Attached files
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EXCEL - IDEA: XBRL DOCUMENT - ABAKAN, INC | Financial_Report.xls |
EX-32 - EXHIBIT 32 - ABAKAN, INC | exhibit32.htm |
EX-31 - EXHIBIT 31 - ABAKAN, INC | exhibit31.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended November 30, 2011.
o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to .
Commission file number: 000-52784
ABAKAN INC.
(Exact name of registrant as specified in its charter)
Nevada (State or other jurisdiction of incorporation or organization) | 98-0507522 (I.R.S. Employer Identification No.) |
2665 S. Bayshore Drive, Suite 450, Miami, Florida 33133
(Address of principal executive offices) (Zip Code)
(786) 206-5368
(Registrants telephone number, including area code)
N/A
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company as defined by Rule 12b-2 of the Exchange Act:
Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date. The number of shares outstanding of the issuers common stock, $0.0001 par value (the only class of voting stock), at January 23, 2012, was 59,377,425.
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1
TABLE OF CONTENTS PART 1- FINANCIAL INFORMATION | ||
Item1. | 4 | |
| 5 | |
| Unaudited Condensed Consolidated Statements of Operations for the | 6 |
| Unaudited Consolidated Condensed Statements of Cash Flows for the | 7 |
| Condensed Notes to Consolidated Financial Statements (Unaudited) | 8 |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 28 |
Item 3. | Quantitative and Qualitative Disclosures about Market Risk
| 42 |
Item 4. |
| 42 |
|
PART II-OTHER INFORMATION
|
|
Item 1. |
| 43 |
Item 1A. |
| 43 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
| 47 |
Item 3. | Defaults Upon Senior Securities
| 49 |
Item 4. |
| 50 |
Item 5. |
| 50 |
Item 6. |
| 50 |
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| 51 |
|
| 52 |
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
As used herein, the terms we, our, and us refer to Abakan Inc. (formerly Waste to Energy Group Inc.), a Nevada corporation, and its consolidated subsidiaries, unless otherwise indicated. In the opinion of management, the accompanying financial statements included in this Form 10-Q 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.
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3
ABAKAN, INC. | ||||||||||
(Formerly known as Waste to Energy Group, Inc.) | ||||||||||
(A DEVELOPMENT STAGE ENTERPRISE) | ||||||||||
CONDENSED CONSOLIDATED BALANCE SHEETS | ||||||||||
November 30, | May 31, | |||||||||
2011 | 2011 | |||||||||
(unaudited) | ||||||||||
ASSETS | ||||||||||
Current assets | ||||||||||
Cash and cash equivalents | $ | 433,294 | $ | - | ||||||
Accounts receivable | 95,944 | - | ||||||||
Note receivable - related parties | 4,500 | 4,500 | ||||||||
Prepaid expenses | 42,177 | 16,200 | ||||||||
Prepaid expenses - related parties | - | 1,485 | ||||||||
Total current assets | 575,915 | 22,185 | ||||||||
Noncurrent assets | ||||||||||
Property, plant and equipment, net (Note 4) | 2,549,989 | 4,630 | ||||||||
Patents and licenses, net (Note 5) | 2,050,185 | - | ||||||||
Assignment agreement - MesoCoat | 250,000 | 250,000 | ||||||||
Investment deposit on MesoCoat investment | - | 2,050,000 | ||||||||
Investment - MesoCoat (Note 6) | - | 858,418 | ||||||||
Investment - Powdermet (Note 6) | 1,742,930 | 1,721,656 | ||||||||
Goodwill | 4,335,646 | - | ||||||||
Finance fees, net | 2,877 | - | ||||||||
Total Assets | $ | 11,507,542 | $ | 4,906,889 | ||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||
Current liabilities | ||||||||||
Accounts payable | $ 742,215 | $ 202,017 | ||||||||
Accounts payable - related parties | 235,949 | 79,214 | ||||||||
Capital leases - current portion | 13,730 | - | ||||||||
Loans payable (Note 8) | 489,711 | 70,600 | ||||||||
Accrued interest - loans payable (Note 8) | 163,549 | 41,532 | ||||||||
Loan payable- related parties (Note 11) | 9,000 | - | ||||||||
Accrued interest - related parties (Note 11) | 133 | - | ||||||||
Accrued liabilities | 302,156 | 139,689 | ||||||||
Total current liabilities | 1,956,443 | 533,052 | ||||||||
Noncurrent liabilities | ||||||||||
Loans payable, net of discounts of $955,076 (Note 8) | 4,071,204 | 1,400,914 | ||||||||
Capital leases - noncurrent portion | 56,143 | - | ||||||||
Total liabilities | 6,083,790 | 1,933,966 | ||||||||
Commitments and contingencies (Note 13) | ||||||||||
Stockholders' equity (Note 9) | ||||||||||
Preferred stock, $0.0001 par value, 50,000,000 shares | ||||||||||
authorized, none issued and outstanding | - | - | ||||||||
Common stock, par value $0.0001, 2,500,000,000 shares | ||||||||||
authorized, 59,377,425 issued and outstanding - November 30, 2011, | ||||||||||
59,247,425 issued and outstanding - May 31, 2011 | 5,937 | 5,924 | ||||||||
Paid-in capital | 9,784,246 | 8,330,530 | ||||||||
Subscription receivable | - | (165,465) | ||||||||
Contributed capital | 5,050 | 5,050 | ||||||||
Accumulated deficit during the development stage | (5,715,637) | (5,203,116) | ||||||||
4,079,596 | 2,972,923 | |||||||||
Non-controlling interest | 1,344,156 | - | ||||||||
Total stockholders' equity | 5,423,752 | 2,972,923 | ||||||||
Total liabilities and stockholders' equity | $ | 11,507,542 | $ | 4,906,889 | ||||||
See accompanying notes to consolidated financial statements.
4
ABAKAN, INC. | |||||||||||
(Formerly known as Waste to Energy Group, Inc.) | |||||||||||
(A DEVELOPMENT STAGE ENTERPRISE) | |||||||||||
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | |||||||||||
Cumulative | |||||||||||
amounts from | |||||||||||
development stage | |||||||||||
activities | |||||||||||
For the three months ended | For the six months ended | June 27, 2006 | |||||||||
November 30, | November 30, | (Inception) to | |||||||||
2011 |
| 2010 | 2011 |
| 2010 | November 30, 2011 | |||||
Revenues | |||||||||||
Commercial | $ | 25,338 | $ | - | $ | 31,515 | $ | - | $ | 31,515 | |
Contract and grants | 391,654 | - | 689,768 | - | 689,768 | ||||||
Other income | 131,885 | - | 175,982 | - | 177,578 | ||||||
548,877 | - | 897,265 | - | 898,861 | |||||||
Cost of Revenues | 220,947 | - | 391,031 | - | 391,031 | ||||||
Gross profit | 327,930 | - | 506,234 | - | 507,830 | ||||||
Expenses | |||||||||||
General and administrative | |||||||||||
General and administrative | 111,098 | 69,296 | 217,303 | 98,754 | 487,269 | ||||||
Professional fees | 81,782 | 33,513 | 156,543 | 92,404 | 479,601 | ||||||
Professional fees - related parties | 15,000 | 15,000 | 30,000 | 30,000 | 135,000 | ||||||
Consulting | 159,417 | 195,358 | 384,789 | 300,403 | 1,160,635 | ||||||
Consulting - related parties | 76,500 | 102,000 | 153,077 | 218,600 | 1,086,477 | ||||||
Payroll and benefits expense | 215,442 | 19,464 | 353,049 | 44,021 | 609,918 | ||||||
Depreciation and amortization | 84,171 | 1,386 | 166,230 | 2,764 | 195,456 | ||||||
Research and development | 139,964 | - | 273,212 | - | 273,212 | ||||||
Impairment of asset | - | - | - | - | 180,000 | ||||||
Stock expense on note conversion | - | 37,333 | - | 37,333 | 337,660 | ||||||
Stock options expense | 453,339 | 229,704 | 791,856 | 398,728 | 2,069,608 | ||||||
Total expenses | 1,336,713 | 703,053 | 2,526,059 | 1,223,006 | 7,014,836 | ||||||
Loss from operations | (1,008,783) | (703,053) | (2,019,825) | (1,223,006) | (6,507,006) | ||||||
Other (expense) income | |||||||||||
Interest expense: | |||||||||||
Interest - loans | (42,960) | (8,011) | (78,540) | (12,017) | (131,168) | ||||||
Interest - related parties | (133) | - | (133) | - | (5,575) | ||||||
Liquidated damages | - | (100,000) | - | (100,000) | (250,000) | ||||||
Amortization of discount on debt | (155,787) | - | (279,322) | - | (416,812) | ||||||
Total interest expense | (198,880) | (108,011) | (357,995) | (112,017) | (803,555) | ||||||
Interest income | 74 | 1,264 | 221 | 2,125 | 4,350 | ||||||
Loss on debt settlement | - | - | - | - | (5,257) | ||||||
Gain on debt settlement | - | - | - | - | 200,709 | ||||||
Unrealized gain on MesoCoat acquisition | - | - | 1,764,345 | - | 1,764,345 | ||||||
Equity in Powdermet income/ (loss) | (24,775) | - | 21,274 | - | 92,930 | ||||||
Equity in MesoCoat loss | - | (180,016) | (44,408) | (302,031) | (586,020) | ||||||
Total Other (expense) income | (223,581) | (286,763) | 1,383,437 | (411,923) | 667,502 | ||||||
Net profit/ (loss) before non-controlling interest | (1,232,364) | (989,816) | (636,388) | (1,634,929) | (5,839,504) | ||||||
Non-controlling interest in MesoCoat Loss | 69,975 | - | 123,867 | - | 123,867 | ||||||
Net profit/ (loss) attributable to Abakan Inc. | (1,162,389) | (989,816) | (512,521) | (1,634,929) | (5,715,637) | ||||||
Provision for income taxes | - |
| - | - | - | - | |||||
Net profit/ (loss) | $ | (1,162,389) | $ | (989,816) | $ | (512,521) | $ | (1,634,929) | $ | (5,715,637) | |
Net profit/ (loss) per share - basic | $ | (0.02) | $ | (0.02) | $ | (0.01) | $ | (0.03) | |||
Net profit/ (loss) per share - diluted | $ | (0.02) | $ | (0.02) | $ | (0.01) | $ | (0.03) | |||
Weighted average number of common | |||||||||||
shares outstanding - basic | 59,377,425 | 56,371,044 | 59,353,818 | 55,793,590 | |||||||
Weighted average number of common | |||||||||||
shares outstanding - diluted | 59,377,425 | 56,371,044 | 59,353,818 | 55,793,590 |
See accompanying notes to consolidated financial statements.
5
ABAKAN, INC. | ||||||||||
(Formerly known as Waste to Energy Group, Inc.) | ||||||||||
(A DEVELOPMENT STAGE ENTERPRISE) | ||||||||||
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||||
Cumulative | ||||||||||
amounts from | ||||||||||
development stage | ||||||||||
activities | ||||||||||
For the six months ended | June 27, 2006 | |||||||||
November 30, | (Inception) to | |||||||||
2011 | 2010 | November 30, 2011 | ||||||||
CASH FLOWS FROM DEVELOPMENT STAGE ACTIVITIES | ||||||||||
Net profit/ (loss) before non-controlling interest | $ (636,388) | $ (1,634,929) | $ (5,839,504) | |||||||
Adjustments to reconcile net profit/ (loss) to net | ||||||||||
cash provided by (used in) development stage activities: | ||||||||||
Depreciation and amortization | 166,230 | 2,764 | 195,456 | |||||||
Amortization of discount on debt | 279,322 | - | 416,812 | |||||||
Amortization of deferred financing fees | 730 | - | 730 | |||||||
Stock options expense | 791,856 | 398,728 | 2,069,608 | |||||||
Stock expense from note conversion | - | 37,333 | 337,660 | |||||||
Stock issued for services | 76,000 | 60,600 | 597,401 | |||||||
Equity in investee loss | 44,408 | 302,031 | 514,365 | |||||||
Equity in investee profit | (21,274) | - | (21,274) | |||||||
Unrealized gain on MesoCoat acquisition | (1,764,345) | - | (1,764,345) | |||||||
Changes in operating assets and liabilities: | ||||||||||
Accounts receivable | 75,513 | - | 75,513 | |||||||
Notes receivable - related parties | - | 4,000 | (4,500) | |||||||
Prepaid expenses | (25,977) | 3,371 | (56,330) | |||||||
Prepaid expenses - related parties | 1,485 | - | 14,152 | |||||||
Accounts payable | 272,146 | 168,552 | 612,632 | |||||||
Accounts payable - related parties | 156,735 | 83,229 | 318,680 | |||||||
Accrued interest - related parties | - | - | 2,664 | |||||||
Accrued interest - loans payable | 77,801 | 11,053 | 132,244 | |||||||
Accrued liabilities | 96,922 | - | 169,350 | |||||||
Waste to Energy Group Inc. | - | - | 180,000 | |||||||
Total adjustments | 227,552 | 1,071,660 | 3,790,818 | |||||||
NET CASH PROVIDED BY/ (USED IN) DEVELOPMENT STAGE ACTIVITIES | (408,836) | (563,269) | (2,048,686) | |||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||
Purchase of property, plant, equipment and website | (626,105) | (1,018) | (659,961) | |||||||
MesoCoat - minority interest, net of cash assumed in business combination | 307,650 | (1,100,000) | (3,142,380) | |||||||
Powdermet - minority interest | - | (500,000) | (1,650,000) | |||||||
Capitalized patents and licenses | (27,148) | - | (127,148) | |||||||
Waste to Energy Group Inc. | - | - | (180,000) | |||||||
NET CASH USED IN INVESTING ACTIVITIES | (345,603) | (1,601,018) | (5,759,489) | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||
Proceeds from sale of common stock | 245,465 | 1,673,000 | 4,421,606 | |||||||
Proceeds from loans payable | 944,833 | 460,769 | 3,716,635 | |||||||
Proceeds from loans payable - related parties | 9,000 | - | 88,680 | |||||||
Payments on loans payable - related parties | - | - | 21,063 | |||||||
Repayments of capital leases | (11,565) | - | (11,565) | |||||||
Proceeds from capital contributed | - | - | 5,050 | |||||||
NET CASH PROVIDED BY FINANCING ACTIVITIES | 1,187,733 | 2,133,769 | 8,241,469 | |||||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 433,294 | (30,518) | 433,294 | ||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | - | 40,564 | - | |||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ 433,294 | $ 10,046 | $ 433,294 | |||||||
See accompanying notes to consolidated financial statements.
6
ABAKAN, INC. |
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(Formerly known as Waste to Energy Group, Inc.) |
| ||||||||||||||||||
(A DEVELOPMENT STAGE ENTERPRISE) |
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UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS |
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| Cumulative |
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| amounts from |
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| development stage |
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| activities |
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| For the six months ended |
| June 27, 2006 |
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| November 30, |
| (Inception) to |
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Continued |
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| 2011 |
| 2010 |
| November 30, 2011 | |||||||||||
Supplemental Disclosures: |
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| Cash paid for income taxes |
| $ | - | $ | - | $ | - |
| ||||||||||
| Cash paid for interest |
| $ | - | $ | 964 | $ | 964 |
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Supplemental Non-cash Disclosures: |
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Notes and accounts payable converted to stock |
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| Accounts payable - related parties | $ | - | $ | - | $ | (205,971) |
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| Loans payable |
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|
| - |
| (400,000) |
| (650,169) |
| |||||||||
| Accrued interest |
|
| - |
| - |
| (4,331) |
| ||||||||||
| Notes payable - related parties |
| - |
| - |
| (99,515) |
| |||||||||||
| Accrued interest - related parties |
| - |
| - |
| (9,724) |
| |||||||||||
| Common stock |
|
| - |
| 400,000 |
| 974,460 |
| ||||||||||
| Subscription payable |
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| - |
| - |
| (3,000) |
| ||||||||||
| Subscription receivable |
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| - |
| - |
| (1,750) |
| ||||||||||
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| $ | - | $ | - | $ | - |
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Stock issued for assignment agreement - MesoCoat |
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| Assignment agreement - MesoCoat | $ | - | $ | - | $ | (150,000) |
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| Common stock |
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| - |
| - |
| 150,000 |
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| $ | - | $ | - | $ | - |
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Capital lease equipment acquired |
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Property, plant and equipment |
| $ | 38,532 |
| - | $ | 38,532 |
| |||||||||||
Capital lease payable |
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| (38,532) |
| - |
| (28,532) |
| |||||||||||
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| - |
| - |
| - |
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Non-cash write off of balances |
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| Accounts payable - related parties | $ | - | $ | - | $ | 52,030 |
| |||||||||||
| Loans payable |
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|
| - |
| - |
| (156) |
| |||||||||
| Accrued interest |
|
| - |
| - |
| (553) |
| ||||||||||
| Notes payable - related parties |
| - |
| - |
| (52,260) |
| |||||||||||
| Accrued interest - related parties |
| - |
| - |
| (811) |
| |||||||||||
| Subscription receivable |
|
| - |
| - |
| 1,750 |
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| $ | - | $ | - | $ | - |
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Beneficial conversion valuation |
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| Additional paid-in capital |
| $ | 505,873 | $ | - | $ | 1,241,449 |
| ||||||||||
| Discount on convertible debts |
| (505,873) |
| - |
| (1,241,449) |
| |||||||||||
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| $ | - | $ | - | $ | - |
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Controlling interest purchase - MesoCoat |
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| Accounts receivable |
| $ | 171,457 | $ | - | $ | 171,457 |
| ||||||||||
| Property and equipment, net |
| 1,899,598 |
| - |
| 1,899,598 |
| |||||||||||
| Patents and licenses, net |
|
| 2,170,391 |
| - |
| 2,170,391 |
| ||||||||||
| Deferred financing fees |
|
| 3,607 |
| - |
| 3,607 |
| ||||||||||
| Total assets |
|
| 4,245,053 |
| - |
| 4,245,053 |
| ||||||||||
| Accounts payable |
|
| (268,398) |
| - |
| (268,398) |
| ||||||||||
| Capital leases |
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|
| (42,906) |
| - |
| (42,906) |
| |||||||||
| Loans Payable and accrued interest |
| (2,415,469) |
| - |
| (2,415,469) |
| |||||||||||
| Other accrued liabilities |
|
| (65,545) |
| - |
| (65,545) |
| ||||||||||
| Total liabilities |
|
| (2,792,318) |
| - |
| (2,792,318) |
| ||||||||||
| Net assets |
|
|
| 1,452,735 |
| - |
| 1,452,735 |
| |||||||||
| Non-controlling interest equity |
| (1,468,023) |
| - |
| (1,468,023) |
| |||||||||||
| Goodwill |
|
|
| 4,335,646 |
| - |
| 4,335,646 |
| |||||||||
| Investment in MesoCoat |
|
| (1,849,665) |
| - |
| (1,849,665) |
| ||||||||||
| MesoCoat net assets received | $ | 2,470,694 | $ | - | $ | 2,470,694 |
| |||||||||||
See accompanying notes to consolidated financial statements.
7
ABAKAN INC.
(Formerly Waste to Energy Group Inc.)
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2011 and 2010
NOTE 1 BUSINESS
Your Digital Memories, Inc. was incorporated in the state of Nevada on June 27, 2006.
Waste to Energy Group Inc., a wholly-owned subsidiary of Your Digital Memories Inc., was incorporated in the state of Nevada on August 13, 2008. Waste to Energy Group Inc. and Your Digital Memories Inc. entered into an Agreement and Plan of Merger on August 14, 2008. The board of directors of Waste to Energy Group Inc. and Your Digital Memories Inc. deemed it advisable and in the best interest of their respective companies and shareholders that Waste to Energy be merged with and into Your Digital Memories Inc. with Your Digital Memories Inc. remaining as the surviving corporation under the name Waste to Energy Group Inc.
Abakan Inc., a wholly-owned subsidiary of Waste to Energy Group Inc., was incorporated in the state of Nevada on November 6, 2009. Abakan Inc. and Waste to Energy Group Inc. entered into an Agreement and Plan of Merger on November 6, 2009. The board of directors of Abakan Inc. and Waste to Energy Group Inc. deemed it advisable and in the best interest of their respective companies and shareholders that Abakan Inc. be merged with and into Waste to Energy Group Inc. with Waste to Energy Group Inc. remaining as the surviving corporation under the name Abakan Inc.
Unless the context indicates otherwise, all references herein to Abakan, we, us, and our refer to Abakan Inc. and its consolidated subsidiaries. Abakan is in the development stage as defined under FASB ASC 915-10, "Development Stage Entities."
On December 10, 2009 Abakan purchased a thirty-four percent (34%) interest in MesoCoat, Inc. ("MesoCoat"), and on July 13, 2011 purchased an additional seventeen percent (17%), for an aggregate total of fifty-one percent (51%) of the outstanding stock of MesoCoat.
MesoCoat (formerly Powdermet Coating Technologies, Inc.) was incorporated in Nevada as a wholly owned subsidiary of Powdermet, Inc. ("Powdermet") on May 18, 2007. Operations began in 2008 and effective March 31, 2008 it was renamed as MesoCoat. Future success of operations is subject to several technical hurdles and risk factors, including satisfactory product development, regulatory approval and market acceptance of MesoCoats products and its continued ability to obtain future funding. MesoCoat is currently in the development stage, as operations consist primarily of research and development expenditures, and revenues from planned principal operations that have not yet been realized. MesoCoat has invested heavily in intellectual property, machinery and equipment to initiate the research and development of its core technology. Currently, MesoCoats revenue consists almost entirely of government grants and cooperative reimbursement agreements.
On March 21, 2011, Abakan purchased 596,813 shares of Powdermet from Kennametal, Inc., an unrelated party, equal to a fully diluted 41% interest in Powdermet.
Powdermet was formed in 1996 as an Ohio corporation and has since developed a product platform of advanced materials solutions derived from nano-engineered particle agglomerate technology and derived hierarchically structured materials.
On June 8, 2011, Abakan formed a wholly owned subsidiary company named, AMP Distributors, Ltd. (AMP Distributors), a Grand Cayman corporation. We formed AMP Distributors to distribute MesoCoat products to consumer markets.
8
ABAKAN INC.
(Formerly Waste to Energy Group Inc.)
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2011 and 2010
NOTE 1 BUSINESS - continued
Abakans plan of operation is to acquire interests in early stage companies. Since those firms are typically pre-commercialization, it is anticipated that each firm Abakan decides to acquire will need successive rounds of financing to fund research & development, lengthy qualification periods, sales and marketing efforts. However, this may not necessarily be the case if a company which we acquire has a new technology with existing sales or we agree to a licensing strategy.
Abakans acquisition strategy is to make sure it negotiates upfront future ownership based on a series of value creating steps whereby we have the right to continue or discontinue investing based on an investee meeting those milestone steps. Our approach allows management to forecast potential financing needs of any given firm in stages to plan for present and future fundraising efforts. Further, our approach also enables Abakan to hedge its investing if it feels a company is not performing up to the goals that were anticipated during the negotiating process. By taking this approach, each investee company is expected to reach certain operating milestones prior to receiving the next round of fundraising or us exercising our next round of acquisition.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation Policy
The accompanying November 30, 2011 financial statements include Abakans accounts and the accounts of its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
Basis of Presentation
In the opinion of management, the accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of Abakans financial position as of November 30, 2011, and the results of its operations and cash flows for the three and six months ended November 30, 2011, have been made. Operating results for the six months ended November 30, 2011 are not necessarily indicative of the results that may be expected for the year ended May 31, 2012.
These condensed consolidated financial statements should be read in conjunction with the financial statements and notes for the year ended May 31, 2011, thereto contained in Abakans Form 10-K/A-2.
Reclassifications
Certain amounts in the six months ended November 30, 2010 financial statements have been reclassified to conform to the current six months ended November 30, 2011 presentation.
9
ABAKAN INC.
(Formerly Waste to Energy Group Inc.)
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2011 and 2010
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Non-Controlling Interest
Non-controlling interest represents the minority members proportionate share of the equity of MesoCoat, Inc. Abakans controlling interest in MesoCoat requires that its operations be included in the unaudited condensed consolidated financial statements. The equity interest of MesoCoat that is not owned by Abakan is shown as non-controlling interest in the unaudited condensed consolidated financial statements.
Development Stage Enterprise
At November 30, 2011, Abakans business operations had not fully developed and it remains highly dependent upon funding and therefore is considered a development stage enterprise.
Accounts receivable
Accounts receivable are stated at face value, less an allowance for doubtful accounts. Abakan provides an allowance for doubtful accounts based on management's periodic review of accounts, including the delinquency of account balances. Accounts are considered delinquent when payments have not been received within the agreed upon terms, and are written off when management determines that collection is not probable. As of November 30, 2011 management has determined that no allowance for doubtful accounts is required.
Property, plant, and equipment
Property, plant, and equipment are stated at cost less accumulated depreciation and amortization. Maintenance and repairs are charged to operations as incurred. Depreciation and amortization are based on the straight-line method over the estimated useful lives of the related assets. When assets are retired or otherwise disposed of, the cost and accumulated depreciation and amortization are removed from the accounts, and any resulting gain or loss is reflected in operations in the period realized.
Asset construction in progress
Construction in progress assets, represent assets that are in process of construction and rehabilitation in order to bring them to operational status. All costs are captured in a separate Construction in Progress account, and are included in the Property, plant, and equipment net amounts, and when the asset is ready to enter service, the total costs are capitalized and depreciation commences per the schedule below.
Depreciation is computed on the straight-line method net of salvage value with useful lives as follows:
Computer equipment and software 3 - 5 years
Office furniture and equipment 5 - 7 years
Machinery and equipment 7 - 10 years
Leasehold improvements balance of lease term
10
ABAKAN INC.
(Formerly Waste to Energy Group Inc.)
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2011 and 2010
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Patent and technology licenses
Patent costs are recorded at the cost to obtain the patent and are amortized on a straight-line basis over their estimated useful lives up to 20 years, beginning when the patent is secured by Abakan. License costs are recorded at the cost to obtain the license and are amortized on a straight-line basis over effective term of the license, up to 15 years.
Goodwill
In accordance with GAAP, goodwill in the amount of $4,355,646 related to the acquisition of MesoCoat will be evaluated for impairment on an annual basis starting fiscal year ending May 31, 2013.
Revenue Recognition
Abakan recognizes revenue when there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price if fixed or determinable, and collectability is reasonably assured.
Grant Revenue
Revenue from grants is generally recorded when earned as defined under the terms of the agreements. Each grant document sets the timing of amounts that are allowed to be billed and how to bill those amounts. We generally look at a two week time period to bill from and work on the incurred costs for the same time period and bill according to preset amounts that are allowed to be billed for per the grant documents. This is then billed through a government billing system, reviewed by the government department, and then payment is sent to us.
Research and development costs
Research and development costs are charged to expense as incurred and are included in operating expenses. Total research and development costs were $273,212 and none for the six months ended November 30, 2011 and 2010, respectively.
Advertising Expenses
Advertising costs are expensed as incurred. Advertising expenses are included in general and administrative expense in the accompanying statement of operations. Total advertising expenses were $496 and $37,450 for the six months ended November 30, 2011 and 2010, respectively.
Shipping and Handling Costs
Abakans shipping and handling costs are included in cost of sales for all periods presented.
11
ABAKAN INC.
(Formerly Waste to Energy Group Inc.)
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2011 and 2010
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates and assumptions.
NOTE 3 GOING CONCERN
The accompanying financial statements have been prepared assuming that Abakan will continue as a going concern. Abakan has net losses for the period of June 27, 2006 (inception) to the period ended November 30, 2011, of $5,715,637, and a working capital deficit of $1,380,528. These conditions raise substantial doubt about Abakans ability to continue as a going concern. Abakans continuation as a going concern is dependent on its ability to develop additional sources of capital, and/or achieve profitable operations and positive cash flows. Managements plan is to aggressively pursue its present business plan. Since inception we have funded our operations through the issuance of common stock, debt financing, and related party loans and advances, and we will seek additional debt or equity financing as required. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
NOTE 4 PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment consisted of the following:
| November 30, 2011 | May 31, 2011 |
Machinery and equipment | $ 330,454 | $ - |
Construction in progress- assets | 2,226,531 | - |
Computer equipment and office furniture | 35,108 | 12,856 |
Leasehold Improvements | 46,927 | - |
| 2,639,020 | 12,856 |
Less accumulated depreciation and amortization |
(89,031) |
(8,266) |
| 2,549,989 | 4,630 |
Depreciation and amortization expense was $18,878 and $2,764 for the six months ended November 30, 2011 and 2010, respectively. On July 13, 2011 we completed our second purchase of ownership in MesoCoat, Inc, as more fully discussed in Note 7. Due to the consolidation of MesoCoats accounting with ours we gained $1,961,526 of property and equipment, and accumulated depreciation of $61,928.
|
12
ABAKAN INC.
(Formerly Waste to Energy Group Inc.)
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2011 and 2010
NOTE 5 - PATENTS AND LICENSES
Patents and licenses consist of the following:
|
|
| y November 30, 2011 |
|
|
|
|
| Patents | $ | 174,713 |
| Licenses |
| 2,086,484 |
|
|
| 2,261,197 |
| Less accumulated amortization |
| (211.012) |
| $ | 2,050,185 |
Amortization expense was $147,354 for the six months ended November 30, 2011. In the six months ended November 30, 2011, we have capitalized an additional $27,148 on patents and licenses, and have begun amortizing those according to our policy.
NOTE 6 - INVESTMENT IN NON-CONTROLLING INTEREST
MesoCoat, Inc.
On July 13, 2011, we have acquired an additional 86,156 shares of common stock from MesoCoat, representing seventeen percent (17%) of their outstanding common stock, in exchange for $2,800,000 in cash. Accordingly, beginning on July 13, 2011 and for subsequent periods, since our ownership has increased to 51%, and we can affect control of the MesoCoat, we will consolidate the financials of MesoCoat into ours.
We have analyzed our investment for the period of June 1 through July 12, 2011 in accordance of Investments Equity Method and Joint Ventures (ASC 323), and concluded that our 34% minority interest investment did give us significant influence over MesoCoats business actions, board of directors, or its management, and therefore we did account for our investment using the Equity Method. The table below reconciles our investment amount and equity method amounts to the amount on the accompanying balance sheet.
December 10, 2009, initial investment | $ 1,400,030 |
Equity in loss for year ended May 31, 2010 | (191,665) |
Investment balance, May 31, 2010 | $ 1,208,365 |
Equity in loss for year ended May 31, 2011 | (349,947) |
Investment balance, May 31, 2011 | $ 858,418 |
Equity in loss for period ended July 12, 2011 | (44,408) |
Investment balance, July 12, 2011 | $ 814,010 |
13
ABAKAN INC.
(Formerly Waste to Energy Group Inc.)
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2011 and 2010
NOTE 6 - INVESTMENT IN NON-CONTROLLING INTEREST - continued
Below is a table with summary financial results of operations and financial position of MesoCoat:
MesoCoat, Inc. | |||
Unaudited | |||
|
For the period June 1 - July 12, 2011 |
|
For the six months ended November 30, 2010 |
|
|
|
|
Equity Percentage | 34% |
| 34% |
Condensed income statement information: |
|
|
|
Total revenues | $ 245,389 |
| $ 613,309 |
Total cost of revenues | 229,641 |
| 939,063 |
Gross margin | 15,748 |
| (325,753) |
Total expenses | 146,359 |
| 562,572 |
Net loss | $ (130,611) |
| $ (888,325) |
Abakan's equity in net loss | $ (44,408) |
| $ (302,031) |
|
|
|
|
| For the period June 1 - July 12, 2011 |
| For the year ended May 31, 2011 |
Condensed balance sheet information: |
|
|
|
Total current assets | $ 1,199,061 |
| $ 980,635 |
Total non-current assets | 4,073,596 |
| 4,019,646 |
Total assets | $ 5,272,657 |
| $ 5,000,281 |
Total current liabilities | $ 691,771 |
| $ 1,005,334 |
Total non-current liabilities | 2,100,547 |
| 2,104,092 |
Total equity | 2,480,339 |
| 1,890,855 |
Total liabilities and equity | $ 5,272,657 |
| $ 5,000,281 |
Powdermet, Inc.
We have analyzed our investment in accordance of Investments Equity Method and Joint Ventures (ASC 323), and concluded that when the stock purchase agreement was completed our 41% minority interest investment gave us significant influence over Powdermets business actions, board of directors, and its management, and therefore we account for our investment using the Equity Method. The table below reconciles our investment amount and equity method amounts to the amount on the accompanying balance sheet.
March 21, 2011, initial investment | $ 1,650,000 |
Equity in profit for period of March 21 through May 31, 2011 |
71,656 |
Investment balance, May 31, 2011 | $ 1,721,656 |
Equity in profit for period ended November 30, 2011 | 21, 274 |
Investment balance, November 30, 2011 | $ 1,742,930 |
14
ABAKAN INC.
(Formerly Waste to Energy Group Inc.)
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2011 and 2010
NOTE 6 - INVESTMENT IN NON-CONTROLLING INTEREST - continued
Below is a table with summary financial results of operations and financial position of Powdermet:
Powdermet, Inc. |
| |
| Unaudited |
|
|
|
|
| For the six months ended November 30, 2011 | For the year ended May 31, 2011 |
|
|
|
Equity Percentage | 41% | 41% |
Condensed income statement information: |
|
|
Total revenues | $ 983,055 |
|
Total cost of revenues | 417,300 |
|
Gross margin | 565,755 |
|
Total expenses | 513,866 |
|
Net profit | $ 51,890 |
|
Abakan's equity in net profit | $ 21,274 |
|
Condensed balance sheet information: |
|
|
Total current assets | $ 545,232 | $ 438,869 |
Total non-current assets | 771,361 | 857,866 |
Total assets | $ 1,316,593 | $ 1,296,735 |
Total current liabilities | $ 256,998 | $ 648,351 |
Total non-current liabilities | 1,104,920 | 745,599 |
Total equity | (45,326) | (97,215) |
Total liabilities and equity | $ 1,316,593 | $ 1,296,735 |
NOTE 7 - MATERIAL BUSINESS COMBINATION
On December 10, 2009, Abakan acquired 34% of the outstanding common shares of Mesocoat, Inc. (Mesocoat). On July 13, 2011, Abakan acquired 17% of the outstanding common shares of Mesocoat for an aggregate total of 51% of the outstanding common shares. The goodwill of $4,335,646 arising from the acquisition of a non-controlling interest consists largely of the excess fair value paid due to the added values associated with progress associated with ongoing research and development completed, values credited to the product and intellectual property portfolio owned by MesoCoat and scientific recognition over and above that recorded in relation to the credibility attached to government and university grants. Abakan believes that the MesoCoat acquisition is in line with its business plan and the amount paid will be supported on completion of independent valuations. None of the goodwill recognized is expected to be deductible for income tax purposes.
15
ABAKAN INC.
(Formerly Waste to Energy Group Inc.)
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2011 and 2010
NOTE 7 - MATERIAL BUSINESS COMBINATION - continued
The following table summarizes the consideration paid for MesoCoat and the amounts of the estimated fair values of the identifiable assets acquired and liabilities assumed recognized at the acquisition date, as well as the fair value at the acquisition date of the non-controlling interest in MesoCoat at July 13, 2011:
Consideration: |
|
Cash paid for 17% equity | $ 2,800,000 |
Fair value of Abakans 34% equity interest in MesoCoat held before business combination |
2,578,355 |
| $ 5,378,355 |
| |
Recognized amounts of identifiable assets acquired and liabilities assumed: | |
Financial assets | $ 1,229,454 |
Other asset | 3,607 |
Property, plant, and equipment | 1,899,598 |
Identifiable intangible assets | 2,170,391 |
Financial liabilities | (2,792,318) |
Liability arising from a contingency | (0) |
Total identifiable net assets | 2,510,732 |
Non-controlling interest in MesocCoat | (1,468,023) |
Goodwill | 4,335,646 |
| $ 5,378,355 |
The fair value of the financial assets acquired includes cash and cash equivalents and accounts receivables with an aggregate fair value of $1,229,454.
The fair value of the acquired property, plant and equipment and identifiable intangible assets is provisional pending receipt of the final valuations for those assets.
The fair value of the non-controlling interest in MesoCoat, a private company, was estimated by applying the negotiated share price per share and apply that to the outstanding shares of MesoCoat. This fair value measurement is based on significant inputs that are not observable in the market and, therefore, represents a Level 3 measurement as defined in FASB ASC 820. Key assumptions include (a) negotiated share price, (b) financial multiples of companies deemed to be similar to MesoCoat, and (d) adjustments because of the lack of control or lack of marketability that market participants would consider when estimating the fair value of the noncontrolling interest in MesoCoat. This estimate is provisional pending receipt of the final valuation of the noncontrolling interest.
Abakan recognized a gain of $1,764,345 as a result of remeasuring to fair value its 34% equity interest in MesoCoat held before the business combination. The gain is included in other income in Abakans statement of operations for the period ended November 30, 2011.
The following (unaudited) pro forma consolidated results of operations have been prepared as if the acquisition of MesoCoat had occurred at June 1, 2010:
16
ABAKAN INC.
(Formerly Waste to Energy Group Inc.)
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2011 and 2010
NOTE 8 NOTES PAYABLE
As of November 30, 2011 and May 31, 2011, the loans payable balance comprised of:
Description | November 30, 2011 |
| May 31, 2011 |
Convertible demand note to an unrelated entity bearing 5% interest per annum which matures on April 13, 2013. The note is shown net of a discount of $120,289 attributable to the beneficial conversion feature. |
$ 379,711 |
|
$ 337,256 |
Convertible demand note to an unrelated entity bearing 5% interest per annum which matures on March 17, 2013. The note is shown net of a discount of $317,339 attributable to the beneficial conversion feature. |
1,182,661 |
|
1,063,658 |
Convertible demand note to an unrelated entity bearing 5% interest per annum which matures on June 7, 2013. The note is shown net of a discount of $81,662 attributable to the beneficial conversion feature. |
118,338 |
|
- |
Convertible demand note to an unrelated entity bearing 5% interest per annum which matures on July 14, 2013. The note is shown net of a discount of $262,404 attributable to the beneficial conversion feature. |
237,596 |
|
- |
Convertible demand note to an unrelated entity bearing 5% interest per annum which matures on August 29, 2013. The note is shown net of a discount of $66,190 attributable to the beneficial conversion feature. |
80,475 |
|
- |
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum |
70,000 |
|
70,000 |
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum |
3,590 |
|
600 |
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum |
45,800 |
|
- |
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum |
30,628 |
|
- |
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum |
11,250 |
|
- |
Uncollateralized demand note to an unrelated entity bearing 8% interest per annum |
7,500 |
|
- |
Convertible demand note to an unrelated entity bearing 7.5% interest per annum which matures on July 22, 2013. The note is shown net of a discount of $77,364 attributable to the beneficial conversion feature. |
320,944 |
|
- |
Convertible demand note to an unrelated entity bearing 7.5% imputed interest per annum which matures on July 10, 2018. The note is shown net of a discount of $29,828 attributable to the beneficial conversion feature. |
72,422 |
|
- |
Capital leases payable to various vendors expiring in various years through September 2016; collateralized by certain equipment with a cost of $109,659. |
69,873 |
|
- |
Uncollateralized demand note to an unrelated entity for royalties | 2,000,000 |
| - |
| $ 4,630,788 |
| $ 1,471,514 |
Less current liabilities | 503,441 |
| 70,600 |
Total long term liabilities | $ 4,127,347 |
| $ 1,400,914 |
18
ABAKAN INC.
(Formerly Waste to Energy Group Inc.)
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2011 and 2010
NOTE 8 NOTES PAYABLE - continued
Abakan also owed $163,549 and $41,532 in accrued interest for the above notes as of November 30, 2011 and May 31, 2011, respectively.
As of November 30, 2011 and May 31, 2011, we had no restrictive covenants attached to any of the above referenced notes.
Future maturity of our notes payable is presented in the table below:
For the years ended May 31, |
|
2012 | $ 168,768 |
2013 | 2,000,000 |
2014 | 3,244,973 |
2015 | - |
2016 and beyond | 102,250 |
| $ 5,515,991 |
Convertible Debentures
On June 7, July 14, and August 29, 2011 we signed three convertible debentures for a total of $846,665, due June 7, July 14 and August 29, 2013, respectively. As of November 30, 2011, we received all of the proceeds from these debentures. The notes bear an interest rate of 5% per annum, if any amounts are not paid when due the interest rate will adjust and will be 10% per annum until paid.
The notes have a provision for conversion of the outstanding amounts owed into conversion units for $1.00 per unit; units consists of one share of our common stock and one-half share common stock warrant to purchase shares of stock for $1.50 per share, with an expiration date of two years from the conversion date. We have analyzed these detachable warrants in accordance with FASB ASC 470-20-25-4, Debt with conversion options, and have determined that they have a beneficial conversion feature. Accordingly we have valued these using the Black-Scholes method and have arrived at an aggregate total $505,873, of relative fair value and was recorded as additional paid-in capital and has been recorded as a discount on debt against the corresponding convertible note payable. In our valuation of the warrant value we used the following terms:
| June 7, 2011 | July 14 2011 | August 29, 2011 |
Expected volatility (based on historical volatility) | 170.29% | 170.29% | 170.29% |
Expected dividends | 0.00 | 0.00 | 0.00 |
Expected term in years | 2.0 | 2.0 | 2.0 |
Risk-free rate | 0.39% | 0.38% | 0.20% |
In accordance with FASB ASC 470-20-55-32, we are amortizing this amount on the straight-line method over the life of the notes payable of 24 months. For the six months ended November 30, 2011, we have recorded $95,617 in amortization of discount on debt and are reflected as a component of interest expense in our statement of operations. The remaining aggregate total of $410,256 will be amortized over the remaining life of the notes.
19
ABAKAN INC.
(Formerly Waste to Energy Group Inc.)
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2011 and 2010
NOTE 9 STOCKHOLDERS' EQUITY
Common Shares Authorized
Abakan has 2,500,000,000 common shares authorized at a par value of $0.0001 per share and 50,000,000 shares of preferred stock, par value $0.0001 per share. All common stock shares have equal voting rights, are non-assessable and have one vote per share. Voting rights are not cumulative and, therefore, the holders of more than 50% of the common stock could, if they choose to do so, can elect all of Abakans directors.
Common Stock Issuances
For the six months ended November 30, 2011, we issued the following shares:
Private placements
On June 6, 2011, we closed a private placement for $20,000, or 20,000 units consisting of one share of our restricted common stock and one-half share common stock warrant to purchase shares of our common stock, with a purchase price of $1.50 per share and an expiration date of two years from the closing. In connection with this placement we had no offering costs for a net of $20,000.
On June 10, 2011, we closed a private placement for $30,000, or 30,000 units consisting of one share of our restricted common stock and one-half share common stock warrant to purchase shares of our common stock, with a purchase price of $1.50 per share and an expiration date of two years from the closing. In connection with this placement we had no offering costs for a net of $30,000.
On July 6, 2011, we closed a private placement for $30,000, or 30,000 units consisting of one share of our restricted common stock and one-half share common stock warrant to purchase shares of our common stock, with a purchase price of $1.50 per share and an expiration date of two years from the closing. In connection with this placement we had no offering costs for a net of $30,000.
Share based compensation
On July 29, 2011, Abakan issued 50,000 shares of our common stock for services performed valued at $76,000.
20
ABAKAN INC.
(Formerly Waste to Energy Group Inc.)
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2011 and 2010
NOTE 9 STOCKHOLDERS' EQUITY continued
Common Stock Warrants
In connection with the above private placements we valued the common stock warrants granted during the six months ended November 30, 2011, using the Black-Scholes model with the following assumptions:
| June 6, 2011 | June 10, 2011 | July 6, 2011 |
Expected volatility (based on historical volatility) | 170.29% | 170.29% | 170.29% |
Expected dividends | 0.00 | 0.00 | 0.00 |
Expected term in years | 10 | 2.00 | 2.00 |
Risk-free rate | 0.39% | 0.41% | 0.43% |
The expected volatility assumption was based upon historical stock price volatility measured on a daily basis. The risk-free interest rate assumption is based upon U.S. Treasury bond interest rates appropriate for the term of Abakans warrants. The dividend yield assumption is based on our history and expectation of dividend payments. All warrants are immediately exercisable upon granting, with the exception of the warrants connected with the convertible debentures (Note 8), which are immediately exercisable upon conversion of the debt.
A summary of the common stock warrants granted during the six months ended November 30, 2011 and the year ended May 31, 2011 is presented below:
| Number of Warrants |
|
| Number of Warrants |
|
|
|
|
|
Balance at June 1, 2011 | 2,670,233 |
| Balance at June 1, 2010 | 2,300,000 |
Granted | 40,000 |
| Granted | 370,233 |
Exercised | - |
| Exercised | - |
Forfeited or Expired | - |
| Forfeited or Expired | - |
Balance at November 30, 2011 | 2,710,233 |
| Balance at May 31, 2011 | 2,670,233 |
Exercisable at November 30, 2011 | 2,710,233 |
| Exercisable at May 31, 2011 | 2,670,233 |
21
ABAKAN INC.
(Formerly Waste to Energy Group Inc.)
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2011 and 2010
NOTE 10 EARNINGS-PER-SHARE CALCULATION - continued
In periods where losses are reported the weighted-average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.
These securities below were excluded from the calculations above because to include them would be anti-dilutive:
| For the three months ended November 30, 2011 | For the three months ended November 30, 2010 |
|
|
|
Common Stock Equivalents: |
|
|
Warrants | 2,710,233 | 2,300,000 |
Options to purchase common stock | 5,545,000 | 5,475,000 |
Total of Common Stock Equivalents: | 8,255,233 | 7,775,000 |
| For the six months ended November 30, 2011 | For the six months ended November 30, 2010 |
|
|
|
Common Stock Equivalents: |
|
|
Warrants | 2,710,233 | 2,300,000 |
Options to purchase common stock | 5,545,000 | 5,475,000 |
Total of Common Stock Equivalents: | 8,255,233 | 7,775,000 |
NOTE 11 RELATED PARTY TRANSACTIONS
Due to the common control between Abakan and its related parties, Abakan is exposed to the potential that ownership risks and rewards could be transferred among the parties.
In addition to related party transactions mentioned elsewhere, we have the below agreements and transactions:
Consulting Agreements
On June 1, 2011, we entered into a consulting agreement commencing June 1, 2011, with a related individual to provide business consulting. The terms of the consulting agreement are the consultant will be paid $10,000 per month. We also agreed to reimburse the consultant for all reasonable business expenses incurred by him in the performance of his duties, and will be in effect until June 1, 2012.
Notes Payable Related Party
For the six months ended November 30, 2011, we entered into two uncollateralized demand notes to a company controlled by our chief executive officers spouse, Prosper Financial, bearing 8% interest per annum for an aggregate total of $9,000. We also owed $133 in accrued interest for the above notes as of November 30, 2011.
23
ABAKAN INC.
(Formerly Waste to Energy Group Inc.)
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2011 and 2010
NOTE 12 STOCK BASED COMPENSATION
2009 Stock Option Plan
Our board of directors adopted and approved our 2009 Stock option Plan (Plan) on December 14, 2009, which provides for the granting and issuance of up to 10 million shares of our common stock. On August 15, 2011, we granted 25,000 stock options to a consultant at an exercise price of $1.25 per share, and these options will expire ten years from the grant date, and will vest in equal one third parts on the anniversary of the option grant date. On October 24, 2011, we granted 100,000 stock options to our former chief financial officer in connection with his Separation Agreement at an exercise price of $1.20 per share, and these options will expire five years from the grant date, and will vest immediately. After these grants there will be 4,355,000 available for future grant.
Our board of directors administers our Plan, however, they may delegate this authority to a committee formed to perform the administration function of the Plan. The board of directors or a committee of the board has the authority to construe and interpret provisions of the Plan as well as to determine the terms of an award. Our board of directors may amend or modify the Plan at any time. However, no amendment or modification shall adversely affect the rights and obligations with respect to outstanding awards unless the holder consents to that amendment or modification.
The Plan permits us to grant Non-Statutory stock options to our employees, directors and consultants. The options issued under this Plan are intended to be Non-Statutory Stock Options exempt from Code Section 409A.
The duration of a stock option granted under our Plan cannot exceed ten years. The exercise price of an incentive stock option cannot be less than 100% of the fair market value of the common stock on the date of grant.
The Plan administrator determines the term of stock options granted under our Plan, up to a maximum of ten years, except in the case of certain events, as described below. Unless the terms of an optionee's stock option agreement provide otherwise, if an optionee's relationship with us ceases for any reason other than disability or death, the optionee may exercise any vested options for a period of ninety days following the cessation of service. If an optionee's service relationship with us ceases due to disability or death the optionee or a beneficiary may exercise any vested options for a period of 12 months in the event of disability or death.
Unless the Plan administrator provides otherwise, options generally are not transferable except by will, the laws of descent and distribution, or pursuant to a domestic relations order. An optionee may designate a beneficiary, however, who may exercise the option following the optionee's death.
The value of employee and non-employee stock warrants granted during the six months ended November 30, 2011 was estimated using the Black-Scholes model with the following assumptions:
24
ABAKAN INC.
(Formerly Waste to Energy Group Inc.)
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2011 and 2010
NOTE 12 STOCK BASED COMPENSATION - continued
2009 Stock Option Plan (continued)
| August 15, 2011 | October 24, 2011 |
Expected volatility (based on historical volatility) | 170.29% | 166.66% |
Expected dividends | 0.00 | 0.00 |
Expected term in years | 10 | 5 |
Risk-free rate | 2.29% | 1.10% |
The expected volatility assumption was based upon historical stock price volatility measured on a daily basis. The risk-free interest rate assumption is based upon U.S. Treasury bond interest rates appropriate for the term of Abakans employee stock options. The dividend yield assumption is based on our history and expectation of dividend payments.
A summary of the options granted to employees and non-employees under the plan and changes during the years ended May 31, 2011 and the six months ended November 30, 2011 is presented below:
| Number of Options |
| Weighted Average Exercise Price | Weighted Average Remaining Contractual Terms (In Years) |
| Aggregate Intrinsic Value |
|
|
|
|
|
|
|
Balance at June 1, 2010 | 3,150,000 | $ | 0.64 |
|
|
|
Granted | 2,370,000 |
| 0.87 |
|
|
|
Exercised | - |
| - |
|
|
|
Forfeited or expired | (100,000) |
| 0.60 |
|
|
|
Balance at May 31, 2011 | 5,420,000 | $ | 0.75 | 9.00 years | $ | 185,000 |
Exercisable at May 31, 2011 | 983,240 | $ | 0.63 | 9.00 years | $ | -- |
Weighted average fair value of options granted during the year Ended May 31, 2011 |
|
$ |
0.87 |
|
|
|
Balance at June 1, 2011 | 5,420,000 | $ | 0.75 |
|
|
|
Granted | 125,000 |
| 1.21 |
|
|
|
Exercised | - |
| - |
|
|
|
Forfeited or expired | - |
| - |
|
|
|
Balance at November 30, 2011 | 5,545,000 | $ | 0.76 | 8.00 years | $ | 185,000 |
Exercisable at November 30, 2011 | 1,083,240 | $ | 0.67 | 8.00 years | $ | -- |
Weighted average fair value of options granted during the period ended November 30, 2011 |
| $ | 1.21 |
|
|
|
25
ABAKAN INC.
(Formerly Waste to Energy Group Inc.)
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the six months ended November 30, 2011 and 2010
NOTE 12 STOCK BASED COMPENSATION - continued
2009 Stock Option Plan (continued)
The following table summarizes information about employee stock options under the 2009 Plan outstanding at November 30, 2011:
Options Outstanding | Options Exercisable | |||||||||||||
| Range of Exercise Price |
| Number Outstanding at November 30, 2011 |
| Weighted Average Remaining Contractual Life |
| Weighted Average Exercise Price |
| Intrinsic Value | Number Exercisable at November 30, 2011 |
| Weighted Average Exercise Price |
| Aggregate Intrinsic Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ | 0.60 |
| 2,700,000 |
| 8.00 Years | $ | 0.60 | $ | -- | 933,240 | $ | 0.60 | $ | -- |
$ | 0.65 |
| 1,400,000 |
| 8.00 Years | $ | 0.65 | $ | 120,000 | -- | $ | 0.00 | $ | -- |
$ | 0.75 |
| 100,000 |
| 9.00 Years | $ | 0.75 | $ | 15,000 | -- | $ | 0.00 | $ | -- |
$ | 1.01 |
| 25,000 |
| 9.00 Years | $ | 1.01 | $ | -- | -- | $ | 0.00 | $ | -- |
$ | 1.02 |
| 650,000 |
| 10.0 Years | $ | 1.02 | $ | 50,000 | -- | $ | 0.00 | $ | -- |
$ | 1.05 |
| 270,000 |
| 10.0 Years | $ | 1.05 | $ | -- | 50,000 | $ | 1.01 | $ | -- |
$ | 1.20 |
| 100,000 |
| 5.0 Years | $ | 1.20 | $ | -- | 100,000 | $ | 1.20 | $ | -- |
$ | 1.25 |
| 50,000 |
| 10.0 Years | $ | 1.25 | $ | -- | -- | $ | 0.00 | $ | -- |
$ | 1.30 |
| 250,000 |
| 10.0 Years | $ | 1.30 | $ | -- | -- | $ | 0.00 | $ | -- |
|
|
| 5,545,000 |
| 9.0 Years | $ | 0.85 | $ | 185,000 | 1,083,240 | $ | 0.67 | $ | -- |
The total value of employee and non-employee stock options granted during the six months ended November 30, 2011 and 2010, was $143,267 and $2,061,628, respectively. During six months ended November 30, 2011 and 2010 Abakan recorded $791,856 and $398,728, respectively, in stock-based compensation expense relating to stock option grants.
At November 30, 2011 and 2010 there was $2,130,783 and $3,363,043, respectively, of total unrecognized compensation cost related to stock options granted under the plan. That cost is expected to be recognized pro-rata through August 15, 2014. The following table represents the stock options expense for the each of the next four fiscal years ended May 31:
For years ended May 31, |
| Expense |
|
|
|
2012 |
| $ 654,578 |
2013 |
| 1,084,035 |
2014 |
| 390,060 |
2015 |
| 2,110 |
|
| $ 2,130,783 |
26
MesoCoat has exclusively licensed and developed a proprietary metal cladding application process as well as advanced nano-composite coating materials that combine corrosion and wear resistant alloys, and nano-engineered cermet materials with proprietary high-speed application systems. The result is protective cladding applications that will be offered on a competitive basis with existing market solutions. The coating materials unite high strength, hardness, fracture toughness, and a low coefficient of friction into one product structure. MesoCoats products are currently undergoing extensive testing by the U.S. Air Force, U.S. Navy and Marine Corp, oil field service companies, and original equipment manufacturers (OEMs).
MesoCoat products nearing commercialization are CermaCladTM for cladding applications and PComP TM for cermet-metallic composite powder thermal spray applications.
CermaClad
CermaClad is a premier metallurgically bonded, high rate cladding solution optimized to manage the risks and consequences of corrosion damage and the failure of large assets such as oil and gas pipelines, refineries, ships, and bridges. In corrosive environments, including seawater, road salt, unprocessed oil, chemical processing, metals production, and other industrial applications, asset owners and operators either need to periodically maintain and replace major assets, using expensive, corrosion resistant alloy materials, which substantially run up costs, or clad their carbon steel with a corrosion resistant alloy coating. Cladding solutions such as CermaClad can save up to 80% of the cost of using solid alloys, while providing equivalent maintenance free corrosion lifetimes equal to the life of the asset. Clad metals are widely used in oil and gas exploration and production, marine transportation, mining, petrochemical processing and refining, nuclear, paper and pulp, desalination, and power generation industries. Each industry sector has different needs for this material. For instance, to meet growing global energy demands, oil companies continue to extend their offshore drilling efforts into deeper seas. The higher temperatures and corrosivity of deeper reserves eliminate plastics and other solutions from consideration, increasing the use of corrosion resistant alloys and lower-cost clad pipe alternatives.
CermaClad is MesoCoats proprietary cladding process which utilizes a high density infrared fusion heat source an arc lamp to metallurgically bond (make inseparable) metals, corrosion resistant alloys and/or cermets onto a metal substrate. Using this process, products like pipe and plates can be protected against harsh operating environments with great efficiency and speed compared to competing weld overlay products. Today, cladded steel is a specialized segment of the steel industry where it is estimated that demand outstrips supply.
The competitive advantages of CermaClad over current competing technologies and products are:
· Cermaclad and other clad overlays are substantially lower cost than pure alloy products
· CermaClad produces a metallurgically bonded overlay, reducing risk of catastrophic failure and buckling of lined pipes such as industry leader Buttings BuBi bimetallic pipe
· CermaClad can be applied to seamless pipe, eliminating 90% of welds which are a common source of early failure.
· CermaClad application technology occurs with a 30-40cm wide torch compared to less than 1 cm for laser or inert gas welding torches, resulting in planned application rates over an order of magnitude faster than current weld overlay technologies.
· CermaClad produces a smooth overlay that is virtually free of base metal dilution, improving inspectability and corrosion resistance, and eliminating many sources of corrosion and fatigue initiation. Smooth surfaces also decrease flow resistance, enabling reduced friction losses in pipeline applications.
30
The CermaClad product line in development today is as follows:
- CermaClad CR (Corrosion Resistant Alloys)
- CermaClad WR (Wear Resistant)
- CermaClad HT (High Temperature)
- CermaClad LT (Low Thickness)
PComP
PComP is a series of nanocomposite cermet coatings that are used to impart wear and corrosion resistance, and to restore dimensions, of metal components. PComP competes against chrome and nickel plating, and tungsten carbide in the multibillion dollar inorganic metal finishing market. Competing materials like hexavalent chrome, carbides and tungsten carbide cobalt have become major headaches for industrial producers in the metal finishing industry since these materials are on the EPAs hazardous materials watch list and are legally banned in several countries. Industry spends billions annually on these hazardous materials, and Mesocoats customers can gain a competitive advantage while mitigating environmental liabilities by adopting green products and processes into their product offerings. While businesses grapple with the need to transition away from these harmful products, MesoCoat has developed a solution platform that we plan to offer at substantially lower cost and higher productivity than leading chrome alternatives, and which has shown order of magnitude improvements in head to head wear and corrosion performance testing.
PComP, named for its particulate composite powders, is one of the few economically viable industry replacement solutions for hard chrome and carbides due to the product lines advanced corrosion, friction, wear and thermal barrier properties.
MesoCoat scientists have developed and patented a family of corrosion resistant coating solutions that combine extreme wear resistance, fracture toughness (resiliency), and a low friction coefficient all in one product structure. In conventional materials science toughness normally decreases as hardness and wear resistance increases by combining nano-level structure control and advanced materials science, , MesoCoat has developed a patented coating structure that can be both very tough and very wear resistant. Equally important, the hardness of a wear coating normally limits the ease with which it can be machined. The unique nanostructural design of the PComP coating solutions results in a coatings that can be machined through a finish grinder much faster than a product with a traditional carbide coating. The speed of coating application and final machining results in higher productivity and lower costs in metal finishing operations.
MesoCoats engineers have also been able to build an increased ductility into the PComP product structure combined with a lower stiffness than traditional carbides, imparting and ability to resist coating failure and spallation under heavy loads. Hard and brittle coatings often crack and flake off metals when stressed. PComP has been designed to have increased ductility and strain tolerance. Products coated with PComP are extremely wear resistant and can sustain very high loads without cracking and flaking, making it suitable for use in highly loaded components such as oilfield equipment like mandrels, plungers, drill bits, hydraulics, and others used in highly turbulent offshore oil production.
The PComP product line was specifically designed to meet the needs of two large markets: hard chrome plating and tungsten carbide coating replacement. The PComP family of nanocomposite coatings consists of five products, all of which have shown, in testing by third parties, to provide better wear, corrosion and mechanical properties at a lower life cycle cost than most of todays alternatives.
31
MesoCoat intends to sell these products through different channels. Commercial sector accounts will have access to these advanced coatings by buying thermal spray application services from MesoCoat. Large OEMs and Government agencies like the U.S. Air Force would procure raw powders as they are vertically integrated to do their own thermal spray applications using dedicated maintenance and repair depots. Recently, several defense organizations have been given congressional mandates to make better use of their existing equipment (planes, helicopters, jets, tanks and other armored vehicles, etc.) as budgets for the purchase of new equipment will be limited over the next few years. MesoCoats low-cost, long-life coating materials should appeal to government buyers striving to meet budgetary restrictions. Finally, to achieve more rapid penetration of a territorial (geographic) market, MesoCoat is actively qualifying preferred provider partners in certain territories (Houston and Los Angeles as two examples) to provide services in territories it is not currently able to service.
Stage of Development
None of MesoCoats materials are currently produced on a full-scale commercial production basis even though some materials have been produced on a small scale. Even though some of the materials are in limited release, certain of MesoCoats materials are expected to be ready for commercial market entry and production within the next twelve months. The following table indicates our estimated timeline for the commercial introduction of those products that are most imminent:
Product | Production Scale | Time (months) |
PComP T | Market Entry | 4 |
PComP W | Market Entry | 4 |
PComP S | Market Entry | 10 |
CermaClad CR | Full Production | 9 |
CermaClad WR | Market Entry | 6 |
CermaClad WR | Full Production | 15 |
Powdermets Business
Powdermet was formed in 1996 and has since developed a product platform of advanced materials solutions derived from nano-engineered particle agglomerate technology and derived hierarchically structured materials. These advanced materials include energy absorbing ultra-lightweight syntactic- and nano-composite metals in addition to the PComP nanocomposite cermets exclusively licensed to MesoCoat. The business has historically financed itself through corporate engineering consulting fees, government contracts and grants (over 90), and recently through partnerships with prime contractors and systems integrators. Powdermet now expects to transition from an engineered nano-powder R&D lab and toll powder manufacturer into a commercial sector company.
While MesoCoats product focus is on developing advanced cermets to address corrosion and wear coating needs, Powdermets product differentiation is based on its ability to build advanced nano-structured metal formulations to address energy efficiency, reduction in hazardous materials, and life cycle cost reduction. Powdermets technologies are particularly useful in crash and ballistic energy management markets since they offer weight reduction and the ability to dissipate substantially more impact energy than the aluminum alloys and foamed metals currently available.
Powdermet has four materials solution families under development:
32
· SComP - A family of syntactic metal composites known for their light weight properties and ability to absorb more energy than any other known material. SComP can provide weight savings over cast aluminum and magnesium without magnesiums corrosion and wear limitations.
· MComP - A family of hierarchically structured, rare earth free, nanocomposite metal and metal matrix composites meant to enable higher strength and temperature capability compared to traditional light metals. They have been designed to be a market replacement for beryllium, aluminum and magnesium in structural applications, without relying on scare and expensive rare earths to produce high strength and thermal stability.
· EnComP - A diverse family of engineered microstructure energy based solutions includes substitutes for rocket fuel, hydrogen storage and obscuring products with a primary product now being final tested by the U.S. Army to replace red phosphorous in munitions equipment.
· SynFoam - A family of structural, thermally insulating syntactic ceramic composites combining strength, high temperature functionality and low thermal conductivity into one multifunctional material.
Powdermets two products closest to commercialization are SComP and EnComP.
AMP Distributors Inc.
AMP Distributors Inc. (AMP) was formed by Abakan in June of 2011 as a Cayman Island company for the primary purpose of negotiating, executing and administrating international sales of MesoCoat's products. AMP is also tasked with acquiring equipment and coating materials for Abakans international transactions. AMP has appointed a managing director with over 15 years of experience in the offshore financial services industry and retained Kariola Limited, a consultancy organization, to assist it with technical advice and entry into Asian markets.
Future Acquisition Targets
Abakan utilizes multiple resources to identify future acquisition targets including a professional network of senior management, relationships with national labs such as the Oak Ridge National Lab, and a broad spectrum of other methods in the search for innovative technologies and companies.
Every future opportunity will be evaluated based on several criteria. Prospective companies must have individual market solutions intended to solve critical industry problems and have the potential to generate at least a $100 million in revenue within five years of Abakans involvement. Most companies that are ultimately acquired by Abakan will offer more than one market solution. We are therefore restricted to firms that have established R&D programs, with a preference for firms that have solutions in final stages of R&D or in pilot-scale production. Abakan is directing its attention to owners that are willing to accept a multi-phased investment option while guaranteeing operational control. We plan to support these technology-centric R&D opportunities and investments with our own corporate strategy, market development, licensing and contracted support.
33
Plan of Operation
Abakans plan of operation for the coming year is to position itself to succeed in commercialization efforts focused on MesoCoats CermaClad and PComP products. To achieve this success Abakan aims to:
· Establish overseas subsidiaries and plants while supporting their management teams.
· Gain market entry by creating awareness and establishing relationships with key investors.
· Increase interests in previously acquired companies.
· Target existing coating companies to qualify and use powders produced by MesoCoat and Powdermet.
· Assist MesoCoat in achieving the following objectives:
o Becoming American Petroleum Institute (API) compliant for CermaClad corrosion and wear resistant alloys products through a joint development agreement with Petrobras and ongoing development work.
o Gaining another joint venture agreement with one or two other major oil corporations by second quarter 2012.
o Continuing a plan of constructing CermaClad and PComP operating plants in strategic market locations (Houston, Alberta, Brazil and the Far East).
o Continuing the formation of strategic partnerships and a pipeline of potential clients for the CermaClad and PComP product lines.
Growth Strategy
Abakan intends to help MesoCoat grow over the next five years through the use of project and investor financing that involves two growth strategies: i) a conservative or organic strategy that requires a further $16,000,000 and ii) a moderate strategy which requires early market acceptance and $45,000,000 to $50,000,000 (dependent on the level of cash flow achieved and the level of project debt financing secured). On realizing sufficient financing, Abakan plans to assist MesoCoat in opening between six and fifteen operating plants worldwide. Given the wide range of the scenario assumptions, the growth strategy depends largely upon the successful execution of the marketing plans for both CermaClad and PComP. Given our strategy of targeting strategic global regions with multiple potential clients, it is feasible for us to meet our plan. However, Abakan will carefully monitor the risks associated with achieving the goals in each scenario to ensure MesoCoat can meet our expectations.
Plant locations for MesoCoat depend upon first securing client purchase orders sufficient to finance the construction of the plants. Another key component of plant location lies within strategic global positioning. We prefer to finance and build plants in locations with multiple organizations that can become potential clients for our products, hence the focus on locations in Houston, Alberta, Brazil and Asia. However, we are aware of the inherent political and currency risks that may exist due to working in offshore markets and intend to appropriately address such risks as we move forward with our construction plans.
34
Operational Logistics
CermaClad, PComP SComP, MComP and ENComP are platform technologies with extensive product potential in multiple large market verticals. Abakan and related operations will play a major role in six distinct product segments of the value chain: raw materials/consumables, application equipment, coating (cladding) services, casting, fabrication, and maintenance & repair of existing assets. By playing a major role in these six segments of the value chain, Abakan and its partners may prove to be an influential player in defining market prices and trends in the structural composites, steel plate, sheet, bar, and tubular products industries. Our vision is to form partnerships, and set up captive or regional facilities with the power players in the target industry. Most of these large manufacturers have project management and installation capabilities besides fabrication, and thus partnerships with these companies would help us build one-stop-shops for customers, where the customers define the specifications/requirements and we, and our value chain partners would take care of the steel fabrication, coating/cladding operations, casting, assembly integration, and inspection activities.
We intend to partner with a major suppliers or end users within geographic regions. Depending on the amount of financing available, we are considering three approaches to this market:
· High Capital Intensity: Abakan will self-finance and act as owner-operator.
· Medium Capital Intensity: Abakan will enter into joint venture partnerships, with it being the operator at 51% ownership and a partner at 49% ownership.
· Low Capital Intensity: Abakan will joint venture with supply chain partners which will act as operators and financiers with 51% ownership and it will act as technology supplier at 49% ownership. Within these arrangements we do not intend to be a licensor but rather participate in the operations and service end of the businesses.
Additional Funding
MesoCoat will require additional funding over the next twelve months. Not all of the funding sought is currently available though MesoCoat expects to receive additional funding from Abakan on the prospective exercise of the second option under the Investment Agreement. Should MesoCoat be unable to secure additional financing from outside sources or Abakan, it will most likely be unable to meet its milestones and may need to scale back operations. Any shortfall in minimum funding will adversely affect MesoCoats ability to grow or even continue operations.
Results of Operations
During the six month period ended November 30, 2011:
· Abakan increased its interest in MesoCoat to 51% on a fully-diluted basis.
· Abakan continued its search to identify prospective business opportunities for merger or acquisition.
During the six month period ended November 30, 2011, Abakan assisted MesoCoat with the following developments:
· Redefining its marketing strategy.
· Improving its branding.
· Beginning communication with several new potential joint commercialization partners.
· Accelerating R&D schedules by negotiating favorable engineering contracts with third parties.
35
· Constructing a new 11,000 sq. ft. manufacturing plant in Euclid, Ohio; full-scale production from the plant is expected to begin early in 2012; the plant is able to produce 10,000 square meters of CermaClad tubing per year and is able to fabricate PComP products for application in the aerospace, oil and gas, mining and chemical processing industries. MesoCoat began producing work samples for certification and approval by potential clients, with work split 60%/40% between samples and commercial sales.
· Working toward certain milestones of the Cooperation Agreement with Petroleo Brasiliero S.A. (Petrobras) to develop and qualify the CermaClad process for the application of CRA (corrosion resistant alloys) to the internal and external surfaces of pipes using proprietary High Density InfraRed (HDIR) lamp technology; Petrobras is a leading integrated oil and gas company headquartered in Rio de Janeiro, Brazil, and is the largest company in Latin America.
Net Profit/Loss
For the period from June 27, 2006 (inception) until November 30, 2011, Abakan incurred net losses of $5,715,637. Net losses for the three month period ending November 30, 2011 were $1,162,389 compared to a net loss of $989,816 for the three month period ending November 30, 2010. Net losses for the six month period ended November 30, 2011 were $512,521 compared to a net loss of $1,634,929 for the six month period ended November 30, 2010.
The increase in net losses over the comparative three month periods can be primarily attributed to increases in general and administrative expenses, professional fees, payroll and benefits expense, research and development costs, depreciation and amortization and stock option expenses, which increases reflect the consolidation of MesoCoats operations with those of Abakan. The decrease in net losses over the comparative six month periods can be attributed primarily to an unrealized gain of $1,764,345 recognized as a result of reconciling to fair value our 34% equity interest in MesoCoat held before the completion of our business combination offset by costs associated with our subsequent consolidation with MesoCoat.
We expect net losses to continue until such time as anticipated commercialization efforts are realized over the next twelve months.
Revenues
For the period from inception until November 30, 2011, Abakan realized revenues of $898,861. Revenues for the three month period ended November 30, 2011 were $548,877 compared to $0 for the three month period ended November 30, 2010. Revenues for the six month period ended November 30, 2011 were $897,265 as compared to $0 for the six month period ended November 30, 2010. Revenues in the current three and six month periods can be wholly attributed to the operations of MesoCoat.
Revenue in the current three month period was derived from commercial revenues of $25,338, contract and grant revenues of $391,654, and other income of $131,885. Revenue in the current six month period was derived from commercial revenues of $31,515, contract and grant revenues of $689,768, and other income of $175,982.
We expect revenue growth over the next twelve months as MesoCoats new commercial and government sponsored contracts that commenced in the last part of 2011 are completed and new products under development are brought on line for commercial sales.
36
Gross Profit
For the period from inception until November 30, 2011, Abakan realized a gross profit of $507,830. Gross profit for the three month period ended November 30, 2011 was $327,930 compared to $0 for the three month period ended November 30, 2010. Gross profit for the six month period ended November 30, 2011 was $506,234 compared to $0 for the six month period ended November 30, 2010. Gross profits in the current three and six month periods can be wholly attributed to the operations of MesoCoat.
The calculation of gross profit in the current three month period offset revenue of $548,877 against cost of revenue of $220,946. The calculation of gross profit in the current six month period offset revenue of $897,265 against cost of revenue of $391,031.
We expect continued volatility in gross profits in line with the varied nature of contracts in progress. Until such time as commercialization is established on a larger scale production costs associated with the products will vary and fluctuate based on individual agreements.
Expenses
For the period from inception until November 30, 2011, Abakan realized expenses of $7,014,835. Expenses for the three month period ended November 30, 2011 were $1,336,713 as compared to $703,053 for the three month period ended November 30, 2010, an increase of 90%. Expenses for the six month period ended November 30, 2011 were $2,526,058 as compared to $1,223,006 for the six month period ended November 30, 2010, an increase of 107%.
The increase in expenses over the comparative three month periods can be attributed to increases in general and administrative costs to $111,098 from $69,296, professional fees that increased to $81,782 from $33,513, payroll and benefit costs that increased to $215,442 from $19,464, research and development costs that increased to $139,964 from $0, depreciation and amortization expenses that increased to $84,171 from $1,386 and stock option expenses that increased to $453,339 from $229,704. The increases can be mainly attributed to the consolidation of Abakans operations with that of MesoCoat within the current three month period. Otherwise, professional fees and stock option expenses have increased due to new contracts to strengthen management and marketing.
The increase in expenses over the comparative six month periods can be attributed to increases in general and administrative costs to $217,303 from $98,754, professional fees that increased to $156,543 from $92,404, consulting fees that increased to $384,789 from $300,403, payroll and benefit costs that increased to $353,049 from $44,021, depreciation and amortization that increased to $166,230 from $2,764 and research and development fees that increased to $273,212 from $0. The increases can be mainly attributed to the consolidation of Abakans operations with that of MesoCoat within the current six month period. Otherwise, professional fees and stock option expenses have increased due to new contracts to strengthen management and marketing.
We expect that expenses will continue to increase over the next twelve months as Abakan intends to expand research and development, manufacturing capacity, management and marketing resources in pursuit of our growth strategy.
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Other Income/Expense
For the period from inception until November 30, 2011, Abakan incurred other income of $667,502. Other expenses for the three month ended November 30, 2011 were $223,581 as compared to $286,763 for the three month period ended November 30, 2010, a decrease of 22%. Other income for the six month period ended November 30, 2011 was $1,383,437 as compared to other expenses of $411,923 for the six month period ended November 30, 2010. Other income can be attributed to an unrealized gain of $1,764,345 on reconciling to fair value our 34% equity interest in MesoCoat prior to our consolidation.
The decrease in other expenses over the comparative three month periods can be attributed to the absence of liquidated damages of $100,000 and the elimination of $180,016 in losses associated with our equity interest in MesoCoat despite increases in interest expense in the current period.
The transition from other expense to other income in over the comparative six month periods can be attributed to the recognition of an unrealized gain of $1,764,354 on reconciling to fair value our 34% interest in MesoCoat prior to the consolidation which amount offset costs related to certain convertible debt instruments and the amortization of discount on debt due to the beneficial conversion feature associated with detachable warrants.
We expect to continue to incur other expenses in future periods based on convertible debt and the prospect that additional debt may be sought over the next twelve months.
Income Tax Expense (Benefit)
Abakan may have a prospective income tax benefit resulting from a net operating loss carry-forward and start up costs that will offset any future operating profit.
Impact of Inflation
Abakan believes that inflation has not had a material effect on operations for the period from June 27, 2006 (inception) to November 30, 2011.
Capital Expenditures
Abakan, through its majority interest in MesoCoat, has spent $2,626,164 on property, plant and equipment for the period from inception to November 30, 2011.
Liquidity and Capital Resources
Abakan has been in the development stage since inception.
As of November 30, 2011 Abakan had a working capital deficit of $1,380,528, current assets of $575,915 consisting of cash and cash equivalents of $443,294, accounts receivable of $95,944, a note receivable from a related party of $4,500, and prepaid expenses of $42,177. Abakan had total assets of $11,507,542 consisting of current assets, property, plant and equipment of $2,549,989, patents and licenses of $2,050,185, an assignment agreement of $250,000, an investment in Powdermet of $1,742,930, goodwill of $4,335,646, and finance fees of $2,877.
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As of November 30, 2011 Abakan had current liabilities of $1,956,443, consisting of accounts payable of $742,215, accounts payable to related parties of $235,949, capital leases of $13,730, loans payable of $489,711, loan payable to a related part of $9,000 accrued interest to a related party of $133 and accrued liabilities of $302,156. Abakan had total liabilities of $6,083,790 consisting of current liabilities, loans payable of $4,071,204 and capital leases of $56,143.
Stockholders equity, including controlling and non-controlling interests was $5,423,752 as of November 30, 2011.
For the period from inception until November 30, 2011, cash flow used in operating activities was $2,048,687. Cash flow used in operating activities for the six month period ended November 30, 2011, was $408,837 compared to cash flow used in operating activities of $563,269 for the six month period ending November 30, 2010. Cash flow used in operating activities during the current period can be primarily attributed to a net loss and the unrealized gain on the consolidation with MesoCoat of $1,764,345 offset by depreciation and amortization of $166,230, the amortization of a discount on debt of $279,322, a stock option expense of $791,856, stock issued for services of $76,000, equity in an investee loss of $44,408, accounts receivable of $75,513, accounts payable of $272,145, accounts payable to related parties of $156,735, accrued interest on loans payable of $77,801 and accrued liabilities of $96,922.
We expect to continue to use additional cash flow in operating activities over the next twelve months as net losses are anticipated in the near term as products are introduced to market and fiscal operational responsibilities are met.
For the period from inception until November 30, 2011, cash flow used in investing activities was $5,759,489. Cash flow used in investing activities for the six month period ending November 30, 2011, was $345,603 compared to $1,601,018 for the six month period ending November 30, 2010. Cash flow used in investing activities during the current period can be primarily attributed to the purchase of property, plant, and equipment in the amount of $626,106 and the capitalization of patents and licenses in the amount of $27,148 offset by cash assumed on consolidation with MesoCoat in the amount of $307,650.
We expect to use additional cash flow in investing activities over the next twelve months in additional plant, machinery and equipment as anticipated manufacturing facilities are brought into service.
Specifically, MesoCoat expects to continue to use cash flow in investing activities in connection with financing the construction of a new 11,000 sq. ft. manufacturing plant in Euclid, Ohio together with the purchase of machinery and equipment that will be needed to put the plant into operation. We estimate that $6.8 million will be required to fund the construction and equipment required of which $2,226,532 had been allocated to construction in progress including $195,023 in accruals as of November 30, 2011. MesoCoat will require approximately an additional $4.6 million to complete the project which funding is yet to be committed to the facility. Should MesoCoat be unable to secure sufficient funds to complete the project in Euclid, Ohio on a timely basis, the commercialization timetable for certain of its products and certain contracts that it expects to be fulfilled at the new plant will be delayed until such time as sufficient funds are obtained and the project completed. Smaller contracts and grant work being carried out at MesoCoats existing facilities and at third party locations will not be impacted by the delay though its operating results will be negatively affected on a prospective basis by a delay or abandonment of the project.
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For the period from inception until November 30, 2011, cash flow provided by financing activities was $8,241,469. Cash flow provided by financing activities for the six month period ending November 30, 2011 was $1,187,733 as compared to $2,133,769 for the six month period ending November 30, 2010. Cash flow provided by financing activities in the current period is attributable to proceeds from the sale of common stock of $245,465 and proceeds from loans payable of $944,833 and proceeds from a related party loan of $9,000 offset by the repayment of capital leases of $11,565.
We expect to continue to have cash flow provided by financing activities as Abakan intends to pursue new rounds of financing over the next twelve months as it seeks to fulfill its plan of operation.
Our current assets are insufficient to meet our current obligations or to satisfy our cash needs over the next twelve months and as such Abakan will require debt or equity financing. We had no commitments or arrangements for such financing at November 30, 2011 though we are pursuing a number of prospective sources that include shareholder loans, the sale of equity, the procurement of long term debt or the settlement of additional debt for equity. We face certain financial obstacles to attracting new financing due to our historical and current record of net losses and working capital deficits. Therefore, despite our efforts we can provide no assurance that we will be able to obtain the financing required to meet our stated objectives or even to continue as a going concern.
Abakan does not expect to pay cash dividends in the foreseeable future.
Abakan has a defined stock option plan and contractual commitments with all of its officers and directors.
Abakan has plans for significant purchases of plant and equipment in connection with the operations of MesoCoat, which include the construction of a new manufacturing facility in Euclid, Ohio. We and Powdermet, as shareholders of MesoCoat, are committed to sourcing the capital requisite to fund the construction and purchase of equipment to the extent that MesoCoat is not able to do so through the normal course of business. Should Abakan be called upon to assist MesoCoat to source the capital requisite to fund the construction and purchase of equipment for the Euclid, Ohio manufacturing facility it would rely on its own ability to realize financing through debt or equity offerings in addition to coordinating efforts with Powdermet to secure access to prospective third party lending institutions or prospective joint venture partners. Should MesoCoat be unsuccessful in procuring the capital requisite to fund the construction of the Euclid manufacturing facility and the related purchase of equipment on a timely basis or at all, our operating results will be negatively affected on a prospective basis by any potential delay or abandonment of the project.
Abakan plans to increase the number of employees engaged by MesoCoat on completion of the new manufacturing facility.
Off Balance Sheet Arrangements
As of November 30, 2011, Abakan had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to stockholders.
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The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. The more significant areas requiring the use of estimates include asset impairment, stock-based compensation, beneficial conversion features on debt instruments, and future income tax amounts. Management bases its estimates on historical experience and on other assumptions considered to be reasonable under the circumstances. Actual results may differ from the estimates.
Stock-Based Compensation
We account for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with ASC 505. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services.
Recent Accounting Pronouncements
We have examined all recent accounting pronouncements and believe that none of them will have a material impact on our financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
In connection with the preparation of this quarterly report, an evaluation was carried out by Abakans management, with the participation of the chief executive officer and the chief financial officer, of the effectiveness of Abakans disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (Exchange Act)) as of November 30, 2011. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Commissions rules and forms, and that such information is accumulated and communicated to management, including the chief executive officer and the chief financial officer, to allow timely decisions regarding required disclosures.
Based on that evaluation, Abakans management concluded, as of the end of the period covered by this report, that Abakans disclosure controls and procedures were ineffective in recording, processing, summarizing, and reporting information required to be disclosed, within the time periods specified in the Commissions rules and forms, and such information was not accumulated and communicated to management, including the chief executive officer and the chief financial officer, to allow timely decisions regarding required disclosures.
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Changes in Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the period ended November 30, 2011, that materially affected, or are reasonably likely to materially affect, Abakans internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
Abakans operations and securities are subject to a number of risks. Below we have identified and discussed the material risks that we are likely to face. Should any of the following risks occur, they will adversely affect our business, financial condition, and/or results of operations as well as the future trading price and/or the value of our securities.
Abakan has a history of significant operating losses and such losses may continue in the future.
Abakan incurred net losses of $5,715,637 for the period from June 27, 2006 (inception) to November 30, 2011. Since we have been without significant revenue since inception and have only recently transitioned to producing limited revenue, as a result of the business combination with MesoCoat, historical losses may continue into the future.
Abakan has a history of uncertainty about continuing as a going concern.
Abakans audits for the periods ended May 31, 2011 and 2010 expressed an opinion as to its ability to continue as a going concern as a result of net losses of $5,203,116 and a working capital deficit of $510,868 as of May 31, 2011. Unless Abakan is able to become profitable over successive future periods its ability to continue as a going concern will be in jeopardy.
Abakans success is dependent on its ability to assist MesoCoat and Powdermet to commercialize proprietary technologies to the point of generating sufficient revenues to sustain and expand operations.
Abakans near term future operation is dependent on its ability to assist MesoCoat and Powdermet in the commercial application of proprietary technologies to produce sufficient revenue to sustain and expand operations. The same successful efforts criteria will be required for any additional targets that are acquired by Abakan. The success of these endeavors will require that sufficient funding be available to assist in the development of its business interests. Currently, Abakans financial resources are limited, which limitation may slow the pace at which proprietary technologies can be commercialized and deter the prospect of additional acquisitions. Should we be unable to improve our financial condition through debt or equity offerings, our ability to successfully advance our business plan will be severely limited.
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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 Powdermets products are distinguished by next-generation innovations that are more sophisticated and cost effective than many competitive products currently in the market place, a number of entities and new competitors may enter the market in the future. Some of MesoCoats and Powdermets existing and potential competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than we do, including well known multi-national corporations. Accordingly, MesoCoats and Powdermets products could become obsolete at any time. Competitors could develop products similar to or better than our own, finish development of new technologies in advance of either MesoCoats or Powdermets research and development, or be more successful at marketing new products, any of which factors may hurt our prospects for success.
Market acceptance of the products and processes produced by MesoCoat and Powdermet is critical to our growth.
We expect to generate revenue and realize a gain on our interest in Powdermet from the development and sale of products and processes produced by MesoCoat and Powdermet. Market acceptance of those products is therefore critical to our growth. If our customers do not accept or purchase those products or processes produced by MesoCoat and Powdermet, then our revenue, cash flow and operating results will be negatively impacted.
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General economic conditions will affect our operations.
Changes in the general domestic and international climate may adversely affect the financial performance of Abakan, MesoCoat and Powdermet. Factors that may contribute to a change in the general economic climate include industrial disputes, interest rates, inflation, international currency fluctuations and political and social reform. Further, the delayed revival of the global economy is not conducive to rapid growth, particularly of technology companies with newly commercialized products.
MesoCoat and Powdermet rely upon patents and other intellectual property.
MesoCoat and Powdermet rely on a combination of patent applications, trade secrets, trademarks, copyrights and licenses, together with non-disclosure and confidentiality agreements, to establish and protect proprietary rights to technologies they develop. Should either of MesoCoat or Powdermet be unable to adequately protect their intellectual property rights or become subject to a claim of infringement, their businesses and that of Abakan may be materially adversely affected.
MesoCoat and Powdermet expect to prepare patent applications in accordance with their respective worldwide intellectual property strategies on acquiring new technologies. However, neither they nor Abakan can be certain that any patents will be issued with respect to future patents pending or future patent applications. Further, neither they nor Abakan know whether any future patents will be upheld as valid, proven enforceable against alleged infringers or be effective in preventing the development of competitive patents. Abakan believes that MesoCoat and Powdermet have each implemented a sophisticated internal intellectual property management system to promote effective identification and protection of their products and know-how in connection with the technologies they have developed and may develop in the future
We may not be able to effectively manage our growth.
We expect considerable future growth in our business. Such growth will come from the addition of new plants, the increase in global personnel, and the commercialization of new products. Additionally, our products should have an impact on the cladding industry; as companies learn that they can receive materials with a short lead time at a higher quality and lower price, market demand should grow, expanding the overall market itself. To achieve growth in an efficient and timely manner, we will have to maintain strict controls over our internal management, technical, accounting, marketing, and research and development departments. We believe that we have retained sufficient quality personnel to manage our anticipated future growth though we are still striving to improve financial accounting oversight to ensure that adequate reporting and control systems in place. Should we be unable to successfully manage our anticipated future growth by adherence to these strictures, costs may increase, growth could be impaired and our ability to keep pace with technological advances may be impaired which failures could result in a loss of future customers.
Environmental laws and other governmental legislation may affect our business.
Should the technologies which each of MesoCoat and Powdermet have under development not comply with applicable environmental laws then Abakans business and financial results could be seriously harmed. Furthermore, changes in legislation and governmental policy could also negatively impact us. Although we are currently unaware of any introduced or proposed bills, or policy, that might cause us to make specific changes to our operations, no assurance can be given that if new legislation is passed we will be able to make the changes to comport our technologies with future regulatory requirements.
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Abakan and those subsidiaries in which it holds an interest may face liability claims on future products.
Although MesoCoat and Powdermet intend to implement exhaustive testing programs to identify potential material defects in technology they develop, any undetected defects could harm their reputation and that of Abakan, diminish their customer base, shrink revenues and expose themselves and us to product liability claims. Any imposition of liability that is not covered by insurance or is in excess of insurance coverage could have a material adverse effect on our business, results of operations and financial condition.
The market for our stock is limited and our stock price may be volatile.
The market for our common stock has been limited due to low trading volume and the small number of brokerage firms acting as market makers. Due to the limitations of our market and the volatility in the market price of our stock, investors may face difficulties in selling shares at attractive prices when they want to sell. The average daily trading volume for our stock has varied significantly from week to week and from month to month, and the trading volume often varies widely from day to day.
We incur significant expenses as a result of the Sarbanes-Oxley Act of 2002, which expenses may continue to negatively impact our financial performance.
We incur significant legal, accounting and other expenses as a result of the Sarbanes-Oxley Act of 2002, as well as related rules implemented by the Commission, which control the corporate governance practices of public companies. Compliance with these laws, rules and regulations, including compliance with Section 404 of the Sarbanes-Oxley Act of 2002, has substantially increased our expenses, including legal and accounting costs, and made some activities more time-consuming and costly.
Abakans common stock is currently deemed to be penny stock, which makes it more difficult for investors to sell their shares.
Abakans common stock is and will be subject to the penny stock rules adopted under section 15(g) of the Exchange Act. The penny stock rules apply to companies whose common stock is not listed on the NASDAQ Stock Market or other national securities exchange and trades at less than $5.00 per share or that have tangible net worth of less than $5,000,000 ($2,000,000 if the company has been operating for three or more years). These rules require, among other things, that brokers who trade penny stock to persons other than established customers complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. Many brokers have decided not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. If Abakan remains subject to the penny stock rules for any significant period, it could have an adverse effect on the market, if any, for our securities. If the Abakans securities are subject to the penny stock rules, investors will find it more difficult to dispose of our securities.
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Abakan complied with the exemption requirements of Regulation S by having directed no offering efforts in the United States, by offering common shares only to an offeree who was outside the United States at the time of the offering, and ensuring that the offeree to whom the convertible debenture was offered and authorized was a non-U.S. offeree with an address in a foreign country.
On November 30, 2011 Abakan authorized the issuance of a promissory note to Stratton SA in the amount of $18,000 for cash consideration in reliance upon the exemptions from registration provided by Section 4(2) and Regulation S of the Securities Act. The promissory note is due on demand and bears interest of 8% per annum.
Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the following factors: (1) the issuance was an isolated private transactions by Abakan which did not involve a public offering; (2) the offeree had access to the kind of information which registration would disclose; and (3) the offeree is financially sophisticated.
Abakan complied with the exemption requirements of Regulation S by having directed no offering efforts in the United States, by offering common shares only to an offeree who was outside the United States at the time of the offering, and ensuring that the offeree to whom the convertible debenture was offered and authorized was a non-U.S. offeree with an address in a foreign country.
On November 30, 2011 Abakan authorized the issuance of a promissory note to Orsa & Company in the amount of $11,250 for services rendered in reliance upon the exemptions from registration provided by Section 4(2) of the Securities Act. The promissory note is due on demand and bears interest of 8% per annum.
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 November 24, 2011 Abakan authorized the issuance of a promissory note to Winifred Miller in the amount of $7,500 for cash consideration in reliance upon the exemptions from registration provided by Section 4(2) and Regulation S of the Securities Act. The promissory note is due on demand and bears interest of 8% per annum.
Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the following factors: (1) the issuance was an isolated private transactions by Abakan which did not involve a public offering; (2) the offeree had access to the kind of information which registration would disclose; and (3) the offeree is financially sophisticated.
Abakan complied with the exemption requirements of Regulation S by having directed no offering efforts in the United States, by offering common shares only to an offeree who was outside the United States at the time of the offering, and ensuring that the offeree to whom the convertible debenture was offered and authorized was a non-U.S. offeree with an address in a foreign country.
On October 21, 2011 Abakan authorized the issuance of a promissory note to Stratton SA in the amount of $17,300 for cash consideration in reliance upon the exemptions from registration provided by Section 4(2) and Regulation S of the Securities Act. The promissory note is due on demand and bears interest of 8% per annum.
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Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the following factors: (1) the issuance was an isolated private transactions by Abakan which did not involve a public offering; (2) the offeree had access to the kind of information which registration would disclose; and (3) the offeree is financially sophisticated.
Abakan complied with the exemption requirements of Regulation S by having directed no offering efforts in the United States, by offering common shares only to an offeree who was outside the United States at the time of the offering, and ensuring that the offeree to whom the convertible debenture was offered and authorized was a non-U.S. offeree with an address in a foreign country.
On October 5, 2011 Abakan authorized the issuance of a promissory note to Ted Sarniak, III a related party, in the amount of $25,000 for cash consideration in reliance upon the exemptions from registration provided by Section 4(2) of the Securities Act. The promissory note is due on demand and bears interest of 8% per annum.
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 September 9, 2011 Abakan authorized the issuance of a promissory note to Kosson Ventures Ltd. in the amount of $2,990 for cash consideration in reliance upon the exemptions from registration provided by Section 4(2) and Regulation S of the Securities Act. The promissory note is due on demand and bears interest of 8% per annum.
Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the following factors: (1) the issuance was an isolated private transactions by Abakan which did not involve a public offering; (2) the offeree had access to the kind of information which registration would disclose; and (3) the offeree is financially sophisticated.
Abakan complied with the exemption requirements of Regulation S by having directed no offering efforts in the United States, by offering common shares only to an offeree who was outside the United States at the time of the offering, and ensuring that the offeree to whom the convertible debenture was offered and authorized was a non-U.S. offeree with an address in a foreign country.
On September 8, 2011 Abakan authorized the issuance of a promissory note to Prosper Financial, Inc., a related entity, in the amount of $3,000 for services rendered in reliance upon the exemptions from registration provided by Section 4(2) of the Securities Act. The promissory note is due on demand and bears interest of 8% per annum.
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.
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SIGNATURES
Abakan Inc. | Date |
/s/ Robert H. Miller By: Robert H. Miller Its: Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer and Director |
January 23, 2012 |
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INDEX TO EXHIBITS
Exhibit No. Exhibit Description
3.1* Certificate of Incorporation of the Abakan and Certificate of Amendment, incorporated hereto by reference to the Form SB-2, filed with the Commission on June 19, 2007.
3.2* Bylaws of Abakan, incorporated hereto by reference to the Form SB-2, filed with the Commission on June 19, 2007.
10.1* Lease Agreement between Powdermet and Sherman Properties, LLC dated March 7, 2007, incorporated hereto by reference to the Form 10-K filed with the Commission on September 13, 2011.
10.2* License agreement between MesoCoat and Powdermet dated July 22, 2008, incorporated hereto by reference to the Form 10-K/A-2 filed with the Commission on December 27, 2011.
10.3* Exclusive license between MesoCoat and UT-Battelle, LLC, dated September 22, 2009, incorporated hereto by reference to the Form 10-K/A-2 filed with the Commission on December 27, 2011.
10.4* Articles of Merger dated November 9, 2009, incorporated hereto by reference to the Form 8-K filed with the Commission on December 9, 2009.
10.5* Agreement and Plan of Merger dated November 9, 2009, incorporated hereto by reference to the Form 8-K filed with the Commission on December 9, 2009.
10.5* Consulting agreement dated December 1, 2009, between Abakan and Mr. Greenbaum, incorporated hereto by reference to the Form 8-K filed with the Commission on May 28, 2010.
10.7* Employment agreement dated December 1, 2009, between MesoCoat and Andrew Sherman, incorporated hereto by reference to the Form 10-K filed with the Commission on September 13, 2011.
10.8* Consulting agreement date December 1, 2009 between Abakan and Prosper Financial Inc., incorporated hereto by reference to the Form 10-K filed with the Commission on September 13, 2011.
10.9* Consulting agreement dated December 8, 2009 between Abakan and Robert Miller, incorporated hereto by reference to the Form 10-K filed with the Commission on September 13, 2011.
10.10* Investment Agreement dated December 9, 2009, between the Abakan, MesoCoat and Powdermet, incorporated hereto by reference to the Form 8-K filed with the Commission on December 17, 2009.
10.11* Agreement date March 17, 2010 between Abakan and Sonnen Corporation, incorporated hereto by reference to the Form 10-K filed with the Commission on September 13, 2011.
10.12* Agreement dated April 30, 2010 between Abakan and Mr. Buschor, incorporated hereto by reference to the Form 8-K filed with the Commission on May 11, 2010.
10.13* Commercial lease agreement date June 1, 2010, between Powdermet and MesoCoat, incorporated hereto by reference to the Form 10-K filed with the Commission on September 13, 2011.
10.14* Stock Purchase Agreement dated June 29, 2010 between Abakan and Kennametal, incorporated hereto by reference to the Form 8-K filed with the Commission on September 15, 2010.
10.15* Employment agreement dated August 20, 2010, between Abakan and Mr. Takkas, incorporated hereto by reference to the Form 8-K filed with the Commission on August 26, 2010.
10.16* Amendment No. 1 to Stock Purchase Agreement between Abakan and Kennametal dated September 7, 2010, incorporated hereto by reference to the Form 8-K filed with the Commission on September 15, 2010.
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10.17* Amendment to the Investment Agreement dated December 8, 2010, between Abakan, MesoCoat and Powdermet, incorporated hereto by reference to the Form 10-Q filed with the Commission on January 19, 2011.
10.18* Amendment No. 2 to Stock Purchase Agreement between Abakan and Kennametal dated January 19, 2011, incorporated hereto by reference to the Form 8-K filed with the Commission on July 13, 2011.
10.19* Accord and Satisfaction Agreement dated March 21, 2011 between Abakan and Kennametal, Inc., incorporated hereto by reference to the Form 8-K filed with the Commission on March 25, 2011.
10.20* Assignment Agreement dated March 25, 2011 with Polythermics LLC and MesoCoat, incorporated hereto by reference to the Form 10-Q/A filed with the Commission on September 27, 2011.
21* Subsidiaries of Abakan, incorporated hereto by reference to the Form 10-K on September 13, 2011 filed with the Commission on March 25, 2011.
101. INS XBRL Instance Document
101. PRE XBRL Taxonomy Extension Presentation Linkbase
101. LAB XBRL Taxonomy Extension Label Linkbase
101. DEF XBRL Taxonomy Extension Label Linkbase
101. CAL XBRL Taxonomy Extension Label Linkbase
101. SCH XBRL Taxonomy Extension Schema
* Incorporated by reference to previous filings of Abakan.
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed furnished and not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, or deemed furnished and not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, and otherwise is not subject to liability under these sections.
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