(4,931,694) $

(18,479,767)

Net (loss) per share - basic

(0.02) $

(0.03) $

(0.08) $

(0.08)

Net (loss) per share – diluted

(0.02) $

(0.03) $

(0.08) $

(0.08)

Weighted average number of common

shares outstanding – basic

64,481,144

62,618,063

64,365,475

62,073,783

Weighted average number of common

shares outstanding – diluted

64,481,144

62,618,063

64,365,475

62,073,783

ABAKAN, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED STATEMENTS OF CASH FLOWS

Cumulative

amounts from

development stage

activities

For the nine months ended

June 27, 2006

February 28,

(Inception) to

2014

2013

February 28, 2014

NET CASH (USED IN) DEVELOPMENT STAGE ACTIVITIES

(1,656,379) $

(1,718,730)

(7,555,697)

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of property, plant, equipment and website

(517,519)

(2,415,010)

(4,299,721)

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

(31,581)

(59,319)

(174,849)

Waste to Energy Group Inc.

(180,000)

NET CASH PROVIDED BY/ (USED) IN INVESTING ACTIVITIES

(549,100)

(2,474,329)

(9,073,985)

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from sale of common stock

76,244

2,091,652

9,300,514

Proceeds from loans payable

1,970,000

1,553,489

7,928,579

Payments on loans payable

(29,435)

(155,278)

(612,902)

Proceeds from loans payable - related parties

66,200

145,880

Payments on loans payable - related parties

(36,253)

(15,137)

Repayments of capital leases

(4,717)

(24,423)

(82,650)

Stock Issuable

20,000

17,200

20,000

Proceeds from capital contributed

5,050

NET CASH PROVIDED BY FINANCING ACTIVITIES

2,032,092

3,512,587

16,689,334

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

(173,387)

(680,472)

59,652

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

233,040

859,566

CASH AND CASH EQUIVALENTS, END OF PERIOD

59,653 $

179,094 $

59,652

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ABAKAN INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 28, 2014 and 2013

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements

have been prepared in accordance with accounting principles generally accepted in the United States of

America (GAAP) for interim financial information and with the instructions to Form 10-Q. Accordingly,

they do not include all of the information and footnotes required by GAAP for complete financial

statements. In the opinion of management, all adjustments (consisting of normal recurring accruals)

considered necessary for a fair presentation of Abakan’s financial position as of February 28, 2014, and

the results of its operations and cash flows for the nine months ended February 28, 2014, have been made.

Operating results for the nine months ended February 28, 2014 are not necessarily indicative of the results

for the year.

These condensed consolidated financial statements should be read in conjunction with the financial

statements and notes for the year ended May 31, 2013 contained in Abakan’s Form 10-K.

Consolidation Policy

The accompanying February 28, 2014 financial statements include Abakan’s accounts and the accounts of

its subsidiaries. All significant intercompany transactions and balances have been eliminated in

consolidation. Abakan’s ownership of its subsidiaries as of February 28, 2014 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 February 28, 2014.

Non-Controlling Interest

Non-controlling interest represents the 47.5% minority shareholders’ proportionate share of the equity of

MesoCoat. Abakan’s 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.

Abakan’s 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 February 28, 2014, Abakan’s business operations had not fully developed and are dependent upon

funding and therefore Abakan is considered a development stage enterprise.

ABAKAN INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 28, 2014 and 2013

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Accounts Receivable

Accounts receivable are stated at face value, less an allowance for doubtful accounts. Abakan provides an

allowance for doubtful accounts based on management's periodic review of accounts, including the

delinquency of account balances. Accounts are considered delinquent when payments have not been

received within the agreed upon terms, and are written off when management determines that collection is

not probable. As of February 28, 2014 management has determined that no allowance for doubtful

accounts is required.

Subsequent Events

In accordance with ASC 855-10 “Subsequent Events”, Abakan has evaluated subsequent events and

transactions for potential recognition or disclosure in the financial statements through the date the

financial statements were issued (Note 9).

2. GOING CONCERN

The accompanying financial statements have been prepared assuming that Abakan will continue as a

going concern. Abakan had net losses for the period from June 27, 2006 (inception) to the period ended

February 28, 2014, of $18,479,767 and a working capital deficit of $7,871,766. These conditions raise

substantial doubt about Abakan’s ability to continue as a going concern. Abakan’s continuation as a

going concern is dependent on its ability to develop additional sources of capital, and/or achieve

profitable operations and positive cash flows. 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.

ABAKAN INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 28, 2014 and 2013

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 February 28, 2014. Abakan’s 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 February 28,

2014, 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 Powdermet’s business actions, board of directors, and its management, and therefore we account for

our investment using the Equity Method. The table below reconciles our investment amount and equity

method amounts to the amount on the accompanying balance sheet.

Investment balance, May 31, 2013

2,449,312

Equity in loss for nine months ended February 28, 2014

(295,617)

Investment balance, February 28, 2014

2,153,695

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

Powdermet Inc.

For the nine months

For the nine months ended

ended

February 28, 2013

February 28, 2014

Equity Percentage

41%

Condensed income statement information:

Total revenues

1,593,405 $

1,882,043

Total cost of revenues

482,462

774,137

Gross margin

1,110,942

1,107,906

Total expenses

(1,401,889)

(906,956)

Minority interest loss in MesoCoat

(853,525)

(672,562)

Provision for income tax benefit

423,455

Net profit/ (loss)

(721,017) $

(471,612)

Abakan’s equity in net profit/(loss): 41%

(295,617) $

(193,362)

Condensed balance sheet information:

February 28, 2014

May 31, 2013

Total current assets

1,099,870 $

536,111

Total non-current assets

1,417,763

3,077,305

Total assets

2,517,633 $

3,613,416

Total current liabilities

408,827 $

260,897

Total non-current liabilities

1,447,701

1,676,463

Total liabilities

1,856,528

1,937,360

Total equity

661,105

1,676,056

Total liabilities and equity

2,517,633 $

3,613,416

ABAKAN INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 28, 2014 and 2013

4. LOANS PAYABLE

As of February 28, 2014, and May 31, 2013, the loans payable balance was comprised of:

Description

February 28,

May 31, 2013

2014

Convertible demand note to an unrelated entity bearing 5% interest per annum which

1,500,000 $

1,500,000

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 which

200,000

175,163

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 which

500,000

387,473

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

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

3,850

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

19,350

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

20,000

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

21,308

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

30,867

Collateralized term note to an unrelated entity bearing 5% interest per annum which matures

689,000

on April 29, 2014

Collateralized term note to an unrelated entity bearing 5% interest per annum which matures

80,000

on April 29, 2014

Collateralized term note to an unrelated entity bearing 5% interest per annum which matures

180,000

on April 29, 2014

Collateralized term note to an unrelated entity bearing 5% interest per annum which matures

180,000

on April 29, 2014

Collateralized term note to an unrelated entity bearing 5% interest per annum which matures

180,000

on April 29, 2014

Uncollateralized demand notes to an unrelated entity bearing 5% interest per annum

500,000

Uncollateralized demand notes to an unrelated entity bearing 5% interest per annum

50,000

Uncollateralized demand notes to an unrelated entity bearing 5% interest per annum

70,000

Uncollateralized demand notes to an unrelated entity bearing 6% interest per annum

20,000

Collateralized note to an unrelated entity bearing 1% interest for the first year and then 7%

1,000,000

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 annum

42,184

48,228

which matures on July 10, 2018.

Uncollateralized notes to an unrelated entity bearing 8% interest per annum, matures on

405,000

405,877

September 15, 2014

Capital leases payable to various vendors expiring in various years through September 2016;

87,164

91,881

collateralized by certain equipment with a cost of $205,157.

Collateralized 5 year term note to an unrelated entity bearing 5.15% interest

138,956

Uncollateralized demand note to an unrelated entity for royalties shown net of discount of

1,576,892

$23,108

6,006,209 $

5,328,714

Less current liabilities

4,465,778

1,023,561

Total long term liabilities

1,540,431 $

4,305,153

ABAKAN INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 28, 2014 and 2013

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. As of February 28, 2014, the Company had received the additional $180,000 tranches

dated December 10, 2013, and January 10, 2014.

5. STOCKHOLDERS' EQUITY

Common Stock Issuances

For the nine months ended February 28, 2014, 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.

On December 4, 2013, we issued 50,000 shares of our common stock for exercise of stock options

converted valued at $32,500, and paid for by an outstanding balance of accounts payable.

On December 4, 2013, we issued 10,000 shares of our common stock for services performed valued at

$12,000.

On January 3, 2014, we issued 16,649 shares of our common stock per the terms of his employment

agreement valued at $20,000.

A summary of the common stock warrants granted, forfeited or expired during the nine months ended

February 28, 2014 and the year ended May 31, 2013 is presented below:

ABAKAN INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 28, 2014 and 2013

5. STOCKHOLDERS' EQUITY - CONTINUED

A summary of the common stock warrants granted, forfeited or expired during the nine months ended

February 28, 2014 and the year ended May 31, 2013 is presented below:

Weighted

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

(706,595)

1.25

Balance at February 28, 2014

2,136,397

1.98

.67 years

Exercisable at February 28, 2014

2,136,397

1.98

.67 years

Weighted average fair value of

options granted during the nine months

ended February 28, 2014

The following table summarizes information about the common stock warrants outstanding at February

28, 2014:

Warrants Exercisable

Weighted

Range of

Average

Exercise

Number

Remaining

Exercise

Number

Exercise

Price

Outstanding

Contractual Life

Price

Exercisable

Price

1.25

600,000

.15 Years

1.25

600,000 $

1.25

1.50

250,000

1.15 Years

1.50

250,000 $

1.50

2.00

574,463

.29 Years

2.00

574,463 $

2.00

2.70

576,272

.89 Years

2.70

576,272 $

2.70

3.00

135,662

1.14 Years

3.00

135,662 $

3.00

2,136,397

.72 Years

1.98

2,136,397 $

1.98

ABAKAN INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 28, 2014 and 2013

6. EARNINGS-PER-SHARE CALCULATION

Basic earnings per common share for the three and nine months ended February 28, 2014 and 2013 are

calculated by dividing net income by weighted-average common shares outstanding during the period.

Diluted earnings per common share for the three and nine months ended February 28, 2014 and 2013 are

calculated by dividing net income by weighted-average common shares outstanding during the period

plus dilutive potential common shares, which are determined as follows:

For the three months

ended February 28, 2014 ended February 28, 2013

Net earnings (loss) from operations

(1,371,535)

$ (1,951,858)

Weighted-average common shares

64,481,144

62,618,063

Effect of dilutive securities:

Warrants

Options to purchase common stock

Dilutive potential common shares

64,481,144

62,618,063

Net earnings per share from operations:

Basic

(0.02)

$ (0.03)

Diluted

(0.02)

$ (0.03)

For the nine months

ended February 28, 2014 ended February 28, 2013

Net earnings (loss) from operations

(4,933,979)

$ (4,931,694)

Weighted-average common shares

64,365,475

62,073,783

Effect of dilutive securities:

Warrants

Options to purchase common stock

Dilutive potential common shares

64,365,475

62,073,783

Net earnings per share from operations:

Basic

(0.08)

$ (0.08)

Diluted

(0.08)

$ (0.08)

Dilutive potential common shares are calculated in accordance with the treasury stock method, which

assumes that proceeds from the exercise of all warrants and options are used to repurchase common stock

at market value. The amount of shares remaining after the proceeds are exhausted represents the

potentially dilutive effect of the securities.

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.

ABAKAN INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 28, 2014 and 2013

6. EARNINGS-PER-SHARE CALCULATION - CONTINUED

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

dilutive:

For the three months ended

For the three months

February 28, 2014

ended February 28, 2013

Common Stock Equivalents:

Warrants

2,136,397

Options to purchase common stock

4,166,667

4,545,000

Total of Common Stock Equivalents:

6,303,064

7,166,307

For the nine months ended

February 28, 2014

February 28, 2013

Common Stock Equivalents:

Warrants

2,136,397

Options to purchase common stock

4,166,667

4,545,000

Total of Common Stock Equivalents:

6,303,064

7,166,307

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 nine months ended

February 28, 2014 and 2013, was $824,362 and $2,334,912, respectively.

For the nine months ended February 28, 2014, Abakan granted 580,000 stock options, of these, 80,000

were granted to an officer of MesoCoat on June 14, 2013. The officer is no longer employed with the

company and the options were not vested and no longer outstanding.

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.

ABAKAN INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 28, 2014 and 2013

7. STOCK BASED COMPENSATION - CONTINUED

2009 Stock Option Plan – Abakan - continued

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.

A summary of the options granted to employees and non-employees under the plan and changes during

the nine months ended February 28, 2014 and the year ending May 31, 2013 is presented below:

Weighted

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

580,000

1.48

Exercised

(50,000)

0.65

Forfeited or expired

(163,333)

2.10

(16,754)

Balance at February 28, 2014

4,166,667

1.26

7.27 years

91,996

Exercisable at February 28, 2014

2,629,997

0.92

7.27 years

Weighted average fair value of

options granted during the nine

months ending February 28, 2014

1.48

8. COMMITMENTS

There were no new commitments for the nine months period ending February 28, 2014.

ABAKAN INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 28, 2014 and 2013

9. SUBSEQUENT EVENTS

Management has evaluated subsequent events after the balance sheet date, through the issuance of the

financial statements, for appropriate accounting and disclosure. Abakan has determined that there were no

such events that warrant disclosure or recognition in the financial statements, except for the following:

Share Issuances

On February 21, 2014, we closed a private placement for $20,000, or 20,000 units consisting of one share

of our restricted common stock and one-half common stock warrant to purchase shares of our common

stock, with a purchase price of $1.50 per share and an expiration date of two years from the closing. In

connection with this placement we had no offering costs for a net of $20,000. But the Company did not

issue the share until April 9, 2014, and as such this is reflected in Stock issuable on the Condensed

Consolidated Balance Sheet as of February 28, 2014.

On February 24, 2014, we agreed to issue $216,000 or 216,000 units consisting of one share of our

restricted common stock and one-half common stock warrant to purchase shares of our common stock,

with a purchase price of $1.50 per share and an expiration date of two years from the closing for services

to be rendered. In connection with this placement we had no offering costs for a net of $216,000. But the

Company did not issue the share until April 9, 2014, and as such this is reflected in Stock issuable on the

Condensed Consolidated Balance Sheet as of February 28, 2014.

On March 4, 2014, we closed a private placement for $20,000, or 20,000 units consisting of one share of

our restricted common stock and one-half common stock warrant to purchase shares of our common

stock, with a purchase price of $1.50 per share and an expiration date of two years from the closing. In

connection with this placement we had no offering costs for a net of $20,000.

Private Placement

The Company authorized a new private placement offering on April 8, 2014, to be sold to accredited

investors of up to six million (6,000,000) units on or before April 11, 2014 at a price of $0.80 per unit,

each unit comprised of one (1) share of common stock, par value $0.0001 and one (1) share purchase

warrant that would entitle the holder thereof to purchase one (1) additional share of Common Stock in

exchange for two (2) share purchase warrants at an exercise price of $1.20 for a period of two years from

the date of each placement in exchange for one (1) whole share purchase warrant at a price per share of

$1.20 per share.

On April 9, 2014, we closed a private placement for $400,000, or 500,000 units consisting of one share of

our restricted common stock and one-half common stock warrant to purchase shares of our common

stock, with a purchase price of $1.20 per share and an expiration date of two years from the closing. In

connection with this placement we had no offering costs for a net of $400,000.

ABAKAN INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 28, 2014 and 2013

9. SUBSEQUENT EVENTS - CONTINUED

Conversion of debt to shares

On April 9, 2014, we converted several debt obligations for an aggregate total of $751,414, or 939,268

units consisting of one share of our restricted common stock and one-half common stock warrant to

purchase shares of our common stock, with a purchase price of $1.20 per share and an expiration date of

two years from the closing.

On April 9, 2014, we agreed to issue, an aggregate amount of $70,000 or 70,000 shares of our restricted

common stock, for debt owed to two unrelated vendors. In connection with this placement we had no

offering costs for a net of $70,000.

Consulting agreement

On March 31, 2014, Prosper Financial Inc., a related party, terminated its consulting agreement with the

Company.

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other

parts of this quarterly report contain forward-looking statements that involve risks and uncertainties.

Forward-looking statements can also be identified by words such as “anticipates,” “expects,” “believes,”

“plans,” “predicts,” and similar terms. Forward-looking statements are not guarantees of future

performance and our actual results may differ significantly from the results discussed in the forward-

looking statements. Factors that might cause such differences include but are not limited to those

discussed in the subsection entitled Forward-Looking Statements and Factors That May Affect Future

Results and Financial Condition below.

The following discussion should be read in conjunction with our financial statements and notes thereto

included in this quarterly report and with the financial statements, notes and the Management

Discussion and Analysis of Financial Conditions and Results of Operations section for the year ended

May 31, 2013, contained in Abakan’s 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. Abakan’s 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

MesoCoat’s Business

MesoCoat is an Ohio based materials science company intending to become a technology leader in metal

protection and repair based on its metal coating and metal cladding technologies designed to address

specific industry needs related to conventional oil and gas, oil sands, mining, aerospace, defense,

infrastructure, and shipbuilding. The company was originally formed as a wholly owned subsidiary of

Powdermet, known as Powdermet Coating Technologies, Inc., to focus on the further development and

commercialization of Powdermet’s nano-composite coatings technologies. The company was renamed as

MesoCoat in March of 2008. Thereafter, in July of 2008, the coatings and cladding assets of Powdermet

were conveyed to MesoCoat through an asset transfer, an IP license, and 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.

MesoCoat’s 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. MesoCoat also expects to realize revenue through the provision of thermal spray

application services. The first commercial order for thermal spray application services was accepted

during this reporting period and additional orders have since been accepted. MesoCoat has recently

acquired more production equipment to increase PComP™ powder production and expand coating

services to meet current and projected demand. 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. MesoCoat’s Cermaclad™ cladding solutions

offer improved metallurgy and higher application rates compared to other hardfacing and weld cladding

alternatives. Three of MesoCoat’s PComP™ wear products, PComP™-W333, PComP™ W104, and

PComP™-T48 are utilized by original equipment manufacturers (OEM’s) 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. MesoCoat’s 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.

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 EPA’s 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, award winning, leading solutions platform 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 line’s

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.

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 the final machining of PComP™

coating applications result 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 today’s 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. OEM’s and government agencies like the U.S. Air Force have procured PComP™ raw powders,

have applied our powders using their own thermal spray and coating application processes. MesoCoat

may offer coating application services 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 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 MesoCoat’s 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™ expects to 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

less than half the cost of solid alloy alternatives with maintenance free corrosion lifetimes equal to the

projected life of any given asset which may range from 30 to 100 years. Management believes that the

CermaClad™ process and related equipment will offer the lowest capital cost per unit production, and is

scalable to large volumes with low to modest capital investment in plant requirements.

CermaClad^TM 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. In line with these efforts, it has become necessary to make modifications to our full sized

production equipment that will enable a reliable process and reduce total process costs. We expect to

implement these modifications and upgrades over the next few months, which when completed will allow

us to increase the size of pipe sections to be clad, which when accomplished, we expect one of the major

corporations that are experiencing significant financial losses due to the availability of clad pipe will

express interest to participate in accelerating readiness for production and participation in all of their

growing project demands for clad pipe.

Samples of coated pipe sections that have been produced on our full size production equipment are now

being sent out to major end users, after being subjected to internal and third party testing. Longer pipe

sections will be produced in the same manner and delivered to Petrobras under our Joint Development

Program as well as to other oil majors for their evaluation and qualification.

Mattson Exclusivity Agreement

Due to ongoing supply and support issues with our arc lamp component supplier, Mattson Technology

Inc. (“Mattson”), on October 16, 2014, 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.

Meanwhile, we determined to design a new HDIR (High Density Infrared) plasma lamp system in-house.

In support of this effort, NASA Glenn was awarded a GLIDE contract in addition to the ongoing

company-funded space act agreement to support lamp components and controls development. Our efforts

and those of NASA Glenn have to date produced a new reflector design that is better able than the

previous designs to measure the amount of light required by our CermaClad™ process. We are also

testing anode prototype designs which are exhibiting the same or better anode lifetime properties that are

less expensive than previous anode designs. We expect to have the first MesoCoat working prototype

lamp head in July 2014.

LIMO/LILAS Agreement

On November 21, 2013, the Company entered into a Memorandum of Understanding 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. Highly efficient semiconductor laser technology would extend

Abakan´s capabilities to more portable systems for covering smaller diameter pipes while still providing

significant productivity.

On April 4^th, the parties to the Memorandum of Understanding determined to replace the Memorandum of

Understanding in it entirety with a Definitive Agreement, to assign those obligations of LIMO to its sister

company LILAS GmbH (“LILAS). The execution of the Definitive Agreement remains subject to the

execution of a Shareholder Agreement between the principal of LIMO and LILAS with a third party that

would fund the objectives of the Definitive Agreement to the tune of €3,000,000 in exchange for the

exclusive rights to all coating applications developed for the LILAS laser systems except those rights

associated with thin 50 -500 micron coating of the internal diameter of pipe for which rights Abakan

would pay the third party €1,500,000 within twelve months of the third party’s initial payment to LILAS.

Abakan would also retain a right of first refusal to joint venture all of the other applications with the third

party.

Sales Agency Agreement for Mexico and Central America

Abakan announced on September 16, 2013, the execution of an exclusive sales agent agreement with

Metallurgic Solutions, S.A. de CV (“MetalSol”) intended to facilitate the introduction of MesoCoat’s

products into Mexico and Central America. MetalSol is working with MesoCoat’s to identify prospective

production and service operations in Mexico for PComP™ long-life metal coatings, CermaClad™ clad

steel, and future products that are yet to be developed for commercial applications.

MetaSol has since been in contact with certain prospective customers for the PComP™ family of powders

and coatings. PComP™ M and PComP™ W powders have been delivered to these sales prospects for

testing and we expect to have the first results of this testing mid-summer. Metasol has also been in contact

with the organization in Mexico responsible for drafting a national standard for the cladding of pipes used

for corrosive oil and gas applications. We expect that our product specifications will be considered in the

documentation of that process.

Ohio Department of Development’s Third Frontier Commission Loan

On February 12, 2014, MesoCoat has been awarded a loan of $1,500,000 by the Ohio Department of

Development’s Ohio Third Frontier Commission to scale up PComP™ production and expand PComP™

coating services. The loan will help MesoCoat to increase PComP™ production from 18 tons to 160 tons

per year increasing projected powder sales revenues to $1,600,000 a month and thermal spray revenues to

$1,000,000 per month over the next few years. The terms and conditions of the loan require MesoCoat to

make a like contribution to fund the scale up of which MesoCoat has contributed a significant portion to

date. The proceeds of the loan are yet to be disbursed pending the execution of formal loan

documentation.

Northern Alberta Institute of Technology

Subsequent to period end, MesoCoat received a $2.75 million funding commitment from certain

Canadian federal and provincial agencies for an 18 month collaborative effort with the Northern Alberta

Institute of Technology (“NAIT”) to develop wear-resistant clad pipes to transport the abrasive oil sands

from mining sites to processing/refining facilities. The total project cost for setting-up a R&D facility

within NAIT's Souch campus, and related activities is $4,260,000, of which $1,500,000 is being funded

by Western Economic Diversification' Canada; $1,250,000 is being funded by Enterprise and Advanced

Education, Alberta; $750,000 is being funded by MesoCoat; $450,000 is being funded by Abakan; and

$310,000 being funded by NAIT. A portion of MesoCoat’s funding commitment will include supplying

the lamp system and covering certain of the personnel costs.

Anticipated Product Development Timeline

The anticipated product development timeline detailed below is based on management’s estimate of the

time requisite to bring the respective products to market, all of which products are subject to uncertainties

surrounding the actual completion date of any number of items as is normal in product development.

Note, certain of the anticipated commercial timelines presented have not advanced since the end of our

last 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

Postponed indefinitely

ZComP™

Development

CermaClad™ CRA

Full scale product API qualification

CermaClad™ WR

Development

CermaClad™ LT

Development

CermaClad™ HT

Incubation

PComP™ M has moved into market entry, with the receipt of initial trial orders from two primary metal

producers. MesoCoat is currently in the process of installing equipment to handle the coating of industry

standard rollers used to carry components through molten metal baths. 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 have 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 may be resolved and that our progress into penetrating these target markets may

resume. Market entry of ZComP^TM has also been delayed due the Company’s focus on PComP^TM M

Interest in Cermaclad™ WR continues to be high, but market entry has encountered significant delays

which are now being addressed with the announcement of a collaborative funding commitment to set up a

full scale clad pipe manufacturing facility in Alberta for Cermaclad™ WR and to commence sales our

product.

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 have negotiated the terms of a “build to suit” agreement through our Asian subsidiary, PT

Indonesia MesoCoat 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 nine months ended

February 28,

Change

February 28,

Change

Revenues

2014

2013

2014

2013

Commercial

69 $

61 $

206 $

131 $

Contract and grants

225

(130)

(58)

230

1,550

(1,320)

(85)

Other income

164

286

(122)

(43)

446

1,681

(1,235)

(73)

Gross profit

180

(94)

(52)

181

1,033

(852)

(82)

General and administrative

1,293

1,579

(286)

(18)

4,865

4,162

703

Stock options expense

353

483

(130)

(27)

972

1,382

(410)

(30)

Operation Loss

(1,560)

(1,882)

(322)

(17)

(5,656)

(4,511)

(1,145)

Interest exp & amortization

of discount on debt

(79)

(300)

(221)

(74)

(317)

(921)

(604)

(66)

Other income (expense)

(74)

(117)

(43)

(37)

(296)

(172)

(124)

(72)

Loss before non-

controlling interest

(1,713)

(2,299)

(586)

(6,269)

(5,604)

(665)

(12)

Non-Controlling interest in

MesoCoat loss

341

347

(6)

(2)

1,336

672

(664)

Loss before income taxes

(1,372)

(1,952)

(580)

(30)

(4,933)

(4,932)

(1)

Income taxes

Net Income

(1,372)

(1,952)

(580)

(30)

(4,933)

(4,932)

(1)

Revenues

The increase in commercial revenue for both the three and nine month periods ended February 28, 2014,

over the prior comparative periods ended February 28, 2013, is the result of the commercial sales of

PComP™ powders of $7,995 and $75,301 respectively. The decrease in contract and grant revenue in

the three and nine month periods ending February 28, 2014, over the prior comparative periods ended

February 28, 2013, is due to a reduction in grant applications, as we focused on commercializing

PComP™ powders.

We expect commercial revenue to increase over the next six months in line with the growth in our

capacity for PComP™ powder production having been delayed for six months during the installation of

new larger scale manufacturing equipment and the completion of certain qualifying processes required for

larger batch sizes. Despite the recent decrease in contract and grant revenue, we expect grant revenue to

increase over the next six months as our submissions of grant applications has increased over the last two

quarterly periods. Meanwhile, our focus remains on commercializing existing product lines.

Gross Profit

The decrease in gross profits for both of the three and nine month periods ended February 28, 2014, over

the prior comparative periods ended February 28, 2013, can be attributed to the decrease in contract and

grant revenue of $130,342 and $1,320,143 respectively. The change in focus from grants to commercial

revenue has caused us to reallocate employees to research and development work from grant work over

the current periods which reallocation has had a negative effect on grant revenue.

We expect gross profit to remain consistent over the next six months followed by an increase over the

following six months. Gross profit realized from grant revenue is expected to increase as we have

recently submitted more grant applications than in earlier periods while our profit margin is expected to

grow as we expand sales of the PComP™ and anticipate sales of our CermaClad™ product.

Net Losses

The $468,204 decrease in net losses in the three month period ended February 28, 2014, over the three

month period ended February 28, 2013, can be primarily attributed to overall decreases in general and

administrative expenses, stock expense, interest paid, the smaller gain associated with our non-controlling

equity interest in MesoCoat, the smaller loss associated with our equity interest in Powdermet in the

current period and the decrease in other expenses.

The $114,404 increase in net losses in the nine month period ended February 28, 2014, over the nine

month period ended February 28, 2013, can be primarily attributed to the decrease in gross profit, and the

increase in professional fees, payroll and benefits, depreciation and amortization, research and

development, the larger loss associated with our equity interest in Powdermet, offset by the decrease in

consulting expenses, consulting provided by related parties, stock expense, interest paid, other expenses

and the larger gain associated with our non-controlling equity interest in MesoCoat.

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 management’s focus on ensuring operating efficiencies, we expect to continue to operate at a loss

through fiscal 2014.

Expenses

The $416,961 decrease in operating expenses in the three month period ended February 28, 2014, over

the comparative three month period ended February 28, 2013, can be primarily attributed to decreases

research and development of $153,590, stock option expense of $130,594, professional fees of $33, 920,

consulting fees of $82,058, consulting services rendered by related parties of $67,004 and general and

administration fees of $43,778, offset by increases in depreciation and amortization of $83,500.

The $293,048 increase in operating expenses in the nine month period ending February 28, 2014, over

comparative nine month period ended February 28, 2013, can be primarily attributed to an increase in

professional fees of $168,378, which increase is due in part to the representation required in connection

with our agreements with Metasol, LIMO and ongoing litigation, payroll and benefits of $486,797, a

portion of which increase can be attributed to the addition of two employee positions in the period and the

contribution of Abakan stock to the MesoCoat and Powdermet retirement plans of valued at

approximately $235,000, research and development of $140,164, which increase is due to increased

focus on commercializing our products, and depreciation and amortization of $281,633, which increased

due in part to the onset of the depreciation of the new CermaClad™ equipment and leasehold

improvements in Euclid, Ohio compensated by elimination of the amortization expense relating to the

Mattson mutual exclusivity agreement, offset by a decrease in consulting expense of $165,608, which

decrease is due in part to the termination of services rendered by a Washington, D.C. based lobbying

firm, consulting services rendered by related parties of $170,681, and stock option expense of $410,095,

which decreased due to the vesting of stock options that had already been expensed.

We expect that operating expenses will 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.

Interest Expense and Amortization of Discount on Debt

The $221,063 and $604,176 decreases in interest and amortization of discount of debt expenses in the

three and nine month periods ending February 28, 2014, over the prior comparative periods ended

February 28, 2013, can be attributed to the elimination of amortization of discount on debt in the current

three month period and decrease in the current nine month period, and the decrease in interest expenses in

both periods.

Other Expense

The $303,073 and $518,969 decreases in other expense in the three and nine month periods ending

February 28, 2014, versus the prior comparative periods ended February 28, 2013, can be primarily

attributed to the decreases in interest in both periods and the decrease in losses associated with our equity

interest in Powdermet in the current three month period and offset by the increase in losses associated our

equity interest in Powdermet in the current nine month period.

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 February 28, 2014, which amounted to $9,073,958. A large portion of these expenditures

are related to plant, property and equipment in the construction of the manufacturing facility in Euclid,

Ohio, and its equity interests in MesoCoat and 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 $5,123,463 and a working capital deficit of $7,871,766 at February

28, 2014.

Cash flows

Key elements to the Consolidation Statement of Cash Flows for the nine months ended February, 2014

and 2013:

For the nine months ending

February 28,

2014

2013

Since Inception

Net Change in Cash and Cash Equivalents

Provided by (used in):

Development Stage activities

$ (1,656,379) $ (1,718,730) $

(7,555,697)

Investing activities

( 549,100)

(2,474,329)

(9,073,985)

Financing activities

2,032,092

3,512,587

16,689,334

Net Change in cash and cash equivalents

(173,387) $

(680,472) $

59,652

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 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 nine month period ending February 28, 2014, 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 nine month period ending February 28, 2014, is

attributable to proceeds from the sale of common stock, loans payable and stock issuable, 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 February 28, 2014. Abakan’s financings to date have

come from current shareholders that it expects will continue in the immediate future, as we continue to

pursue a number of prospective sources that include investment banks, industry and/or strategic partners,

the sale of additional equity, and the procurement of short and long term debt. During the current quarter

Abakan received equity investments of $336,000. Subsequent to quarter end, Abakan received equity

investments of $400,000 and $671,414 on current debt that converted to equity. 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 February 28, 2014, Abakan had no off-balance sheet arrangements that have or are reasonably

likely to have a current or future effect on our financial condition, changes in financial condition,

revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is

material to stockholders.

Going Concern

Abakan’s auditors have expressed an opinion that refers to our ability to continue as a going concern as a

result of net losses of $18,479,767 and a working capital deficit of $7,871,766 as of February 28, 2014.

Our ability to continue as a going concern is dependent on realizing net income from operations, gains on

investment, obtaining funding from outside sources or realizing some combination of these objectives.

Management’s plan to address Abakan’s ability to continue as a going concern includes: (i) obtaining

funding from the private placement of debt or equity; (ii) revenue from operations; (iii) converting debt to

equity; and (iv) obtaining loans and grants from financial or government institutions. Management

believes that it will be able to obtain funding to allow Abakan to remain a going concern through the

methods discussed above, though there can be no assurances that such methods will prove successful.

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

The statements contained in the section titled Results of Operations and Description of Business, with the

exception of historical facts, are forward looking statements. We are ineligible to rely on the safe-harbor

provision of the Private Litigation Reform Act of 1995 for forward looking statements made in this

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.

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 February 28, 2014, 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 Abakan’s

management, with the participation of the chief executive officer and the chief financial officer, of the

effectiveness of Abakan’s disclosure controls and procedures (as defined in Rules 13a-15(e) under the

Securities Exchange Act of 1934 (“Exchange Act”)) as of February 28, 2014. Disclosure controls and

procedures are designed to ensure that information required to be disclosed in reports filed or submitted

under the Exchange Act is recorded, processed, summarized, and reported within the time periods

specified in the Commission’s rules and forms, and that such information is accumulated and

communicated to management, including the chief executive officer and the chief financial officer, to

allow timely decisions regarding required disclosures.

Based on that evaluation, Abakan’s management concluded, as of the end of the period covered by this

report, that Abakan’s disclosure controls and procedures were effective in recording, processing,

summarizing, and reporting information required to be disclosed, within the time periods specified in the

Commission’s rules and forms, and such information was accumulated and communicated to

management, including the chief executive officer and the chief financial officer, to allow timely

decisions regarding required disclosures.

Changes in Internal Control over Financial Reporting

Since the end of the prior reporting period, there have been no changes in internal control over financial

reporting that have materially affected, or are reasonably likely to materially affect, Abakan’s internal

control over financial reporting.

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

Uptick’s 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 sought 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 attorney’s fees and court costs. Uptick countersued

Abakan for breach of the terms of the consulting agreement. The matter has been resolved amicably

without compensation being paid by either party.

Paloma Capital Group Ltd.

Abakan initiated legal proceedings against Paloma Capital Group Ltd (“Paloma”) on July 2, 2013, in the

Circuit Court in and for Miami-Dade County. The claim is based on Paloma’s failure to perform

according to the terms of a consulting agreement dated May 2, 2011, pursuant to which Paloma was to

introduce suitable investors to 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

Abakan’s operations and securities are subject to a number of risks. Below we have identified and

discussed the material risks that we are likely to face. Should any of the following risks occur, they will

adversely affect our business, financial condition, and/or results of operations as well as the future trading

price and/or the value of our securities.

Abakan has a history of significant operating losses and such losses may continue in the future.

Abakan has incurred net losses of $18,479,767 for the period from June 27, 2006 (inception) to February

28, 2014. Since we have been without significant revenue since inception and have only recently

transitioned to producing limited revenue, as a result of the business combination with MesoCoat,

historical losses may continue into the future.

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

Abakan’s audits for the periods ended May 31, 2013 and 2012 expressed an opinion as to its ability to

continue as a going concern as a result of net losses of $18,479,767 since inception and a working capital

deficit of $7,871,766 as of February 28, 2014. Unless Abakan is able to produce net income over

successive future periods its ability to continue as a going concern will be in jeopardy.

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.

MesoCoat has secured its assets against the payment of certain loan amounts due in April of 2014.

Should MesoCoat be unable to repay amounts due to a third party creditor of approximately $1,340,000

on April 29, 2014, all of its assets, with limited exceptions, absent any change in certain loan documents,

will become the property of a third party creditor on declaration of default. Abakan is in the process of

securing a financing sufficient to repay said creditor and is confident that MesoCoat’s obligations will be

satisfied or otherwise amended to avert any default. However, neither the financing to satisfy MesoCoat’s

loan obligations nor any changes to the terms and conditions of the loan documents have yet been agreed.

Abakan’s success is dependent on its ability to commercialize proprietary technologies to the point of

generating sufficient revenues to sustain and expand operations.

Abakan’s near term future operation is dependent on its ability to commercialize proprietary technologies

to produce sufficient revenue to sustain and expand operations. The success of these endeavors will

require that sufficient funding be available to assist in the development of its business interests. Currently,

Abakan’s financial resources are limited, which limitation may slow the pace at which proprietary

technologies can be commercialized. Should 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.

MesoCoat and Powdermet compete with larger and better financed corporations.

Competition within the industrial coatings industry and other high technology industries is intense. While

each of MesoCoat and Powdermet’s products are distinguished by next-generation innovations that are

more sophisticated and cost effective than many competitive products currently in the market place, a

number of entities and new competitors may enter the market in the future. Some of MesoCoat’s and

Powdermet’s existing and potential competitors have longer operating histories, greater name recognition,

larger customer bases and significantly greater financial, technical and marketing resources than we do,

including well known multi-national corporations. Accordingly, MesoCoat’s and Powdermet’s products

could become obsolete at any time. Competitors could develop products similar to or better than our own,

finish development of new technologies in advance of either MesoCoat’s or Powdermet’s research and

development, or be more successful at marketing new products, any of which factors may hurt our

prospects for success.

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

our growth.

We expect to generate revenue 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

We may not be able to effectively manage our growth.

We expect considerable future growth in our business. Such growth will come from the addition of new

plants, the increase in global personnel, and the commercialization of new products. Additionally, our

products should have an impact on the cladding industry; as companies learn that they can receive

materials with a short lead time at a higher quality and lower price, market demand should grow,

expanding the overall market itself. To achieve growth in an efficient and timely manner, we will have to

maintain strict controls over our internal management, technical, accounting, marketing, and research and

development departments. We believe that we have retained sufficient quality personnel to manage our

anticipated future growth though we are still striving to improve financial accounting oversight to ensure

that adequate reporting and control systems in place. Should we be unable to successfully manage our

anticipated future growth by adherence to these strictures, costs may increase, growth could be impaired

and our ability to keep pace with technological advances may be impaired which failures could result in a

loss of future customers.

Environmental laws and other governmental legislation may affect our business.

Should the technologies which each of MesoCoat and Powdermet have under development not comply

with applicable environmental laws then Abakan’s business and financial results could be seriously

harmed. Furthermore, changes in legislation and governmental policy could also negatively impact us.

Although we are currently unaware of any introduced or proposed bills, or policy, that might cause us to

make specific changes to our operations, no assurance can be given that if new legislation is passed we

will be able to make the changes to comport our technologies with future regulatory requirements.

Abakan and those entities in which it holds an interest may face liability claims.

Although MesoCoat and Powdermet intend to implement exhaustive testing programs to identify

potential material defects in technology 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.

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

investors to sell their shares.

Abakan’s common stock is and will be subject to the “penny stock” rules adopted under section 15(g) of

the Exchange Act. The penny stock rules apply to companies whose common stock is not listed on the

NASDAQ Stock Market or other national securities exchange and trades at less than $5.00 per share or

that have tangible net worth of less than $5,000,000 ($2,000,000 if the company has been operating for

three or more years). These rules require, among other things, that brokers who trade penny stock to

persons other than “established customers” complete certain documentation, make suitability inquiries of

investors and provide investors with certain information concerning trading in the security, including a

risk disclosure document and quote information under certain circumstances. Many brokers have decided

not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number

of broker-dealers willing to act as market makers in such securities is limited. If Abakan remains subject

to the penny stock rules for any significant period, it could have an adverse effect on the market, if any,

for our securities. If Abakan’s securities are subject to the penny stock rules, investors will find it more

difficult to dispose of our securities.

The elimination of monetary liability against Abakan’s directors, officers and employees under Nevada

law and the existence of indemnification rights to our directors, officers and employees may result in

substantial expenditures by Abakan and may discourage lawsuits against our directors, officers and

employees.

Abakan’s 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 Abakan’s directors and officers even though such actions, if

successful, might otherwise benefit the us and our stockholders.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On January 4, 2014, Abakan authorized the issuance of 16,949 restricted common shares to David

Charbonneau 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 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.

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.

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.

ITEM 3.

DEFAULTS ON SENIOR SECURITIES

None.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS

Exhibits required to be attached by Item 601 of Regulation S-K are listed in the Index to Exhibits on page

37 of this Form 10-Q, and are incorporated herein by this reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this

report to be signed on its behalf by the undersigned, thereunto duly authorized.

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 Miller________________________________

April 14, 2014

____---

By: Robert H. Miller

Its: Chief Executive Officer, and Director

/s/ David Costas

_________________________________

April 14, 2014

By: David Costas

Its: Chief Financial Officer and Principal Accounting Officer

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.

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.

31.1

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.

31.2

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.

32.1

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.

32.2

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.

Attached files

ABAKAN, INC Reports

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