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EX-32.1 - ABAKAN CERTIFICATION - ABAKAN, INCexhibit321.htm
EX-31.2 - ABAKAN CERTIFICATION - ABAKAN, INCexhibit312.htm
EX-31.1 - ABAKAN CERTIFICATION - ABAKAN, INCexhibit311.htm
EX-32.2 - ABAKAN CERTIFICATION - ABAKAN, INCexhibit322.htm

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

quarterly period ended February 28, 2015.

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

transition period from

to

.

Commission file number: 000-52784

ABAKAN INC.

(Exact name of registrant as specified in its charter)

Nevada

98-0507522

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

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

(Address of principal executive offices)    (Zip Code)

(786) 206-5368

(Registrant’s telephone number, including area code)

N/A

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

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

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

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

Yes þ   No o

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

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

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

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

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the

Exchange Act): Yes o  No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest

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

only class of voting stock), at May 4, 2015 was 79,501,088.

1



TABLE OF CONTENTS

PART 1- FINANCIAL INFORMATION

Item1.

Financial Statements:

3

Condensed Consolidated Balance Sheets for the period ended

4

February 28, 2015 (unaudited)  and May 31, 2014

Unaudited Condensed Consolidated Statements of Operations for the

5

Three and nine months ended February 28, 2015 and  2014

Unaudited Condensed Consolidate Statements of Comprehensive Income for the

three and nine months ended February 28, 2015 and 2014

Unaudited Condensed Consolidated Statements of Cash Flows for the

7

nine months ended February 28, 2015 and 2014

Condensed Notes to Consolidated Financial Statements (Unaudited)

8

Item 2.

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

21

Operations

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

38

Item 4.

Controls and Procedures

39

PART II-OTHER INFORMATION

Item 1.

Legal Proceedings

40

Item 1A.

Risk Factors

41

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

45

Item 3.

Defaults Upon Senior Securities

45

Item 4.

Mine Safety Disclosures

45

Item 5.

Other Information

46

Item 6.

Exhibits

46

Signatures

47

Index to Exhibits

48

2



PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

As used herein, the terms “Abakan”, “we,” “our,” and “us” refer to Abakan Inc., a Nevada corporation,

and its consolidated subsidiaries, unless otherwise indicated.  In the opinion of management, the

accompanying financial statements included in this Form 10-Q reflect all adjustments (consisting only of

normal recurring accruals) necessary for a fair presentation of the results of operations for the periods

presented.  The results of operations for the periods presented are not necessarily indicative of the results

to be expected for the full year.

3



ABAKAN INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

February 28,

May 31,

2015

2014

(unaudited)

ASSETS

Current assets

Cash and cash equivalents

$

271,377     $

31,111

Accounts receivable

139,797

119,122

Inventory

34,560

-

Prepaid expenses

57,723

185,770

Total current assets

503,457

336,003

Non-current assets

Deferred finance fees, net

11,638

14,070

Property, plant and equipment, net

5,271,465

5,539,549

Patents and licenses, net

6,114,378

6,106,686

Assignment agreement - MesoCoat

141,450

171,055

Investment - Powdermet (Note 3)

2,267,392

2,151,817

Goodwill

364,384

364,384

Total Assets

$

14,674,164     $

14,683,564

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities

Accounts payable

$

1,035,376     $

1,552,402

Accounts payable - related parties

231,383

675,041

Capital leases - current portion

31,825

31,465

Loans payable

5,148,515

4,820,816

Accrued interest - loans payable

642,519

306,160

Loan payable- related parties

359,468

224,799

Accrued interest – related parties

20,961

480

Deferred rental revenue

150,038

-

Accrued liabilities

929,625

652,212

Total current liabilities

8,549,710

8,263,375

Non-current liabilities

Loans payable (Note 4)

921,103

1,056,106

Capital leases - non-current portion (Note 4)

48,625

54,040

Total liabilities

9,519,438

9,373,521

Commitments and contingencies

Stockholders' equity

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

authorized, none issued and outstanding

-

-

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

79,501,088 issued and outstanding – February 28, 2015,

68,374,815 issued and outstanding - May 31, 2014

7,952

6,840

Subscription receivable

-

(28,000)

Paid-in capital

29,096,649

24,530,074

Contributed capital

5,050

5,050

Accumulated deficit

(24,046,944)

(19,502,097)

Accumulated other comprehensive income

766

-

5,063,473

5,011,867

Non-controlling interest

91,253

298,176

Total stockholders' equity

5,154,726

5,310,043

Total liabilities and stockholders' equity

$

14,674,164     $

14,683,564

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.

4



ABAKAN INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the three months ended

For the nine months ended

February 28,

February 28,

Revenues

2015

2014

2015

2014

Commercial

$

55,090     $

69,120     $

210,329      $

206,507

Contract and grants

189,022

94,400

511,949

229,428

Rental Revenue and other income

51,169

-

51,169

10,094

295,281

163,520

773,447

446,029

Cost of revenues

211,282

77,824

423,390

264,996

Gross profit

83,999

85,696

350,057

181,033

Expenses

General and administrative

General and administrative

202,341

210,582

724,501

589,692

Professional fees

432,801

99,275

788,649

558,810

Professional fees - related parties

10,910

15,000

40,910

48,028

Consulting

208,438

280,008

611,472

799,475

Consulting - related parties

72,185

61,500

200,185

180,500

Payroll and benefits expense

195,456

230,890

473,841

1,070,926

Depreciation and amortization

237,976

191,859

641,637

583,924

Research and development

115,424

203,623

456,589

1,033,571

Stock expense on debt conversion

-

-

76,500

-

Stock options expense

262,341

352,816

786,717

972,481

Total expenses

1,737,872

1,645,553

4,801,001

5,837,407

Loss from operations

(1,653,873)

(1,559,857)

(4,450,944)

(5,656,374)

Other (expense) income

Interest expense:

Interest – loans

(138,709)

(79,359)

(400,063)

(178,639)

Interest - related parties

(15,504)

-

(21,980)

(1,113)

Amortization of discount on debt

-

-

-

(137,364)

Total interest expense

(154,213)

(79,359)

(422,043)

(317,116)

Interest income

2

7

6

14

Loss on debt settlement

-

(510)

(2,651)

(510)

Loss on sale of assets

(34,139)

-

(34,139)

-

Equity in Powdermet gain (loss)

110,561

(73,047)

115,575

(295,617)

Total other (expense) income

(77,789)

(152,909)

(343,252)

(613,229)

Net loss before non-controlling interest

(1,731,662)

(1,712,766)

(4,794,196)

(6,269,603)

Non-controlling interest in MesoCoat loss

84,030

341,231

249,349

1,335,624

Net loss attributable to Abakan Inc.

(1,647,632)

(1,371,535)

(4,544,847)

(4,933,979)

Provision for income taxes

-

-

-

-

Net loss

$      (1,647,632)     $     (1,371,535)

(4,544,847)

(4,933,979)

Net loss per share - basic

$

(.02)

(.02)

(.06)

(.08)

Net loss per share – diluted

$

(.02)     $

(.02)

(.06)

(.08)

Weighted average number of common

79,501,088

64,481,144

73,212,202

64,365,475

shares outstanding – basic

Weighted average number of common

79,501,088

64,481,144

73,212,202

64,365,475

shares outstanding – diluted

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

5



ABAKAN INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

For the three months ended

For the nine months ended

February 28,

February 28,

2015

2014

2015

2014

Net loss

$      (1,647,632)     $     (1,371,535)     $    (4,544,847)      $

(4,933,979)

Other comprehensive income (loss)

Change in foreign currency translation,

766

-

766

-

net of tax effects of $0, $0, $0 and $0

respectively

Total comprehensive loss

$      (1,646,866)     $     (1,371,535)     $    (4,545,613)      $

(4,933,979)

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

6



ABAKAN INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the nine months ended

February 28,

2015

2014

NET CASH USED IN OPERATING ACTIVITIES

$

(3,196,522)     $

(1,656,379)

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of property, plant, equipment and website

(380,260)

(517,519)

Proceeds from sale of capital asset

18,000

-

Capitalized patents and licenses

(22,458)

(31,581)

NET CASH USED IN INVESTING ACTIVITIES

(384,718)

(549,100)

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from sale of common stock

3,535,798

76,244

Proceeds from loans payable

978,184

1,970,000

Payments on loans payable

(652,688)

(29,435)

Proceeds from loans payable - related parties

1,501

-

Payments on loans payable – related parties

(65,000)

-

Repayments of capital leases

(5,055)

(4,717)

Stock issuable

28,000

20,000

NET CASH PROVIDED BY FINANCING ACTIVITIES

3,820,740

2,032,092

EFFECT OF EXCHANGE RATE CHANGES ON CASH

766

-

NET INCREASE (DECREASE)  IN CASH AND CASH EQUIVALENTS

240,266

(173,387)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

31,111

233,040

CASH AND CASH EQUIVALENTS, END OF PERIOD

$

271,377     $

59,653

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7



ABAKAN INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 28, 2015 and 2014

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

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

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

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

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

considered necessary for a fair presentation of Abakan’s financial position as of February 28, 2015, and

the results of its operations and cash flows for the nine months ended February 28, 2015, have been made.

Operating results for the nine months ended February 28, 2015, are not necessarily indicative of the

results for the year.

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

statements and notes for the year ended May 31, 2014, contained in  Abakan’s Form 10-K.

Consolidation Policy

The accompanying February 28, 2015, financial statements include Abakan’s accounts and the accounts of

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

consolidation. Abakan’s ownership of its subsidiaries as of February 28, 2015, is as follows:

Name of Subsidiary

Percentage of Ownership

AMP SEZC (Cayman)

100.00%

AMP Distributors (Florida)

100.00%

MesoCoat, Inc.

88.08%

MesoCoat’s ownership of its subsidiaries as of February 28, 2015, is as follows:

Name of Subsidiary

Percentage of Ownership

MesoCoat Technologies (Canada)

100.00%

MesoCoat Coating Services, Inc.  (Nevada)  100.00%

PT MesoCoat Indonesia

100.00%

Non-Controlling Interest

Non-controlling interest represents the minority members’ proportionate share of the equity of MesoCoat,

Inc.  Abakan’s controlling interest in MesoCoat requires that its operations be included in the

consolidated financial statements.  The equity interest of MesoCoat that is not owned by Abakan is shown

as non-controlling interest in the consolidated financial statements.

8



ABAKAN INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 28, 2015 and 2014

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Accounts Receivable

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

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

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

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

not probable. As of February 28, 2015, management has determined that no allowance for doubtful

accounts is required.

Revenue Recognition – Rental Revenue

Operating leases arise from leasing of the Company’s equipment to a customer in Canada.  The initial

lease term is 24 months.  The Company recognizes revenue ratably over the lease term.   Amounts

received in excess of the leasing revenue recognized are reported as a deferred rental revenue liability on

the balance sheet.   Depreciation expense for assets subject to operating leases is provided on a straight-

line method. Depreciation expense relating to equipment was $77,747 and none for the nine months

ended February 28, 2015 and 2014, respectively.

Operating Leases - Lessor

The cost of equipment leased is included in property, plant and equipment on the balance sheet.

Depreciation expense for assets subject to operating leases is provided on the straight-line method.

Depreciation expense relating to the equipment was $77,747 and none for the nine months ended

February 28, 2015 and 2014, respectively.

Investment in operating leases is as follows at February 28, 2015 and May 31, 2014:

February 28, 2015

May 31, 2014

Equipment, at cost

1,681,200

-

Accumulated depreciation

(77,747)

-

Net book value

1,603,453

-

Foreign Currency Translation

Assets and liabilities of non-U.S. subsidiaries that operate in a local currency environment are translated

to U.S. dollars at exchange rates in effect at the balance sheet date with the resulting translation

adjustments recorded directly to a separate component of shareholders' equity. Income and expense

accounts are translated at average exchange rates during the year. Where the U.S. dollar is the functional

currency, translation adjustments are recorded in income.

Subsequent Events

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

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

financial statements were issued (Note 11).

9



ABAKAN INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 28, 2015 and 2014

2.  GOING CONCERN

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

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

February 28, 2015, of $24,046,944 and a working capital deficit of $8,046,253.  These conditions raise

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

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

profitable operations and positive cash flows. Management’s plan is to aggressively pursue its present

business plan. Since inception we have funded our operations through the issuance of common stock,

debt financing, and related party loans and advances, and we will seek additional debt or equity

financing as required. The accompanying financial statements do not include any adjustments that might

result from the outcome of this uncertainty.

3.   INVESTMENT IN NON-CONTROLLING INTEREST

Powdermet, Inc.

Abakan owns a 24.1% interest in Powdermet.  Powdermet owns 11.92% of MesoCoat as of February 28,

2015.  Abakan’s 24.1% ownership of Powdermet, results in indirect ownership of the shares of MesoCoat

that Powdermet owns.  Abakan’s ownership in Powdermet decreased at the beginning of June 2014 from

24.99% to 24.1% as result of Powdermet’s management exercising certain stock options resulting in a

higher number of shares outstanding. On May 31, 2014, Powdermet’s ownership of MesoCoat changed

from 48.00% to 11.92% and therefore Powdermet has begun to account for its investment using the cost

method.

On June 13, 2013, Powdermet formed a wholly owned subsidiary, Terves Inc. On June 10, 2014,

Powdermet distributed shares to Terves management which reduced ownership to 84.54%. Powdermet’s

controlling interest in Terves requires that its operations be included in their consolidated financial

statements.  The equity interest of Terves that is not owned by Powdermet is shown as non-controlling

interest in their consolidated financial statements.

We have analyzed our investment in Powdermet accordance of “Investments – Equity Method and Joint

Ventures” (ASC 323), and concluded that the 24.1% minority interest gives us significant influence over

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

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

method amounts to the amount on the accompanying balance sheet.

Investment balance, May 31, 2014

$

2,151,817

Equity in gain for nine months ended February 28, 2015

115,575

Investment balance, February 28, 2015

$

2,267,392

10



ABAKAN INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 28, 2015 and 2014

3.   INVESTMENT IN NON-CONTROLLING INTEREST - CONTINUED

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

Powdermet.

Powdermet Inc. & Subsidiary

For the nine months

For the nine months

ended

ended

February 28, 2015

February 28, 2014

Equity Percentage

24.1%

41%

Condensed consolidated income statement

information:

Total revenues

$

2,842,112     $

1,593,405

Total cost of revenues

1,074,922

482,462

Gross margin

1,767,190

1,110,943

Total expenses

(995,989)

(1,401,889)

Other income/ (expense)

28,862

(853,525)

Non-controlling interest in Terves

(48,476)

-

Provision for income tax benefit

(272,022)

423,455

Net profit/ (loss) attributed to Powdermet Inc.

$

479,565     $

(721,016)

Abakan’s equity in net profit/(loss):

$

115,575     $

(295,617)

Condensed consolidated balance sheet

February 28, 2015

May 31, 2014

information:

Total current assets

$

2,310,907     $

624,299

Total non-current assets

3,178,227

2,884,479

Total assets

$

5,489,134     $

3,508,778

Total current liabilities

$

1,028,772     $

422,849

Total non-current liabilities

1,824,389

925,521

Total equity

2,635,973

2,156,408

Total liabilities and equity

$

5,489,134     $

3,504,778

11



ABAKAN INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 28, 2015 and 2014

4.  LOANS PAYABLE

As of February 28, 2015 and May 31, 2014, the loans payable balance comprised of:

Description

February 28, 2015

May 31, 2014

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

1,500,000     $

1,500,000

on September 15, 2014.

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

200,000

200,000

on September 15, 2014.

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

500,000

500,000

on July 14, 2014.

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

70,000

70,000

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

3,850

3,850

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

50,000

50,000

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

19,350

19,350

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

20,000

20,000

Uncollateralized demand note to a related entity bearing 8% interest per annum

-

65,000

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

15,000

15,000

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

43,600

43,600

Uncollateralized demand note to a related entity bearing 8% interest per annum

26,685

26,685

Uncollateralized demand note to a related entity bearing 8% interest per annum

80,994

79,494

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

-

50,000

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

20,000

20,000

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

30,867

30,867

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

250,000

250,000

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

406,766

130,000

Secured convertible promissory note to an unrelated  entity bearing 5% imputed interest per

1,341,963

1,341,963

annum which matures on April 27, 2015

Collateralized term note to an unrelated  entity bearing 5.15% interest per annum which

111,401

132,157

matures on September 7, 2018.

Uncollateralized demand note to a related entity bearing 8% interest per annum

21,308

21,308

Uncollateralized demand note to a related entity bearing 7% interest per annum

32,313

32,313

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

33,201

35,000

Uncollateralized demand note to an unrelated entity bearing 7% interest per annum

-

20,000

Uncollateralized term note to a related  entity bearing 5% interest per annum which matures on

198,168

-

February 28, 2015

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

954,743

1,000,000

per annum for years two – seven.

Uncollateralized demand note to a related entity bearing 6% interest per annum

60,000

-

Convertible demand note to an unrelated  entity bearing 7.5% imputed interest per annum

33,877

40,134

which matures on July 10, 2018.

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

405,000

405,000

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

80,450

85,505

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

6,509,536

6,187,226

Less current liabilities

5,539,808

5,077,080

Total long term liabilities

$

969,728     $

1,110,146

12



ABAKAN INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 28, 2015 and 2014

4.  LOANS PAYABLE - CONTINUED

On August 28, 2014, Joe Eberhard filed a complaint in the United States District Southern District of

Florida alleging that Abakan defaulted on a convertible note and promissory note in the principal

aggregate amount of $550,000. The complaint seeks $720,699 plus interest, penalties and legal fees.

Abakan believes that it has mitigating defenses to the lawsuit. Court proceedings are in the discovery

stage and Abakan has been in settlement discussions with Sonoro through a mediator.

On October 2, 2014, Sonoro Invest, S.A. (“Sonoro”) initiated legal proceedings against Abakan alleging

that Abakan defaulted on two convertible debt obligations and a promissory note due to Sonoro in the

principal aggregate amount of $2,105,000. The complaint seeks $3,187,057 which amount includes

interest, penalties and legal fees. The Court granted a Temporary Restraining Order in favor of Sonoro on

November 6, 2014 and on February 11, 2015, the Company and Sonoro’s attorneys agreed to terms of a

Preliminary Injunction enjoining Abakan from undertaking certain actions “outside of its normal business

without Sonoro’s consent, which will not be unreasonably withheld” pending the outcome of the legal

proceedings. The actions that Abakan is enjoined from undertaking, include paying dividends, acquiring

its own shares, becoming liable for significant new debt outside its normal course business, disposing of

significant amounts of its assets, lending amounts in excess of $100,000, and effecting any distribution of

its capital stock outside of a previously approved equity placement. Court proceedings are in the

discovery stage. Abakan believes that it has mitigating defenses to the lawsuit. A trial date has been set

for October 5, 2015.

13



ABAKAN INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 28, 2015 and 2014

5.  STOCKHOLDERS' EQUITY

Common Stock Issuances

For the nine months ended February 28, 2015, Abakan issued the following shares in private placements

and the conversion of debt to shares:

On July 31, 2014, we issued 43,800 shares of our common stock for services to be performed valued at

$31,098.  In connection with this placement we had no offering costs.

On October 7, 2014, we issued 557,000 shares of our common stock in a private placement valued at

$222,800.  Abakan also issued 512,500 shares of its common stock for a subscription payable valued at

$205,000. In connection with this placement we had no offering costs.

On October 7, 2014, we issued 1,792,973 restricted shares due to a downside protection provision and

obtained the agreement of the placees to relinquish the right to additional warrants to purchase  832,487

restricted shares. Abakan offered downside stock price protection in two private placements that totaled

1,664,973 shares that closed in April 2014 and May 2014. The down-side protection offered additional

shares if new private placements were offered within one year at a lower price. After receipt of these

additional shares, the placees would hold the same quantity of shares as if they would have had

participated in any subsequent lower priced private placement.  As of the date of the issuance of this

report, all private placements with downside protection are past the one year anniversary except 60,000

shares.

On November 11, 2014, we issued 7,500,000 shares of our common stock in a private placement valued

at $3,000,000. In connection with this placement we had no offering costs.

On November 26, 2014, we issued 270,000 shares of our common stock in a private placement valued at

$108,000.  In connection with this placement we had no offering costs.

On November 26, 2014, we satisfied a debt obligation of $140,000, for 350,000 shares of our restricted

common stock. In connection with this placement we incurred stock expense on satisfaction of $59,500.

On November 26, 2014, we satisfied accounts payable obligations of $40,000, for 100,000 shares of our

restricted common stock. In connection with this placement we incurred stock expense on conversion of

$17,000.

14



ABAKAN INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 28, 2015 and 2014

5.  STOCKHOLDERS' EQUITY - CONTINUED

Common Stock Warrants

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

February 28, 2015 and the year ended May 31, 2014, is presented below:

Weighted

Weighted

Average

Average

Remaining

Number of

Exercise

Contractual

Warrants

Price

Terms (In Years)

Balance at June 1, 2013

2,842,992

$

1.80

1.00 years

Granted

877,634

1.41

Exercised

-

-

Forfeited or expired

(1,681,058)

1.89

Balance at May 31, 2014

2,039,568

$

1.89

1.15 years

Granted

-

-

Exercised

-

-

Forfeited or expired

(1,429,645)

1.72

Balance at February 28, 2015

609,923

$

2.27

0.13 years

Exercisable at February 28, 2015

609,923

$

2.27

0.13 years

Weighted average fair value of

warranted granted during the three

months ended February 28, 2015

$

NA

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

28, 2015:

Warrants Exercisable

Weighted

Weighted

Weighted

Range of

Average

Average

Average

Exercise

Number

Remaining

Exercise

Number

Exercise

Price

Outstanding

Contractual Life

Price

Exercisable

Price

$

1.50

250,000

.13 Years

$

1.50

$

250,000     $

1.50

$

2.70

224,261

.09 Years

$

2.70

$

224,261     $

2.70

$

3.00

135,662

.17 Years

$

3.00

$

135,662     $

3.00

609,923

.13 Years

$

2.27

$

609,923     $

2.27

15



ABAKAN INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 28, 2015 and 2014

6.  EARNINGS-PER-SHARE CALCULATION

Basic earnings per common share for the three and nine months ended February 28, 2015 and 2014 are

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

Diluted earnings per common share for the three and nine months ended February 28, 2015 and 2014 are

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

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

For the three months

For the three months

ended February 28, 2015      ended February 28, 2014

Net earnings (loss) from operations

(1,647,632)

(1,371,535)

Weighted-average common shares

79,501,088

64,481,144

Effect of dilutive securities:

Warrants

-

-

Options to purchase common stock

-

-

Dilutive potential common shares

79,501,088

64,481,144

Net earnings per share from operations:

Basic

$

(0.02)

$

(0.02)

Diluted

$

(0.02)

$

(0.02)

For the nine months

For the nine months

ended February 28, 2015      ended February 28, 2014

Net earnings (loss) from operations

(4,544,847)

(4,933,979)

Weighted-average common shares

73,212,202

64,365,475

Effect of dilutive securities:

Warrants

-

-

Options to purchase common stock

-

-

Dilutive potential common shares

73,212,202

64,365,475

Net earnings per share from operations:

Basic

$

(0.06)

$

(0.08)

Diluted

$

(0.06)

$

(0.08)

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

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

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

potentially dilutive effect of the securities. The increasing number of warrants used in the calculation is a

result of the increasing market value of Abakan’s common stock.

In periods where losses are reported the weighted-average number of common shares outstanding

excludes common stock equivalents because their inclusion would be anti-dilutive.

16



ABAKAN INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 28, 2015 and 2014

6.  EARNINGS-PER-SHARE CALCULATION – CONTINUED

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

dilutive:

For the three months

For the three months

ended February 28,

ended February 28,

2015

2014

Common Stock Equivalents:

Warrants

609,923

2,136,397

Options to purchase common stock

3,928,327

4,166,667

Total of Common Stock Equivalents:

4,538,250

6,303,064

For the nine months

For the nine months

ended February 28,

ended February 28,

2015

2014

Common Stock Equivalents:

Warrants

609,923

2,136,397

Options to purchase common stock

3,928,327

4,166,667

Total of Common Stock Equivalents:

4,538,250

6,303,064

7.  COMPREHENSIVE INCOME

Comprehensive income consist of two components, net income and OCI.  OCI refers to revenue,

expenses, and gains and losses that under GAAP are recorded as an element of shareholders’ equity but

are excluded from net income.  Abakan’s OCI consists of foreign currency translation adjustments from

its Canadian subsidiary not using the U.S. dollar as their functional currency.

The following table shows the changes in OCI by component for the three months ended February 28,

2015.  There was no OCI prior to November 30, 2014.

Cumulative

Foreign

Currency

Translation

Total

Balance at November 30, 2014

$

-     $

-

Other comprehensive income

766

766

Tax effect

-

-

Balance at February 28, 2015

766

766

17



ABAKAN INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 28, 2015 and 2014

8.   STOCK – BASED COMPENSATION

2009 Stock Option Plan – Abakan

Our board of directors adopted and approved our 2009 Stock option Plan (“Plan”) on December 14, 2009,

as amended on June 14, 2012, which provides for the granting and issuance of up to 10 million shares of

our common stock. The total value of employee and non-employee stock options granted during the nine

months ended February 28, 2015 and 2014, was $424,623 and $234,271, respectively.

We granted 100,000 stock options to a consultant on December 11, 2014, at an exercise price of $0.65 per

share that expire in ten years from the grant date, and vest one third parts commencing on the date of the

grant and each anniversary.

We granted 1,000,000 stock options to an employee on January 1, 2015, at an exercise price of $0.60 per

share that expire in ten years from the grant date, and vest in equal one half parts on May 31, 2015 and

May 31, 2016.

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

the nine months ended February 28, 2015 year ending May 31, 2014 is presented below:

Weighted

Weighted

Average

Average

Remaining

Aggregate

Number of

Exercise

Contractual

Intrinsic

Options

Price

Terms(In Years)

Value

Balance at June 1, 2013

3,800,000

$

1.26

7.78 years

$

108,750

Granted

850,000

1.35

Exercised

-

-

Forfeited or expired

(1,230,006)

$

1.35

Balance at May 31, 2014

3,419,994

$

1.36

7.90 years

$

126,750

Granted

1,100,000

.61

Exercised

(50,000)

.65

Forfeited or expired

(541,667)

$

1.87

Balance at February 28, 2015

3,928,327

$

1.14

7.86 years

$

Exercisable at February 28,

2,178,335

$

1.33

6.62 years

$

82,000

2015

Weighted average fair value of

options granted during the nine

months ending February 28,

2015

$

.61

18



ABAKAN INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 28, 2015 and 2014

9.   RELATED PARTY

Employment agreement

On December 20, 2014, we entered into an employment agreement effective January 1, 2015, with a

related individual to perform duties as the Chief Operating Officer of Abakan and to continue to serve

as the Chief Executive Officer of Abakan’s subsidiary, MesoCoat. The individual also serves as a

director of Abakan and MesoCoat.   The employee retains previously granted stock options for his

service as a director. The terms of the employment agreement include a $20,000 per month salary of

which a portion is deferred, and a 1,000,000 stock options grant with an exercise price of $0.60 per

share that will expire ten years from the option grant date that vest in equal parts on May 31, 2015 and

May 31, 2016. The employment agreement will end on December 31, 2016 and at which time it can be

renewed for two one year periods.  In the event that this agreement is terminated early, the employee

may be eligible for a severance payment.

10.   COMMITMENTS

Contribution Agreement

Abakan and MesoCoat entered into a Contribution Agreement with Northern Alberta Institute of

Technology to establish a prototype demonstration facility for developing, testing and commercializing

wear-resistant clad pipe and components in Alberta, Canada.  Out of the total project cost of $4,110,000;

CDN $2,750,000 is being provided by Alberta’s Ministry of Innovation and Advanced Education and

Western Economic Diversification Canada, CDN$160,000 by Northern Alberta Institute of Technology,

and the rest has been committed by MesoCoat and Abakan. The agreement requires Abakan and

MesoCoat to contribute cash of CDN$870,000 to the operating expenses and payroll of the facility which

will be invoiced quarterly with equal payments through January 2017. In addition, Abakan has

committed to spend CDN$330,000, either by itself or with industry partners, for product testing,

qualification, and the hiring of a sales person in Canada during the two year term of this project.

Abakan’s commitments in the agreement are a necessary precursor to commencing sales of CermaClad

wear resistant clad plate and pipe in Canada.   MesoCoat has delivered equipment and will lease the

equipment over 24 months for a total rental value of CDN$500,000 of which CDN$250,000 has been

received as of February 28, 2015 and reflected in both rental revenue and deferred revenue liability.  For

the nine months ending February 28, 2015 and 2014, Abakan has recorded no operating expense

reimbursement as the facility is not yet commissioned. The amounts are to be settled in Canadian dollars

and will be converted from US dollars at the exchange rate in effect at the time of payment.

Operating Leases – Lessor

Future minimum rental payments as of February 28, 2105, to be received on non-cancelable operating

lease in Alberta, Canada are contractually due in Canadian dollars and will be converted to US dollars at

the exchange rate in effect at the time of payment  are as follows:

Year Ending

May 31,

2015

CDN$

83,333

2016

CDN$

166,667

CDN$

250,000

19



ABAKAN INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended February 28, 2015 and 2014

11.  SUBSEQUENT EVENTS

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

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

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

Sonoro Invest S.A.

On April 21, 2015, Abakan notified Sonoro Invest S.A. of its intent to borrow funds to satisfy that amount

due to George Town Associates S.A. on April 27, 2015.  Sonoro responded that it believed that Abakan

was prohibited from borrowing additional funds not for the purpose of repaying amounts due to Sonoro.

The position taken by Sonoro is based on a Preliminary Injunction pursuant to which the Court enjoined

Abakan from assuming new debt. Abakan is in the process of seeking a settlement with Sonoro that

would include its consent to the assumption of debt to repay George Town.

George Town Associates S.A.

On April 22, 2015, Abakan received a Notice of Violation from George Town Associates S.A., in

connection with its failure to file a periodic report on Form 10-Q in a timely manner as required by the

Exchange Act pursuant to the terms and conditions of a Secured Convertible Promissory Note dated April

28, 2014.  The Notice was followed by a Default Notice dated April 30, 2015, due to Abakan’s failure to

cure the violation within the time frame prescribed in the Note. Abakan is in the process of securing

financing to satisfy amounts due to George Town.

20



ITEM  2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

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

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

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

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

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

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

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

Results and Financial Condition below.

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

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

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

May 31, 2014, contained in Abakan’s Form 10-K.  Our fiscal year end is May 31.

Abakan

Abakan designs, develops, manufactures, and markets advanced nano-composite materials, innovative

fabricated metal products, highly engineered metal composites, and engineered reactive materials for

applications in the oil and gas, petrochemical, mining, aerospace and defense, energy, infrastructure, and

processing industries. Our technology portfolio includes high-speed, large-area metal cladding

technology, long-life nano-composite anti-corrosion and wear coating materials, high-strength,

lightweight metal composites, and high-strength dissolvable materials. Operations are conducted through

our subsidiary, MesoCoat, Inc. (“MesoCoat”) and an affiliated entity, Powdermet, Inc. (“Powdermet”),

and Powdermet’s subsidiary Terves Inc. (“Terves”).

Abakan owned a 88.08% controlling interest in MesoCoat and a 24.1% non-controlling interest in

Powdermet as of February 28, 2015. Powdermet owns a 11.92% interest in MesoCoat, and a 82% interest

in Terves.  Abakan’s interest in Powdermet represents an additional 2.87% indirect interest in MesoCoat.

Abakan’s combined direct and indirect interest in MesoCoat is 90.95%.

MesoCoat

MesoCoat’s Business

MesoCoat is an Ohio based materials science company intent on becoming a technology leader in metal

protection and repair based on its metal coating and metal cladding technologies. These technologies are

designed to address specific industry needs related to conventional oil and gas, oil sands, mining,

aerospace, defense, infrastructure, and shipbuilding. MesoCoat was originally formed by Powdermet to

focus on the further development and commercialization of Powdermet’s nano-composite coatings

technologies. The coatings and cladding assets of Powdermet were subsequently conveyed to MesoCoat

in July of 2008.

21



MesoCoathas since developed a proprietary metal cladding application process known as CermaClad and

a family of advanced nano-composite thermal spray coating materials known as PComP. CermaClad and

PComP combine corrosion and wear resistant alloys, and nano-engineered cermet materials with

proprietary high-speed coating or cladding application systems. Ten of MesoCoat’s products; 3 Corrosion

Resistant Alloy (CRA) materials (625,825, 316L), 3 Wear Resistant Alloy (WRA) material (Tungsten

Carbide (WC), Chrome Carbide (CRC), Structurally Amorphous Metal (SAM) Alloys) and 4 PComP

product families (PComP-W, PComP-T, PComP-S and PComP-M) have either undergone extensive

testing, or are being tested by oil and gas majors, pipe manufacturers, oil field equipment manufacturing

and service companies, original equipment manufacturers (OEMs) and other end users. CermaClad

products intended to clad the inside of a full length pipe and plates for the oil and gas, steel, mining, and

other industries, are in the development and qualification stage.

MesoCoat’s revenues are comprised of sales of PComP powder along with thermal spray application

services, research and development grants and equipment rental income. Current grants from U.S.

government agencies are to develop new uses for PComP powders and CermaClad applications to

develop solutions to critical problems, including certain projects for the Environmental Protection

Agency, the National Aeronautics and Space Agency, the Department of Energy and the National

Institute of Health. Rental income is generated from a 24 month equipment lease as part of a Contribution

Agreement with the Northern Alberta Institute of Technology to establish a prototype demonstration

facility for developing, testing and commercializing wear-resistant clad pipe and components in Alberta,

Canada.

Although the oil and gas industry is important to Abakan it is not the only industry that could benefit from

our low life-cycle cost products. The U.S. Department of Commerce counts 800 industry classifications

that face problems with corrosion and wear, which is a growing issue faced by companies worldwide.

Abakan’s advanced metal coating solutions addresses the concerns of several other large industries

including mining, aerospace and defense, chemical, petrochemical, infrastructure, nuclear, desalination,

and others. For example, the U.S. military alone spends over $40 billion annually to address wear and

corrosion of its assets (Source: The U.S. Army’s SBIR Commercialization Brochure, 2010). According to

‘The World Corrosion Organization’, the cost of corrosion to the global economy is $2.2 trillion annually,

or roughly 3% of the world’s GDP.  The global market for products and services to combat wear and

corrosion is estimated at over $200 billion, which includes more than $103 billion annually in paints and

coatings, and a forecasted $100 billion in specialty steel, alloys, and metal composites (Sources: Data

Monitor and BCC Research).

Abakan is also developing solutions for the nuclear, healthcare, medical, and steel industries, primary

funded by government agencies.

PComP.

PComP is a family of nano-composite cermet coating materials used to impart wear and corrosion

resistance and to restore dimensions of worn metal components.  Named for its particulate composite

powders, PComP, is the result of over a decade of nano-engineered materials development, and is now

one of the few commercially viable industry replacement solutions for hard chrome plating and thermal

spray carbide coatings. Note that PComP is a manufacturing methodology and not a product, which

means that with the PComP manufacturing methodology we can combine a variety of materials that

usually do not go-well together leading to the best-in-class corrosion- and wear-protection.

22



PComP competes against thermally sprayed carbide and other coatings such as chrome and nickel plating

in the $32 billion dollar (source, BCC Inc.) inorganic metal finishing market.  Competing materials like

hexavalent chrome, carbides and tungsten carbide-cobalt have become a major concern for industrial

producers in the metal finishing industry since these materials are on the EPA’s hazardous materials

watch list and are legally banned in many countries. While businesses grapple with the need to transition

away from these harmful products, they continue to spend billions on these materials despite the harm

done to the environment. The adoption of green products and processes such as PComP thermal spray

coatings would place the business at a competitive advantage over destructive solutions while at the same

time mitigating environmental liabilities. PComP thermal spray coatings comprise a performance leading

solution platform which has shown order of significant improvements in head to head wear and corrosion

performance tests while offering a significantly better value proposition over hard chrome alternatives.

Using the PComP platform, MesoCoat has developed and patented a family of corrosion resistant and

wear resistant coating solutions that combine extreme corrosion and/or wear resistance, fracture

toughness (resiliency), and a low friction coefficient all in one product.   In conventional materials science

toughness normally decreases as hardness and wear resistance increases. However, by combining nano-

level structure control and advanced ductile phase toughening materials science, MesoCoat has developed

a material structure that can be both very tough and very wear resistant (hard). Equally important, the

hardness of a wear coating normally limits the ease with which it can be machined. The unique

hierarchical structure of the PComP coating solutions results in a coating that can be machined through a

finish grinder much faster than a product with a traditional carbide coating which needs to be diamond

ground. The speed of coating application and final machining results in higher productivity and lower

costs in metal finishing operations.

The revolutionary nano-structure of the PComP coatings produces a coating that is self-polishing when in

use, resulting in friction properties approaching those of diamond-like carbon films and solid lubricants,

with the ability to be applied to large components at substantially lower cost than coatings such as

diamond-like carbon.  This low friction property reduces wear, and improves energy efficiency and life in

sliding components such as drilling rotors, plungers, mandrels, ball and gate valves, rotating and sliding

seals, and metal processing equipment. When MesoCoat began operations in 2008, the primarily goal was

to commercialize the silicon-nitride based PComP S thermal spray coating material in the aerospace

industry as it provided performance similar to the conventionally used tungsten carbide coating (most

viable alternative for toxic chrome plating which is regulated by the Department of Defense) at 1/3rd the

density which could reduce the weight of coatings by approximately 200 lbs. on a single aircraft thereby

saving over $1 million a year in fuel costs.

However, when MesoCoat forayed into the oil and gas industry, it learned more about that industry’s

thermal spray coating needs which rely heavily on conventional tungsten carbide thermal spray powders.

Even though these powders provide coatings that are very hard (can withstand significant impact), the

higher hardness leads to lower toughness (cannot withstand stress, flexing, or vibrations) that leads to

spallation (flaking). Since most components used in the oil and gas industry such as rolls, mandrels, and

drilling tools, vibrate and flex in high-pressure environments, conventional tungsten carbide based

coatings tend to flake causing failure. In early 2010, MesoCoat began development work on a

replacement by integrating its PComP manufacturing process to produce a tungsten carbide coating

material that is both hard and tough. The result was the PComP W family of coating materials, which

produce coatings that are both hard and tough to withstand both impact and stress. PComP W coatings

can enable most oilfield and industrial components to operate 3-10X longer than conventional coatings

potentially saving millions of dollars in early replacement, downtime, and maintenance costs ordinarily

associated with flaking. A further result of this work was the development and commercialization of

titanium nitride based PComP T coatings.

23



MesoCoat is the only company that has been able to develop titanium-nitride (PComP T) and silicon-

nitride (PComP S) based thermal spray coatings. Researchers and scientists have been trying to develop

titanium-nitride and silicon-nitride based thermal spray coatings for several decades with no success.

Nonetheless, MesoCoat has not just been able to develop these thermal spray coatings but has also

demonstrated the value proposition for these coatings. Both the PComP S and PComP T families of

thermal spray powders have lower density and in testing have offered at least 10X higher resistance to

sliding wear compared to the widely used tungsten carbide coatings.

In 2013, MesoCoat with support from funds provided by Department of Energy, set its sight on

developing a non-stick corrosion-resistant coating for molten metal applications using the PComP

manufacturing methodology, which led to the development and commercialization of moly-boride based

PComP M coating materials. PComP M is like an industrial Teflon non-stick coating which protects

metal components from liquid metal corrosion; which means in any application where metal components

are submersed or exposed to liquid metals PComP M coatings can protect the metal component. PComP

M has shown more than a 6X life extension compared to the current state of art moly-boride based

powder in lab testing, and is currently being sold at a cost comparable to the current state-of-art moly-

boride based thermal spray powder. Rolls used in galvanizing, nozzles used in steel processing, dies and

trays used in aluminum production, and several other applications where liquid metal is used would see a

significant reduction in early-replacement, downtime, and the maintenance usually associated with the

early failure of conventional used moly-boride based coatings.

The PComP family of nano-composite coatings currently consists of five products, not including variation

in composition, 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 these, and several other alternatives are as follows:

Wear and Corrosion Resistance and Dimensional Restoration

PComP W is MesoCoat’s “nano-engineered” tungsten carbide coating solution offers industry leading

toughness and wear resistance for thermal spray coatings, making it better for critical high wear

applications such as gate valves and downhole drilling tools. PComP W is a replacement for conventional

tungsten carbide cobalt in the thermal spray industry and provides increased wear resistance, design

allowable (stress levels), and reduced friction in abrasive wear applications, with higher toughness and

impact resistance than ceramic alternatives.

PComP T is a titanium nitride based high corrosion/wear resistant, low friction thermal spray coating that

competes with hard chrome and diamond like carbon PVD (physical vapor deposition) alternatives for

hydraulic cylinders, piston rings, bearings, rotating shafts, and valve components where low stick-slip,

corrosion, and modest wear resistance are required. PComP T provides both wear and corrosion resistance

(unlike chrome), and significantly reduces environmental safety and health liabilities.  Furthermore, in

many applications, thermal spray coatings such as PComP T provide life multiples over chrome (80X in

sliding wear application in testing reported by Caterpillar).  Lower coefficient of friction protects seals

from premature wear and reduces energy consumption in rotating components through lower friction

losses, and the lower coating stresses and higher toughness enable thicker coatings to be applied than

chrome or other alternatives, meaning component life can be extended through enabling additional repair

cycles. Grinding and finishing of PComP T coatings can be done faster and cheaper with conventional

grinding techniques compared to the expensive diamond finishing process used for competing carbide

coatings.

24



PComP S is a silicon-nitride based hard chrome replacement solution for aerospace applications that

exhibits high toughness, wear resistance and displays increased spallation resistance. PComP S also has

the lowest density of any chrome alternative, enabling significant fuel savings to be realized in

transportation markets.

Liquid Metal Corrosion

PComP M is a hierarchically structured molybdenum boride based thermal spray coating material

designed for use in liquid metal corrosion application, especially the rolls used in galvanizing baths.

PComP M has demonstrated, in laboratory and initial field testing, vastly improved molten metal

corrosion resistance, improved thermal shock resistance, combined with increased durability and

reliability encountered in molten metal environments when compared to competitive coatings. MesoCoat

believes that its PComP M will be able to provide significant cost savings to industrial customers and

generate a new revenue stream within the $150+ million primary metals production equipment coatings

market. We intend to focus PComP M initially on the zinc pot stabilizer roll and pot bearing roll

refurbishment market.

Thermal Barrier Coatings

ZComP nano-composite thermal barrier coating, that in testing has shown 50% lower thermal

conductivity, with improved toughness and cyclic thermal life compared to conventional thermal barrier

coatings in the $500 million thermal barrier coatings market.  MesoCoat has received interest from

multiple companies in multiple industries needing improved thermal barrier materials, but to date Abakan

has not formed any partnership with such entities. Abakan initially wants to introduce ZComP materials

into the turbine engine market, given the long qualification cycles associated with aerospace applications.

The Company is currently evaluating the next steps to accelerate qualification and commercialization of

ZComP.

Recent Developments

Hundreds of PComP W coated pumps have now been used in the field for over three years by one of the

largest oil field service companies operating in the oil sands of western Canada. Use of the PComP W

product has demonstrated a minimum 3X life extension over existing products. The same customer is

now using PComP W coated mandrels, plungers and other oil field components in field tests which also

have demonstrated a 3X life extension and are yet to fail. The field testing continues.

Metallurgic Solutions, SA de CV (“MetalSol”), Abakan’s partner in Mexico, after six months of side by

side testing, has secured test orders for PComP coatings with a large prospective customer in Mexico. Our

PComP coated roller screens looked as good as new, showing almost no sign of abrasion or dimensional

loss and did not need to be replaced. By comparison, the rolls protected with the steel company’s existing

coatings were absolutely battered, showed a dimensional loss of 6mm to 15mm and required replacement.

We have also received additional trial orders for coating other rolls and cladding components used in steel

and mining industries. Abakan expects to receive its first large commercial order from Mexico within the

next few weeks.

UP Scientech Materials Corp. (“UP Scientech”), Abakan’s partner in Asia, has begun its own evaluation

of PComP coatings and is in the process of introducing these products through its existing distribution

channels to drive adoption in China, Taiwan, Australia and elsewhere.

Meanwhile, Abakan has begun the testing and marketing of its powder and coating services in Canada,

Mexico, India, and China and is communicating with several entities in Thailand, Russia, Korea, Nigeria..

25



The ramp up of PComP powder production in Abakan’s Ohio manufacturing facility is in line with the

anticipated demand. MesoCoat scaled the production of PComP powders  up to 6 tons/year by the end of

2014 and as of April of 2015 has scaled up that production to18 tons/year. On reaching that milestone,

MesoCoat will have scaled up production by 600% over a 12 month period, while continuing to sell all

the powders that it has produced to date.

The anticipated increase in PComP powder production by the end of April, 2015, caused MesoCoat’s

technical and sales team to recently spend a week in Houston visiting the largest oilfield services

companies and coating application shops. The goal of this visit was to reiterate the value that PComP

coatings would add to their operations, let these entities know that with increased powder production

capacity MesoCoat would be ready to take large orders, learn about their most important challenges, and

get test/sales orders. The MesoCoat team was successful on all of these fronts. The visit led to one of the

largest coating shops visited initiating the testing and qualification of PComP coatings for oilfield and

industrial components, one of the largest oilfield completion companies giving MesoCoat a component

for coating (being sold in the order of thousands of components per month), and assurances from other

oilfield completion companies that would begin testing and qualification of PComP coatings within the

next few weeks.

CermaClad

CermaClad is a multiple award winning technology used to produce coatings that protect metal, primarily

carbon steel, from wear and corrosion, that offers the benefits of corrosion resistant alloys such as

stainless steel, nickel, or titanium based alloys and wear resistant materials such as tungsten carbide and

chrome carbide at a fraction of the cost by adding a permanent thin layer of the expensive corrosion- and

wear-resistant layer on the surface of low-cost carbon steel.  The result is a hybrid product offering the

wear and corrosion performance of costly alloys with the ease of fabrication and the lower cost of

traditional steel material.

Cladding refers to the process where a high performance wear or corrosion resistant metal alloy or

composite (the cladding material) is applied through the use of high pressure and/or high temperature

processes onto another dissimilar metal (the base metal or substrate) to enhance its durability, strength or

appearance. The majority of clad products produced today use carbon steel as the substrate and nickel

alloys, stainless steel, or various hard materials such as chrome carbides as the clad layer to protect that

underlying steel base metal from the environment it resides in.  MesoCoat is utilizing a unique, patented,

“High Density Infrared (HDIR)” or ‘Plasma Arc Lamp’ technology, exclusively licensed from Oak Ridge

National Laboratory (“ORNL”) to produce clad steel.  Testing by ORNL and Abakan has shown that the

plasma arc lamp is capable of applying a very high quality cladding at 2 to 10 times higher productivity

(100’s of Kg’s versus 3-20Kg/hr) than traditional laser bead or weld cladding techniques, in current wide

commercial use.  MesoCoat believes that this plasma arc lamp represents the first truly scalable, large

area cladding technology.  Scalable, low capital cost cladding technology enables the production of large

volumes of customized, premium, high margin clad steel products.

26



CermaClad clad steel is a metallurgically bonded, clad carbon steel materials solution that is optimized to

manage the risks and consequences of wear and corrosion damage and the failure of large assets including

oil and gas risers and flowlines, refinery/chemical processing towers and transfer lines, power plant heat

exchanger tubes, and other steel infrastructure. In corrosive environments, including unprocessed crude

oil that contains water, sulfides, and carbon dioxide, seawater, road salt, mining slurry transport lines,

chemical processing and transportation equipment, metals production, and other large industrial

applications, asset owners and operators either need to continually maintain and replace major assets, or

fabricate these assets using expensive, corrosion resistant alloy (CRA) materials, which substantially

increase capital costs. Clad steel offers a competing, lower cost solution to these alloys, allowing the

owner or operator to use clad carbon steel which typically costs about half of solid CRA.  Combining the

reduced material cost with reduced fabrication, installation, and maintenance costs, cladding solutions

such as CermaClad are estimated to save up to 85% over the cost of using solid alloys, while still

providing essentially maintenance free corrosion lifetimes equal to the life of the asset. In the last 20

years, clad steel products have gained wide acceptance and continually increased its market share in oil

and gas exploration and production, mining, petrochemical processing and refining, nuclear, and power

generation industries.  The oil and gas industry is the largest consumer of clad steel products. In order to

meet growing global energy demands, oil companies continue to extend their offshore drilling efforts into

deeper waters farther from shore. The higher temperatures and corrosivity (carbon dioxide, sea water,

hydrogen disulfide content, etc.) of these new reserves are resulting in a significantly increased demand

for corrosion resistant alloys.

Currently used cladding processes include weld overlay, roll-bonding, co-extrusion, explosion cladding,

and mechanical lining. While cladding carbon steel pipes is cheaper than using a solid stainless steel

alloy, current production technologies still have significant limitations which CermaClad is believed to

overcome.  Directly comparable metallurgically clad pipes are primarily manufactured with roll-bonded

clad plate, that is bent and welded to form a pipe.  Though a higher productivity process, Roll-bonded

plate-to-pipe involves a lot of welded area and the failure of that weld is the single most common reason

for pipeline leaks. Furthermore, current bimetal rolling mills are limited to produce sheets that are around

40 feet in length by 5 feet in width (less than 20 inch diameter), limiting the size of pipe that can be

fabricated.  Expanding a roll-bonded plate manufacturing facility to enable the production of larger

diameter pipe needed for large gas projects would require very large investments, estimated to be in

excess of $400 million compared to an 8-line CermaClad large diameter pipe production facility that we

budget would cost $38 million.

Mechanically lined (bi-metal) pipe now makes up a significant portion of the clad pipe market. Bimetal

pipe is lower in cost than metallurgically clad pipe, but provides only a mechanical attachment between

the inner and outer pipe. This reduced bonding strength results in a higher risk of buckling, wrinkling and

disbonding when under stress, such as during bending, reeling, or application of external coatings on

these pipes. Mechanically lined pipe also raise concerns with respect to uniformity and reliability in that

the gap between the inner and outer pipes, coupled with the mixture of materials, leads to challenges in

NDT (non-destructive testing) inspections. Co-extrusion is another process that involves extruding a

bimetal billet into a clad pipe. Co-extrusion has not been successful in producing long lengths of larger

diameter pipes, and would require significant capital investment and further technology development to

be commercially acceptable.  The other production process, weld overlay, does not have the productivity

needed to meet clad pipe demand, and is primarily used for smaller diameter and complex shapes, such as

manifolds and “Christmas trees” used in oil and gas, although weld overlay is a dominant technology for

wear resistant overlays that cannot be produced by the other techniques. A significant demand for thicker-

walled clad pipes also exists driven by higher pressure oilfields in Gulf of Mexico, and for large-diameter

clad pipes driven by large gas filed in Asia-Pacific. The current cladding technologies have several

quality and supply concerns regarding thick-walled and large-diameter clad pipes, and CermaClad

provides the ideal solution for these clad pipes.

27



CermaClad clad steel utilizes MesoCoat’s proprietary cladding process based on the use of a high-

intensity arc lamp to rapidly melt, fuse, and metallurgically bond (make inseparable) the protective,

proprietary cladding materials onto steel pipes and tubes (internal and external surfaces), plates and

sheets. CermaClad has been used for melting, fusing, and metallurgical bonding nickel based alloys,

stainless steel, copper based alloys, niobium, tungsten and chrome carbides, structurally amorphous

materials, and several other materials including titanium on metal substrates – so there is no limitation on

the materials that we can clad using CermaClad. The CermaClad clad steel product portfolio combines

this high-speed fusion cladding process with proprietary corrosion resistant alloy (“CRA”) and wear

resistant alloy (“WR”) coating materials, which incorporate patented micro-structural and compositional

modifications.  The CermaClad process melts and fuses material within seconds to produce the

CermaClad product that offers a seamless metallurgical bond, a smooth surface, low porosity, and

minimal dilution of the overlay, along with good strength retention of the substrate. More importantly,

CermaClad clad pipe is expected to be easier to inspect and install (reel) irrespective of the size and

thickness of the pipe compared to current alternatives.

Clad steel is a specialized, profitable segment of the steel industry where demand has outstripped supply

and margins are high as a result.  Historically, the typical contract for clad pipe was for 3 to 5 kilometers

of product with larger contracts for 20 to 30 kilometers of product. Typical requirements today, even for

those projects that will be put on hold or reevaluated with the recent drop in energy prices, are for tens of

kilometers with a number of long term projects needing hundreds of kilometers per project. As a result the

clad pipe market has grown rapidly and the limitations of current solutions in terms of installation,

inspectability, quality, and availability are inhibiting growth. The expected commercialization of

CermaClad clad pipes should be able to address these constrains to clad pipe market growth.

Management believes the competitive advantages of CermaClad over current competing technologies and

products are:

§     CermaClad clad steel provides a metallurgically bonded overlay, making the clad pipes easier to

inspect, bend, reel, and install compared to the widely used and slightly lower cost mechanically

bonded clad pipes.

§     CermaClad clad steel offers a seamless metallurgical cladding requiring only girth welds, unlike

the pipes made from metallurgically clad plates which have longitudinal welds.

§     CermaClad application technology utilizes a 30cm wide, high density, infrared, plasma arc lamp

compared to a 0.7cm wide laser beam or inert gas welding systems, resulting in application rates

much faster than current weld overlay technologies.

§     The proprietary process used to make CermaClad clad steel products is more flexible (it can do

both wear and corrosion resistant alloys, for example), and has relatively low capital costs for

initial and added capacity.  This provides the advantage of being able to respond to customer

needs, such as meeting local content requirements, faster and with less investment risk than

currently established alternatives.

§     CermaClad is the only cladding technology that allows metallurgical cladding of layers as thin as

0.15mm that meets all the required metallurgical and mechanical specifications. Conversely,

CermaClad has also demonstrated cladding as thick as 15mm.

§     CermaClad products exceed the requirements of the defining API 5LD and DNV OS F101

standard requirements for clad pipes used in oil and gas applications.

§     CermaClad offers a smoother surface, minimal dilution, greater flexibility in materials, and the

ability to do thinner, lower cost claddings than current production technologies.

28



The CermaClad clad steel product lines under development include:

CermaClad CRA (Corrosion Resistant Alloys): 1-3mm thick CRA clad steel in a single pass, that

offers a lower cost alternative to solid nickel, stainless steel, and titanium alloys for oil and gas,

mining, desalination, pulp and paper, and chemical process.

§     CermaClad WR (Wear Resistant): 1-15mm thick carbide, metal matrix composite, structurally

amorphous metal, and nano-composite wear resistant clad steel that extends the life of steel

structures such as hydro-transport slurry lines, pump components, valve components, spools, T’s,

and elbows for oil sands, heavy oil, mining and mineral processing.

§     CermaClad LT (Low Thickness): Lower cost thin-clad (0.15-1mm) steel that exploits the unique

high purity capabilities of the CermaClad application process to provide thin claddings that

should provide 50-200 year corrosion free life for steel components exposed to atmospheric and

seawater corrosion environments.

§     CermaClad HT (High Temperature): Steel clad with nickel-chromium and metal-chromium-

aluminum alloys for high temperature applications such as heat exchanger tubing, boiler

waterwalls, and other energy production components offering greater compositional control

(higher performance) and lower cost than solid alloys or traditional weld overlays.

Recent Developments

MesoCoat continues to receive significant interest from oil and gas majors, national oil companies,

engineering firms, and steel companies globally due to quality and delivery concerns associated with the

current manufacturers of clad pipes. Meanwhile MesoCoat’s continues to progress towards the

development and qualification of its CermaClad clad pipes. MesoCoat expects to ship clad pipe sections

to prospective end users for testing by the end of FY2015, and expects to have full-length clad pipes

ready for qualification by the end of FY2016.

Since announcing its partnership with UP Scientech, MesoCoat has accelerated development of its clad

plate products. MesoCoat has been cladding small clad plates/samples since 2010 and is now  scaling-up

to larger plates to eventually clad plates that are 3 meter X 2.5 meter (which is the largest clad plate being

sold at high volume in the industry currently). Unlike cladding pipes using CermaClad high intensity arc

lamp system which is a fairly complex process, cladding plates using CermaClad is relatively simple and

MesoCoat expects to have mid-sized clad plates ready for sale within the next 6-9 months. MesoCoat has

also decided to take commercial orders for smaller clad plates and flat components and expects to receive

a test order shortly.

MesoCoat’s partnership to establish a prototype demonstration facility for developing, testing and

commercializing wear-resistant clad pipe and components in Alberta, Canada was delayed due to some

facility inadequacies that have since been addressed. A CermaClad cladding system was shipped to the

demonstration facility in December for installation. Ancillary components and equipment have now been

ordered and are being installed. We expect that this facility will be commissioned by the end of May,

2015.

Current Grants

Abakan’s subsidiary MesoCoat has consistently received highly-competitive funding from several federal

and state agencies, which has significantly assisted it in developing a robust product pipeline. MesoCoat’s

PComP family of nano-composite thermal spray coating materials was incubated and developed using

federal funding. Below is a brief summary of recently completed and ongoing federally funded projects

that also provide an overview of the product pipeline.

29



Joining Dissimilar Metals

MesoCoat and Oak Ridge National Laboratory (ORNL), have been awarded $1 million by the

Department of Energy (DOE) to develop a process to join dissimilar metal alloys. The $1 million award is

shared equally by ORNL and MesoCoat. The primary objective of this project is to develop functional

gradient transition joints between carbon steel and austenitic stainless steel for nuclear reactors. The

research will directly address the needs described in development of advanced joining techniques for

materials for nuclear fission reactor applications. This collaborative project capitalizes on recent advances

made by each organization in the field of dissimilar metal joining and application of high-energy density

plasma arc lamp processing. This project will use our CermaClad plasma arc lamp to build gradient

transition joint for dissimilar metal welding.

In order to add new design and functionalities to metal components, equipment, and structures; it is

essential that engineers are provided with the tools to join dissimilar metals. For example, on the inside

the reactor may need corrosion or wear protection and on the outside heat-resistance or toughness. By

providing the technology to join dissimilar metals, MesoCoat is providing designers and engineers the

capabilities to explore, design, and develop new material systems. The uniqueness of MesoCoat’s

CermaClad process is the ability to melt, fuse, and metallurgically bond dissimilar materials.

Improving the ability to join dissimilar materials with engineered properties is enabling new approaches

to add limitless functionalities to metals, light-weighting automotive structures, improving methods for

energy production, creating next generation medical products and consumer devices, and many other

manufacturing and industrial uses. CermaClad technology is ideally-suited for additive manufacturing,

the newest trend in manufacturing to add layers of metals one upon the other for dimensional restoration

and extending the useable life of metal assets. Not many are aware of the problems caused by metal

components, equipment, and structures that do not last long enough. Apart from the massive costs

involved with infant failure of metals which includes downtime, maintenance, and replacement costs; it is

estimated that every tonne of metal production leads to 2.4 tonnes of CO2 emission. The impact of metals

that could last three to six times longer would be significant development that could lead to a paradigm

shift in metal asset protection and life extension.

Antimicrobial Coating for Healthcare

The National Institute of Health (NIH) provided $150,000 funding to MesoCoat to develop copper-based

antimicrobial coatings primarily for contact surfaces like door knobs, handles, rails, carts, poles, sinks,

etc. In addition to hospital use, these coatings could also be applied to many other public areas such as

airports, bus and railway stations, schools, restaurants and work places. Antimicrobial coatings could

have a significant positive impact on public health by preventing the onset of infections and diseases.

Under this program, MesoCoat intends to demonstrate the technical and manufacturing feasibility and

capabilities of producing durable, aesthetically pleasing and cost-effective, antimicrobial touch surfaces

for hospitals and public places. This development combines known antimicrobial copper alloys with a

low cost high volume process such as CermaClad capable of achieving touch surface market penetration

by offering a corrosion resistant aesthetically pleasing solution that is lower cost than stainless steel

components currently used with the known benefit of being anti-microbial. The project is designed to

provide the evidence and experience to verify the technical and economic feasibility of producing and

using copper-alloy cladded steel as a cost-effective, visually attractive antimicrobial material for touch

surfaces in the medical and healthcare and other industries.

30



Our initial test results have shown that after exposure to 1.25 x 108 colonies forming unit (CFU) of

Staphylococcus aureus bacteria, there was an 83% reduction in CFUs on the copper-based cladded

surfaces compared to the stainless steel surface actually used in hospitals.

Based on the extremely promising test results from Phase I of the development program and the huge

market need, Abakan expects to receive a Phase II funding of $1,000,000 from NIH to complete

development and commercialize this application.

Developing CermaClad as an Alternative to Toxic Galvanizing

The Environmental Protection Agency (EPA) provided $100,000 in funding to MesoCoat to develop zinc

coatings that have excellent corrosion resistance using its R&D100 award-winning CermaClad process,

which uses a high-density infrared (HDIR) lamp to fuse a uniform layer of metal onto metal surfaces.

Under this program, MesoCoat’s CermaClad process was used to coat the base materials with Zn in order

to minimize the detrimental effect on environment caused by the pickling step in the galvanizing process

conventionally used for coating steel parts.

Zinc powder was sourced to confirm a suitable supply for the CermaClad process.  The powders were

evaluated for relative ease in manufacturing of an alloy precursor, prior to coating fusion on steel

surfaces.  Precursor composition and thickness were down-selected and lamp processing parameters

determined to successfully melt and fuse a thin (0.1 mm) layer of zinc to plain carbon steel surfaces. The

coating surface composition contained 2-3 wt% Fe; the corresponding microstructure was evaluated and

found similar to commercial hot dip galvanized plates, having significant volume fraction -phase

encased by solid solution zinc.  It was shown that fused zinc coatings behaved similarly to commercial

galvanized steel coatings.  Finally, extensive testing was performed on both CermaClad zinc coatings and

commercial galvanized coatings. The CermaClad zinc coatings exhibited similar or better corrosion

properties than the commercially galvanized steel, surviving 500 hours of ASTM B117 Salt Fog testing.

Based on the extremely promising test results from the Phase I development program and the huge market

need, Abakan expects to receive a Phase II funding of $300,000 from EPA to complete development and

commercialize this application.

High-Temperature Coatings for Nuclear Reactors

National Aeronautics and Space Agency (NASA) provided $125,000 in funding to MesoCoat to develop

a series of nano-/micro-composite coated nuclear reactor facing components using MesoCoat's

CermaClad process. MesoCoat's CermaClad process has been used to coat carbon-carbon substrates with

Tungsten (W), and Molybdenum (Mo). The different combinations of substrates and coatings produced a

material structure that is capable of high heat transfer and is able to withstand the high-temperature and

high-heat flux environments present in fission energy reactors, such as nuclear thermal rockets. The

proposed concept is ideal for fission energy technology applications at high temperatures (less than

4400oF) where these nano-composite coatings that can withstand extreme heat and facilitate high heat

transfer for an extended period of time.

Based on the extremely promising test results from the Phase I development program and huge market

need, Abakan expects to receive a Phase II funding of $750,000 from NASA to complete development

and commercialize this application.

31



Extreme Coatings for Gears, Bearings, and Shafts

NASA provided $125,000 in funding to MesoCoat to develop advanced coatings that self-lubricate to

minimize friction and wear in extreme environments. MesoCoat’s R&D100 award-winning PComP

nano-composite coatings have the same characteristics as diamond like carbon coating, but the additional

advantages of low cost application, ability to shield the substrate, and the ability to incorporate solid

lubricants into the nano-composite, and offer one of the few viable alternatives to diamond like carbon

(DLC) coatings with a (in at least one experts opinion) significantly higher probability of success in a

gearbox application.

MesoCoat achieved the goal of this program by thermal spraying hierarchical nano-structured hard

particle-based powders with specific chemistry. MesoCoat conducted preliminary testing to prove the

high wear resistance and low friction of novel materials under specified conditions. Under this program,

MesoCoat successfully demonstrated that the nano-structured thermally sprayed coatings exhibits wear

rates that are under the detection limit. MesoCoat successfully demonstrated that the proposed material is

a viable candidate for gears, bearings or shafts.

Based on the extremely promising test results from the Phase I development program and the huge market

need, Abakan expects to receive a Phase II funding of $750,000 from NASA to complete development

and commercialize this application.

Anticipated Product Development Timeline

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

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

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

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

last reporting period. Unless otherwise explained below in respect to specific products, the unanticipated

delays are attributed, in large part, to ongoing supply and support issues with our arc lamp component

supplier, personnel changes, the need to replace aging equipment associated with  PComP and the

availability of financing.

TIME TO

PRODUCT

COMMERCIAL STATUS

COMMERCIALIZE

(MONTHS)

PComP W

Growth and Expansion

Current

PComP T

Market Entry

Current

PComP M

Market Entry

Current

PComP S

Prototype Qualification

12 to 24

PComP Coating Services

Market Entry

Current

ZComP

Development

On Hold

CermaClad CRA

Development

12 for qualification 18

for full scale production

CermaClad WR

Development

6 for plate sales from

Ohio plant

CermaClad LT

Development Delayed

24

CermaClad HT

Incubation

36

Product Commercial Expansion Timeline

32



Abakan’s near term plan is to expand the presence of its products in North and South America and the

Asia-Pacific market. We expect to soon enter into negotiations to construct a production facility in

Taiwan in partnership with UP Scientech. Metalsol has been working to get financial support from local

government and corporate entities to build a PComP coating services and clad pipe production facility in

Mexico.

Results of Operations

(000)

For the three months ended

For the nine months ended

February 28,

Change

February 28,

Change

Revenues

2015

2014

$

%

2015

2014

$

%

Commercial

$

55     $

69     $

(14)

(20)      $

210    $

207  $

3

2

Contract and grants

189

94

95

100

512

229

283

123

Rental & Other income

51

-

51

-

51

10

41

407

295

163

132

81

773

446

327

73

Gross profit

84

86

(2)

(2)

350

181

169

93

General and

1,476

1,293

183

4,014

4,865

(851)

administrative

14

(17)

Stock options expense

262

353

(90)

(26)

787

972

(185)

(19)

Operation Loss

(1,654)

(1,560)

(95)

6

(4,451)

(5,656)

1,205

(21)

Interest exp &

(154)

(79)

(75)

(422)

(317)

105

amortization of discount

on debt

94

33

Other income (expense)

76

(74)

150      (204)

79

(296)

375      (127)

Loss before non-

controlling interest

(1,732)

(1,713)

(20)

1

4,794

(6,269)

1,475

(24)

Non-Controlling interest

in MesoCoat loss

84

341

(257)

(75)

249

1,335

(1,086)

(81)

Loss before income taxes

(1,648)

(1,372)

(277)

20

(4,545)

(4,934)

389

8

Income taxes

-

-

-

Net Losses

(1,648)

(1,372)

(27)

20

(4,545)

(4,934)

389

8

Revenues

The $132,000 increase in revenue, or 81%, from $295,000 for the current three month period as compared

to the prior comparative period revenue of $164,000, is the result of increased grant revenue primarily

from three awards.  Abakan also began leasing a $1.6 million of lamp system in December 2014 to NAIT

as part of the partnership to establish a prototype demonstration facility for developing, testing and

commercializing wear-resistant clad pipe and components in Alberta, Canada.   The total lease revenue

over a 24 month period will be $500,000 Canadian dollars or approximately $400,000 US dollars.

Abakan recorded $51,000 in revenue related to this lease for the current three month period.  Commercial

revenue for the three month period was $55,000 and was a slight decrease from the prior comparative

period that can be attributed to the production facility being shut down in December of 2014 for repairs

and the installation of equipment.

The $327,000 increase in revenue, or 73% from $773,000 for the current nine month period over the prior

comparative period revenue of $446,000, is the result of increased factory production, award of three

grants and the revenue derived from leasing a lamp system to a demonstration facility in Alberta, Canada.

We expect grant revenue to remain consistent over the next twelve months, which will include the

continued work on grants in place.  The current grants in place are a $1 million grant, to be shared equally

33



with the Oak Ridge National Laboratory over thirty months, from the DOE, to develop a process to join

dissimilar metal alloys and $150,000 SBIR (Small Business Innovation Research), award from the NIH,

to develop antimicrobial coatings based on its high-speed large-area metal cladding technology

CermaClad.  Work on the SBIR is anticipated to continue through the next two quarters.

We expect an increase in commercial revenue over the next twelve months as MesoCoat completes its

PComP expansion plan. MesoCoat expects to better penetrate the market for PComP through qualified

PComP application partners in Houston, Calgary, and Florida, while simultaneously working directly

with OEMs, to build demand and market acceptance. MesoCoat is also relying on agents and partners

including MetalSol/Mexico and UP Plate/Taiwan to augment direct marketing resources to pursue

industry projects, get placed on approved vendors list, create demand and eventually preference, and

manage market acceptance risk.   While implementing the PComP expansion, we continue to focus on the

development of both current and new products.

We also expect rental revenue and other income to increase over the next 12 months as we will continue

to earn $62,500 rental revenue in Canadian dollars per quarter. This is $50,000 US dollars per quarter

using a currency conversion of 80 percent.

Gross Profit

Gross profits in both periods can be wholly attributed to the operations of MesoCoat.  .  The gross profit

margin percentage decreased from 53% for the three month period ending February 28, 2014 to 28% for

the period ending February 28, 2015.  The decrease was the result of the temporarily shut down of

commercial operations during December to complete repairs and equipment installation. The margins

benefited from the recognition of rental revenue during the period.  The $169,000 increase in gross profit,

or 93% from $350,000 for current nine month period over the prior comparative period of $181,000, is

attributable to the award of additional grants during the current and prior periods and the recognition of

rental revenue.

We expect gross profit to increase over the next twelve months as MesoCoat expands sales of its PComP

product line, increases grant revenue due to the awards received after the end of the quarter and realizes

rental income each quarter.

Net Losses

Net losses increased by $276,097 or 20% to $1,647,632 in the current three month period from

$1,371,535 in the prior three month period while net losses decreased by $389,132 or 8% to $4,544,847

in the current nine month period from $4,933,979 in the prior nine month period.

We do not expect to realize net income in the near term due to anticipated operational expenses associated

most significantly with facility expansion, research and development, consulting, payroll expenses and

the depreciation and amortization of existing assets. The increase in expenses are expected to be the direct

result of continued research and development costs associated with the CermaClad product line in

addition to costs anticipated for the building of a manufacturing plant.

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

through fiscal 2015.

34



Expenses

The $183,000 increase in operating expense, or 14% from $1,476,000 for the current three month period

as compared to the prior comparative period of $1,293,000, can be attributed to higher professional fees

which were offset by lower research and development costs. The increase in professional fees for the

quarter was attributable to higher legal and related fees as result of ongoing litigation and a Commission

inquiry.  The research and development cost decreased due to the increase in the number of personnel and

the time spent in meeting grant revenue requirements and therefore these personnel costs were classified

as cost of sales.

The $851,000 decrease in operating expense, or 17% from $4,014,000 for the current nine month period

as compared to the prior comparative period of $4,865,000 can be attributed to a realignment of our

management team and labor force that included the decision not to fill non-critical positions eliminated in

the realignment, and our renewed focus on operating efficiencies that caused us to further examine our

research and development practices.

We expect that operating expenses will increase over the next 12 months as our aggressive growth

strategy over the next five years will require significant increases in personnel and facilities along with

significant research and development to ensure that products nearing commercialization are brought to

market as quickly and as effectively as possible.

Interest Expense and Amortization of Discount on Debt

The $75,000 increase in interest expense, or 94% from $154,000 for the current three month period as

compared to the prior comparative period of $79,000, can be attributed to the increase in our debt load

and the accrual of higher interest expenses associated with certain debt defaults which are currently being

contested through the judicial process. The $105,000 increase in interest expense, or 33% from $422,000

for current nine month period over the prior comparative period of $317,000, is similarly attributable to

the increase in our debt load and the accrual of higher interest expenses on certain debt defaults. The

increase was partially offset by the prior period discount on debt being fully amortized in the period.

Other Expense/Income

The $150,000 and $375,000 positive change in other expense / income in the three and nine month

periods ending February 28, 2015, over the prior comparative periods, was mainly due to the change in

Abakan’s ownership of MesoCoat at fiscal year-end May 2014 and increased profitability at Powdermet.

During the prior three and nine month periods, Powdermet was required to recognize their proportionate

share of MesoCoat’s loss in their profit and loss statement.  In the current year, due to the change in their

ownership interest in MesoCoat, Powdermet  elected to record its investment in MesoCoat on a cost basis

which does not require recognition of the MesoCoat’s loss or profit in their books.   In addition,

Powdermet’s operating profit increased during the quarter due to an increase in sales.  Abakan continues

to record their investment in Powdermet using the equity method.

We expect other expense to increase in future periods based on the recognition by higher interest due to

existing debt and that debt anticipated in future periods to support future expansion.  We also anticipate

other income to increase due to the recognition of investment income from investments.

35



Non-controlling interest in MesoCoat loss

The $257,000 and $1,086,000 decreases in non-controlling interest of MesoCoat loss in the three and nine

month periods ending February 28, 2015, over the prior comparative periods, was due to the increase in

Abakan’s equity interest in MesoCoat and the corresponding decrease in its equity interest as a minority

owner of Powdermet.

We expect to continue to record the allocation of a non-controlling interest in MesoCoat in the future until

such time as Abakan’s ownership of MesoCoat increases to 100%.

Income Tax Expense (Benefit)

Abakan may have a prospective income tax benefit resulting from a net operating loss carry-forward and

start up costs that will offset any future operating profit once taxable income is generated.

Capital Expenditures

Abakan has spent a significant investment amount for development activities for the period from June 27,

2006, (inception) to February 28, 2015, which amounted to $10,078,564, which sum does not include

funds received from government grants and awards.  A large portion of these expenditures are related to

plant, property and equipment in the construction of the manufacturing facility in Euclid, Ohio, and to its

minority interest in Powdermet.

Liquidity and Capital Resources

Abakan has experienced significant changes in liquidity, capital resources, and stockholders’ equity.

Abakan had stockholders’ equity of $5,154,726 and a working capital deficit of $8,046,253 at February

28, 2015.

Cash flows

Key elements to the Consolidation Statement of Cash Flows for the nine months ended February 28, 2015

and 2014:

2015

2014

Net Change in Cash and Cash Equivalents

Provided by (used in):

Operating activities

$

(3,196,522)     $

(1,656,379)

Investing activities

(384,718)

(549,100)

Financing activities

3,820,740

2,032,092

Effect of exchange rate on cash

766

-

Net Change in cash and cash equivalents

$

240,266     $

(173,387)

Net cash used in operating activities resulted from current period loss plus certain non-cash items which

included depreciation, amortization of discount on debt, stock issued for services and stock option

expense plus net change accrued liabilities, accounts payable, accrued interest on loans payable, prepaid

expenses and accounts receivable.  We expect to continue to generate negative cash flow in operating

activities until such time as net losses transition to net income.

36



Net cash used in investing activities in the current period can be primarily attributed to the purchase of

property, plant and equipment.   We expect to continue to generate negative cash flow in investing

activities as Abakan increases its investment in property, plant and equipment through MesoCoat.

Net cash provided by financing activities in the current period is attributable to proceeds from loans

payable, offset by payments on loans payable and repayments on capital leases.  We expect to continue to

generate positive cash flow from financing activities as Abakan seeks new rounds of financing to build its

business.

Our current assets are insufficient to meet our current obligations, including debt either in default or

coming due in the near term, or to satisfy our cash needs over the next twelve months and as such Abakan

will require additional debt or equity financing. Management to this end initiated a private equity

placement prior to period end of its restricted common stock, at a price of $0.40 a share pursuant to which

Abakan has raised $3,535,800 as of the filing date of this report and settled debt, accounts payable and

services in an amount of $180,000. Nonetheless, additional capital will be required to meet obligations

and needs over the next twelve months. Except for the private equity placement noted, we had no other

commitments or arrangements for financing at February 28, 2015, though we continue to pursue a number

of prospective sources that include industry or strategic partners, sale of additional equity through our

ongoing private placement, the procurement of long term debt, shareholder loans or the settlement of

additional debt for equity. We face certain financial obstacles to attracting new financing due to our

historical record of net losses, working capital deficits and ongoing litigation. Therefore, despite our

efforts we can provide no assurance that Abakan will be able to obtain the financing required to meet its

stated objectives or even to continue as a going concern.

Most urgent of Abakan’s required financing obligations is the payment of $1,341,963 now past due as of

April 27, 2015, to a secured third party creditor of MesoCoat. Should Abakan fail to repay this debt

substantially all of MesoCoat’s assets may become the property of the third party creditor on the

occurrence of default and action by the creditor to seize those assets. A notice of default was received

from the creditor dated April 30, 2015. Abakan is in the process of securing a financing to repay said

creditor. However, neither a financing to satisfy MesoCoat’s loan obligations nor any changes to the

existing terms of the loan documents have been agreed.

Abakan does not expect to pay cash dividends in the foreseeable future.

Abakan has a defined stock option plan titled “The Amended Abakan Inc., 2009 Stock Option Plan” and

contractual commitments with all of its officers and directors.

Abakan has plans for the purchase of plant or equipment in connection with expansion of the PComP

powder production commercial line.

Abakan intends to increase the number of employees engaged by MesoCoat on completion on the PComP

product line expansion and upon completion of development and commercialization of the CermaClad

product in the Euclid, Ohio manufacturing facility.

Off Balance Sheet Arrangements

As of February 28, 2015, 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.

37



Going Concern

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

result of net losses since inception and a working capital deficit of $7,927,372 as of May 31, 2014. Our

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

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

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

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

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

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

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

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

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

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

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

current report. Forward looking statements reflect our current expectations and beliefs regarding our

future results of operations, performance, and achievements. These statements are subject to risks and

uncertainties and are based upon assumptions and beliefs that may or may not materialize. These

statements include, but are not limited to, statements concerning:

 §     our anticipated financial performance;

 §     uncertainties related to the commercialization of proprietary technologies held by entities in which

we have an investment interest;

 §     our ability to generate revenue from operations or gains on investments;

 §     our ability to raise additional capital to fund cash requirements for operations;

 §     the volatility of the stock market; and

 §     general economic conditions.

We wish to caution readers that our operating results are subject to various risks and uncertainties that

could cause our actual results to differ materially from those discussed or anticipated including the factors

set forth in the section entitled Risk Factors included elsewhere in this report. We also wish to advise

readers not to place any undue reliance on the forward looking statements contained in this report, which

reflect our beliefs and expectations only as of the date of this report. We assume no obligation to update

or revise these forward looking statements to reflect new events or circumstances or any changes in our

beliefs or expectations, other that is required by law.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required.

38



ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

In connection with the preparation of this quarterly report, an evaluation was carried out by Abakan’s

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

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

15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)) as of February 28, 2015. Disclosure

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

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

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

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

allow timely decisions regarding required disclosures.

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

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

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

Commission’s rules and forms, and such information was not accumulated and communicated to

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

decisions regarding required disclosures.

Changes in Internal Control over Financial Reporting

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

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

control over financial reporting.

39



PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Sonoro Invest S.A.

On October 2, 2014, Sonoro Invest, S.A. (“Sonoro”) initiated legal proceedings against Abakan alleging

that it defaulted on two convertible debt obligations and a promissory note due to Sonoro in the principal

aggregate amount of $2,105,000. The complaint seeks $3,187,057 which amount includes interest,

penalties and legal fees. The Court granted a Temporary Restraining Order in favor of Sonoro on

November 6, 2014 and on February 11, 2015, the Company and Sonoro’s attorneys agreed to terms of a

Preliminary Injunction enjoining Abakan from undertaking certain actions “outside of its normal business

without Sonoro’s consent, which will not be unreasonably withheld” pending the outcome of the legal

proceedings. The actions that Abakan is enjoined from undertaking include paying dividends, acquiring

its own shares, becoming liable for significant new debt outside normal course business, disposing

significant amounts of its assets, lending amounts in excess of $100,000, and effecting any distribution of

its capital stock outside a previously approved equity placement. The parties are in the discovery stage.

Abakan believes that it has mitigating defenses to the lawsuit. A trial date is set for October 5, 2015.

On April 21, 2015, Abakan noticed Sonoro Invest S.A. of its intent to borrow funds to satisfy that amount

due to George Town Associates S.A. on April 27, 2015.  Sonoro responded that it believed that Abakan

was prohibited from accruing new debt not for the purpose of repaying amounts due to Sonoro. The

position taken by Sonoro is based on a Preliminary Injunction pursuant to which the Court enjoined

Abakan from assuming new debt. Abakan is in the process of seeking a settlement with Sonoro that

would include its consent to the assumption of debt to repay George Town.

Joe T. Eberhard

On August 28, 2014, Joe Eberhard filed a complaint in the United States District Southern District of

Florida alleging that Abakan defaulted on a convertible note and promissory note in the principal

aggregate amount of $550,000. The complaint seeks $720,699 plus interest, penalties and legal fees.

Abakan believes that it has mitigating defenses to the lawsuit. Court proceedings are in the discovery

stage and Abakan has been in settlement discussions with Sonoro through a mediator.

Paloma Capital Group Ltd.

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

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

according to the terms of a consulting agreement dated May 2, 2011. Abakan no longer intends to proceed

with its complaint and expects that the legal proceedings will be dismissed without prejudice.

Securities and Exchange Commission

Abakan received notice of a non-public fact finding inquiry from the Securities and Exchange

Commission (“Commission”) on November 21, 2014, with a formal order to produce certain

documentation. The Commission seeks to determine whether there have been any violations of federal

securities laws. The inquiry does not mean that the Commission has concluded that Abakan or anyone

associated with Abakan has violated federal securities laws or that the Commission has a negative opinion

of any Abakan related person, entity or security. Abakan is cooperating with the Commission’s

investigation.

40



ITEM 1A.

RISK FACTORS

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

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

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

price and/or the value of our securities.

Abakan is the subject of a formal inquiry by the Commission which inquiry may harm our business and

results of operations.

Abakan is the subject of a non-public fact finding inquiry instigated by the Commission. We can neither

determine the focus of the inquiry nor predict its outcome. We have incurred and will continue to incur

expenses related to the Commission’s inquiry, which expenses may be substantial, including

indemnification costs for which we may be responsible. Abakan does carry Director’s & Officers liability

insurance, which coverage may mitigate the financial expense associated with this inquiry. Should there

be an adverse event in connection with the Commission’s inquiry, our business and results of operations

may be adversely impacted. Furthermore, our responses to the Commission’s inquiry may require

significant diversion of management’s attention and resources.

MesoCoat has secured its assets against the payment of certain loan amounts due in April of 2015.

Should MesoCoat be unable to repay amounts due to a secured third party creditor of approximately

$1,341,963 that was due on April 27, 2015, substantially all of MesoCoat’s assets may become the

property of a third party creditor. Abakan is in the process of securing a financing sufficient to repay said

creditor and believes that MesoCoat’s obligations will be satisfied or otherwise amended to avert seizure

of its assets. However, neither a financing to satisfy MesoCoat’s loan obligations nor any changes to the

existing terms of the loan documents have been agreed. Abakan received a notice of default on April 30,

2015.

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

Abakan incurred net losses of $24,046,944 for the period from June 27, 2006 (inception) to February 28,

2015. Since we have been without significant revenue since inception and have only recently transitioned

to producing revenue that is insufficient to support operations, losses may likely continue for the

foreseeable future.

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

Abakan’s audits for the periods ended May 31, 2014 and 2013 expressed an opinion as to its ability to

continue as a going concern as a result of net losses since inception and a working capital deficit of

$7,927,372 as of May 31, 2014. Until Abakan is able to produce net income over successive future

periods its ability to continue as a going concern will remain in jeopardy.

Abakan requires capital funding.

Abakan must raise additional funds, either through equity offerings, debt placements or joint ventures, to

maintain operations and meet our long term financial commitments. Additional capital, if in the form of

equity, will result in dilution to our current shareholders. Should Abakan be unable to realized future

income it ability to continue as a going concern will remain in jeopardy.

41



Abakan has defaulted on certain unsecured debt obligations

Abakan has defaulted on certain significant unsecured debt obligations due prior to or subsequent to the

end of this quarterly reporting period, which defaults have caused the original obligations to increase.

Abakan does intend to address its obligations but without additional capital funding it may be unable to

satisfy the debt holders which in turn is subjecting Abakan to legal action.

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

generating sufficient revenues to sustain and expand operations.

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

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

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

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

technologies can be commercialized. Should Abakan be unable to improve its financial condition through

debt or equity offerings, the ability to successfully advance its business plan will be severely challenged.

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 good 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 us.

MesoCoat and Powdermet compete with larger and better financed corporations.

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

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

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

number of competitive entities may enter the market in the future. Some of MesoCoat’s and Powdermet’s

existing and potential competitors have longer operating histories, greater name recognition, larger

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

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

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

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

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

prospects for success.

42



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

our growth.

We expect to generate revenue and realize a gain on our interest in Powdermet from the development and

sale of products and processes produced by MesoCoat and Powdermet. Market acceptance of those

products is therefore critical to our growth. If our customers do not accept or purchase those products or

processes produced by MesoCoat and Powdermet, then our revenue, cash flow and operating results will

be negatively impacted.

General economic conditions will affect our operations.

Changes in the general domestic and international climate may adversely affect the financial performance

of Abakan, MesoCoat and Powdermet. Factors that may contribute to a change in the general economic

climate include industrial disputes, interest rates, inflation, international currency fluctuations and

political and social reform. Further, the delayed revival of the global economy is not conducive to rapid

growth, particularly of technology companies with newly commercialized products.

MesoCoat and Powdermet rely upon patents and other intellectual property.

MesoCoat and Powdermet rely on a combination of patent applications, trade secrets, trademarks,

copyrights and licenses, together with non-disclosure and confidentiality agreements, to establish and

protect proprietary rights to technologies they develop. Should either of MesoCoat or Powdermet be

unable to adequately protect their intellectual property rights or become subject to a claim of

infringement, their businesses and that of Abakan may be materially adversely affected.

MesoCoat and Powdermet expect to prepare patent applications in accordance with their respective

worldwide intellectual property strategies on acquiring new technologies. However, neither they nor

Abakan can be certain that any patents will be issued with respect to future patents pending or future

patent applications. Further, neither they nor Abakan know whether any future patents will be upheld as

valid, proven enforceable against alleged infringers or be effective in preventing the development of

competitive patents. Abakan believes that MesoCoat and Powdermet have each implemented a

sophisticated internal intellectual property management system to promote effective identification and

protection of their products and know-how in connection with the technologies they have developed and

may develop in the future

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.

43



Environmental laws and other governmental legislation may affect our business.

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

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

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

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

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

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

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

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

potential material defects in technology each develops, any undetected defects could harm their reputation

and that of Abakan, diminish their customer base, shrink revenues and expose themselves and us to

product liability claims. Any imposition of liability that is not covered by insurance or is in excess of

insurance coverage could have a material adverse effect on our business, results of operations and

financial condition.

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

The market for our common stock has been limited due to low trading volume and the small number of

brokerage firms acting as market makers. Due to the limitations of our market and the volatility in the

market price of our stock, investors may face difficulties in selling shares at attractive prices when they

want to sell. The average daily trading volume for our stock has varied significantly from week to week

and from month to month, and the trading volume often varies widely from day to day.

Abakan’s common stock is deemed to be “penny stock”, which determination may make it more difficult

for investors to sell their shares.

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

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

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

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

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

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

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

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

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

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

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

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

difficult to dispose of our securities.

44



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

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

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

employees.

Abakan’s certificate of incorporation contains a specific provision that eliminates the liability of directors

for monetary damages to us and our stockholders; further, Abakan is prepared to give such

indemnification to its directors and officers to the extent provided by Nevada law. Abakan may also have

additional contractual indemnification obligations under its employment agreements with its executive

officers and indemnification obligations to its directors. The foregoing indemnification obligations could

result in our incurring substantial expenditures to cover the cost of settlement or damage awards against

directors and officers, which Abakan may be unable to recoup. Although Abakan does carry Director’s &

Officers liability insurance, which coverage may mitigate the financial expense associated with

indemnification claims, these provisions and resultant costs may also discourage us from bringing a

lawsuit against directors and officers for breaches of their fiduciary duties and may similarly discourage

the filing of derivative litigation by our stockholders against Abakan’s directors and officers even though

such actions, if successful, might otherwise benefit us and our stockholders.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On  December  11,  2014,  Abakan  authorized  the  grant  of  100,000  stock  options  with  an  exercise  price  of

$0.65  per  share  that  expire  ten  years  from  the  date  of  grant  vesting  in  equal  one-third  parts  annually

beginning  on  date  of  grant  to  CFO  Consultants  Inc.,  in  reliance  upon  the  exemption  from  registration

provided by Section 4(2) of the Securities Act.

Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the

following factors: (1) the issuance was a isolated private transaction by Abakan which did not involve a

public offering; (2) the offeree had access to the kind of information which registration would disclose;

(3) the offeree is an entity owned by a former officer and director of Abakan and (4) the offeree is

financially sophisticated.

On  January  1,  2015,  Abakan  authorized  the  grant  of  1,000,000  stock  options  with  an  exercise  price  of

$0.60  per  share  that  expire  ten  years  from  the  date  of  grant  vesting  in  equal  one-half  parts  on  May  31,

2015 and May 31, 2016 to Stephen Goss, Chief Operating Officer of Abakan and Chief Executive Officer

of MesoCoat,  in  reliance  upon  the  exemption  from registration  provided  by Section  4(2)  of the  Securities

Act.

Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the

following factors: (1) the issuance was a isolated private transaction by Abakan which did not involve a

public offering; (2) the offeree had access to the kind of information which registration would disclose;

(3) the offeree is an officer and director of Abakan and (4) the offeree is financially sophisticated.

ITEM 3.

DEFAULTS ON SENIOR SECURITIES

None.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

45



ITEM 5.

OTHER INFORMATION

Notice of Default

On April 22, 2015, Abakan received a Notice of Violation from George Town Associates S.A., in

connection with its failure to file a periodic report on Form 10-Q in a timely manner as required by the

Exchange Act pursuant to the terms and conditions of a Secured Convertible Promissory Note dated April

28, 2014.  The Notice was followed by a Default Notice dated April 30, 2015, due to Abakan’s failure to

cure the violation within the time frame prescribed in the Note. The amount due to George Town is

$1,341,963.34 plus default interest. Abakan is in the process of securing financing to satisfy amounts due

to George Town.

Appointment of Chief Operating Officer

On January 1, 2015, Stephen Goss was appointed as the Chief Operating Officer of Abakan pursuant to

the terms and conditions of an Employment Agreement dated December 20, 2014. He will also continue

to serve as the Chief Executive Officer of MesoCoat under the Employment Agreement. The terms of the

employment agreement include a $20,000 per month salary of which a portion is deferred, and granted

1,000,000 stock options with an exercise price of $0.60 per share that will expire ten years from the

option grant date that vest in equal parts on May 31, 2015 and May 31, 2016. The Employment

Agreement will end on December 31, 2016 and which time it can be renewed for 2 one year periods.  In

the event that this agreement is terminated early, the employee may be eligible for a severance payment.

Mr. Goss continues to also serve as a director of Abakan and MesoCoat.

ITEM 6.

EXHIBITS

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

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

46



SIGNATURES

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

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

Abakan Inc.

Date

/s/ Robert H. Miller

May 4, 2015

By: Robert H. Miller

Its: Chief Executive Officer, and Director

/s/ Costas Takkas

May 4, 2015

By: Costas Takkas

Its: Chief Financial Officer and Principal Accounting Officer

47



INDEX TO EXHIBITS

Exhibit No.

Exhibit Description

3.1*

Articles of Incorporation and Certificate of Amendment, incorporated hereto by reference to

the Form SB-2, filed with the Commission on June 19, 2007.

3.2*

Bylaws, incorporated hereto by reference to the Form SB-2, filed with the Commission on

June 19, 2007.

10.1*

Lease Agreement between Powdermet and Sherman Properties, LLC dated March 7, 2007,

incorporated hereto by reference to the Form 10-K filed with the Commission on September

13, 2011.

10.2*

License agreement between MesoCoat and Powdermet dated July 22, 2008, incorporated

hereto by reference to the Form 10-K/A-2 filed with the Commission on December 27, 2011.

10.3*

Exclusive license between MesoCoat and UT-Battelle, LLC, dated September 22, 2009,

incorporated hereto by reference to the Form 10-K/A-2 filed with the Commission on

December 27, 2011.

10.4*

Articles of Merger dated November 9, 2009, incorporated hereto by reference to the Form 8-

K filed with the Commission on December 9, 2009.

10.5*

Agreement and Plan of Merger dated November 9, 2009, incorporated hereto by reference to

the Form 8-K filed with the Commission on December 9, 2009.

10.5*

Consulting agreement dated December 1, 2009, between 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 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.

48



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*

Cooperation Agreement between MesoCoat and Petroleo Brasileiro S.A. dated January 11,

2011, incorporated by reference to the Form 8-K/A-3 filed with the Commission on March 6,

2012. (Portions of this exhibit have been omitted pursuant to a request for confidential

treatment.)

10.19*

Amendment No. 2 to Stock Purchase Agreement between Abakan and Kennametal dated

January 19, 2011, incorporated hereto by reference to the Form 8-K filed with the

Commission on July 13, 2011.

10.20*

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.

10.21*

Assignment Agreement dated March 25, 2011 with Polythermics LLC and MesoCoat,

incorporated hereto by reference to the Form 10-Q/A filed with the Commission on

September 27, 2011.

10.22*

Exclusivity Agreement between MesoCoat and Mattson Technology, Inc. dated April 7,

2011, incorporated hereto by reference to the Form 8-K/A-3 filed with the Commission on

March 6, 2012. (Portions of this exhibit have been omitted pursuant to a request for

confidential treatment.)

10.23*

Accord and Satisfaction of Investment Agreement dated May 31, 2014, incorporated hereto

by reference to the Form 8-K filed with the Commission on June 3, 2014.

10.24*

UP Letter Agreement dated November 13, 2014, incorporated hereto by reference to the

Form 8-K filed with the Commission on November 25, 2014.

10.25*

Employment Agreement dated December 20, 2014, between Abakan and Stephen Goss

incorporated hereto by reference to the Form 10-Q filed with the Commission on January 14,

2015..

14*

Code of Business Conduct & Ethics adopted on June 13, 2012, and incorporated hereto by

reference to the Form 10-K filed with the Commission on September 13, 2013.

21*

Subsidiaries of Abakan, incorporated hereto by reference to the Form 10-K filed with the

Commission on October 1, 2014.

31.1

Certification of the Chief Executive Officer pursuant to Rule 13a-14 of the Exchange Act as

adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, attached.

31.2

Certification of the Chief Financial Officer pursuant to Rule 13a-14 of the Exchange Act as

adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, attached.

32.1

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted

pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, attached.

32.2

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted

pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, attached.

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.

49