PINX:ABKI Abakan Inc Quarterly Report 10-Q Filing - 8/31/2012

Effective Date 8/31/2012

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UNITED STATES

SECURITIES  AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

quarterly period ended August 31, 2012.

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

transition period from

to

.

Commission file number: 000-52784

ABAKAN INC.

(Exact name of registrant as specified in its charter)

Nevada

98-0507522

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

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

(Address of principal executive offices)    (Zip Code)

(786) 206-5368

(Registrants telephone number, including area code)

N/A

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

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

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

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

Yes þ   No o

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

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

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

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

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

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

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

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

Exchange Act): Yes o  No þ

Indicate the number of  shares outstanding of each of  the issuers classes of  common stock,  as of  the latest

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

only class of voting stock), at October 12, 2012, was 61,672,945.

1




TABLE OF CONTENTS

PART I FINANCIAL  INFORMATION

Item 1.     Financial Statements ...................................................................................................................... 3

Condensed  Consolidated Balance Sheets for the period ended August 31, 2012

(Unaudited) and  May 31, 2012 ........................................................................................................ 4

Unaudited Condensed  Consolidated Statements of Operations for the three months

ended  August 31, 2012 and 2011, and cumulative amounts from development stage

activities (June 27, 2006 (Inception) through August 31, 2012)........................................................... 5

Unaudited Condensed Consolidated Statements of Cash Flows for the three months

ended  August 31, 2012 and 2011, and cumulative amounts from development stage

activities (June 27, 2006 (inception) through August 31, 2012).............................................................6

Condensed Notes to  Consolidated Financial Statements (Unaudited)...................................................8

Item 2.     Management's Discussion and Analysis of Financial Condition and Results of

Operations.................................................................................................................................... 31

Item 3.     Quantitative and Qualitative Disclosures about Market Risk............................................................ 48

Item 4.     Controls and Procedures .............................................................................................................. 48

PART II OTHER INFORMATION

Item 1.     Legal Proceedings........................................................................................................................ 49

Item 1A.   Risk Factors ................................................................................................................................ 49

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds.......................................................... 53

Item 3.     Defaults upon Senior Securities ..................................................................................................... 55

Item 4.     Mine Safety Disclosure................................................................................................................. 56

Item 5.     Other Information ........................................................................................................................ 56

Item 6.     Exhibits....................................................................................................................................... 56

Signatures .................................................................................................................................................. 57

Index to Exhibits.......................................................................................................................................... 58

2




PART I FINANCIAL  INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

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

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

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

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

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

to be expected for the full year.

3




ABAKAN, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED CONSOLIDATED BALANCE SHEETS

August 31,

May 31,

2012

2012

(unaudited)

ASSETS

Current assets

Cash and cash equivalents

$

608,818     $

859,566

Accounts receivable

163,928

22,854

Note receivable - related parties

4,076

4,500

Prepaid expenses (Note 7)

133,161

183,134

Total current assets

909,983

1,070,054

Non-current assets

Property, plant and equipment, net (Note 4)

3,281,645

3,021,088

Patents and licenses, net (Note 5)

7,733,564

7,776,315

Assignment agreement - MesoCoat (Note 6)

240,134

250,000

Investment - Powdermet (Note 8)

2,751,364

2,710,189

Goodwill

364,384

364,384

Total Assets

$

15,281,074     $

15,192,030

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities

Accounts payable

$

616,383     $

425,868

Accounts payable - related parties (Note 12)

99,360

80,773

Capital leases - current portion

39,808

42,999

Loans payable, net of discounts of $323,819  (Note 9)

2,638,712

2,465,165

Accrued interest - loans payable (Note 9)

221,045

183,106

Loan payable- related parties (Note 12)

60,000

-

Accrued liabilities

401,632

310,997

Total current liabilities

4,076,940

3,508,908

Non-current liabilities

Loans payable, net of discounts of $554,290  (Note 9)

1,087,830

1,146,277

Capital leases - non-current portion

66,113

72,176

Total liabilities

5,230,883

4,727,361

Commitments and contingencies (Note 14)

Stockholders' equity (Note 10)

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

61,822,945 issued and outstanding August 31, 2012,

61,465,445 issued and outstanding - May 31, 2012

6,183

6,147

Paid-in capital

14,430,650

13,321,527

Contributed capital

5,050

5,050

Accumulated deficit during the development stage

(7,729,748)

(6,322,365)

6,712,135

7,010,359

Non-controlling interest

3,338,056

3,454,310

Total stockholders' equity

10,050,191

10,464,669

Total liabilities and stockholders' equity

$

15,281,074     $

15,192,030

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.

4




ABAKAN, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Cumulative amounts

from  development

stage activities

For the three months ended

June 27, 2006

August 31,

(Inception) to

2012

2011

August 31, 2012

Revenue

Commercial

$

19,300     $

6,177     $

96,691

Contract  and grants

547,327

298,114

2,646,081

Other income

268,756

44,097

1,033,635

835,383

348,388

3,776,407

Cost of Revenues

336,774

170,084

1,385,972

Gross profit

498,609

178,304

2,390,435

Expenses

General and administrative

General and administrative

161,687

106,205

1,056,954

Professional fees

120,304

74,761

690,105

Professional fees - related parties

15,000

15,000

180,000

Consulting

363,932

225,372

2,068,227

Consulting  - related parties

99,427

76,577

1,339,407

Payroll and  benefits expense

182,976

137,607

1,181,281

Depreciation and amortization

85,500

82,059

417,584

Research and development

293,608

133,248

1,030,924

Impairment  of asset

-

-

180,000

Stock expense on note conversion

-

-

490,977

Stock options expense

459,784

338,517

3,048,568

Total expenses

1,782,218

1,189,346

11,684,027

Loss from operations

(1,283,609)

(1,011,042)

(9,293,592)

Other (expense)  income

Interest expense:

Interest - loans

(103,768)

(35,580)

(429,513)

Interest - related parties

-

-

(6,560)

Liquidated damages

-

-

(250,000)

Amortization of discount  on debt

(181,128)

(123,535)

(793,992)

Total interest  expense

(284,896)

(159,115)

(1,480,065)

Interest income

3,693

147

8,064

Loss on debt  settlement

-

-

(5,257)

Gain on debt  settlement

-

-

257,252

Gain on sale of assets

-

-

429,717

Unrealized gain on MesoCoat  acquisition

-

1,764,345

1,764,345

Equity in Powdermet  income

41,175

46,049

1,101,364

Equity in MesoCoat loss

-

(44,408)

(586,020)

Total Other (expense)  income

(240,028)

1,607,018

1,489,400

Net (loss) before non-controlling  interest

(1,523,637)

595,977

(7,804,192)

Non-controlling  interest  in MesoCoat Loss

116,254

53,892

74,444

Net (loss) attributable to  Abakan Inc.

(1,407,383)

649,868

(7,729,748)

Provision for income taxes

-

-

-

Net (loss)

$

(1,407,383)     $

649,868     $

(7,729,748)

Net (loss) per share - basic

$

(0.02)     $

0.01

Net (loss) per share - diluted

$

(0.02)     $

0.01

Weighted average  number of common

shares outstanding  - basic

61,615,065

59,330,468

Weighted average  number of common

shares outstanding  - diluted

61,615,065

67,485,701

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.

5




ABAKAN, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Cumulative

amounts  from

development stage

activities

For the three  months ended

June 27, 2006

August 31,

(Inception) to

2012

2011

August 31, 2012

CASH FLOWS FROM DEVELOPMENT STAGE ACTIVITIES

Net profit/ (loss) before non-controlling interest

$

(1,523,637)     $

595,977     $

(7,804,192)

Adjustments to reconcile net (loss) to net

cash provided by (used in) development stage activities:

Depreciation and amortization

85,500

82,059

417,584

Amortization of discount on debt

181,128

123,535

793,992

Amortization of deferred financing fees

-

292

-

Stock options expense

459,784

338,517

3,048,568

Stock expense from note conversion

-

-

490,977

Stock issued for services

124,375

76,000

805,026

Equity in investee loss

-

44,408

514,365

Equity in investee profit

(41,175)

(46,049)

(1,029,707)

Unrealized gain on MesoCoat acquisition

-

(1,764,345)

(1,764,345)

Gain on sale of capital asset

-

-

(429,717)

Changes  in operating assets and liabilities:

Accounts receivable

(141,074)

44,839

7,529

Notes receivable -  related parties

-

-

(4,500)

Prepaid  expenses

49,973

10,023

(147,314)

Prepaid  expenses - related parties

424

1,485

14,576

Accounts payable

190,508

45,793

830,066

Accounts payable - related parties

18,587

37,554

182,091

Accrued interest - related parties

-

-

2,664

Accrued interest - loans payable

38,000

35,525

197,404

Accrued liabilities

90,635

39,865

268,826

Waste to Energy Group Inc.

-

-

180,000

Total adjustments

1,056,665

(930,500)

4,378,085

NET CASH (USED IN) DEVELOPMENT STAGE ACTIVITIES

(466,972)

(334,524)

(3,426,107)

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of property, plant, equipment and website

(282,082)

(288,993)

(1,388,956)

Proceeds from sale of capital assets

-

-

470,000

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

-

307,650

(2,390,266)

Investment  in MesoCoat

-

-

(750,070)

Powdermet  - minority interest

-

-

(1,650,000)

Assignment agreement - MesoCoat

-

-

(100,000)

Capitalized patents and licenses

(11,358)

(2,195)

(109,543)

Waste to Energy Group Inc.

-

-

(180,000)

NET CASH PROVIDED BY/ (USED) IN INVESTING ACTIVITIES

(293,440)

16,462

(6,098,835)

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from sale of common stock

525,000

245,465

6,456,841

Proceeds from loans payable

71,000

846,665

3,922,287

Payments on loans payable

(137,028)

-

(512,679)

Proceeds from loans payable - related parties

66,200

-

145,880

Payments on loans payable - related parties

(6,253)

-

14,810

Repayments of capital leases

(9,255)

(3,387)

(63,894)

Stock Issuable

-

-

165,465

Proceeds from capital  contributed

-

-

5,050

NET CASH PROVIDED BY  FINANCING ACTIVITIES

509,664

1,088,744

10,133,760

NET INCREASE (DECREASE)  IN CASH AND CASH

EQUIVALENTS

(250,748)

770,682

608,818

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

859,566

-

-

CASH AND CASH EQUIVALENTS, END OF PERIOD

$

608,818     $

770,682     $

608,818

SEE ACCOMPANING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6




ABAKAN, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Cumulative

amounts  from

development stage

activities

For the three months ended

June 27, 2006

August 31,

(Inception) to

2012

2011

August 31, 2012

Supplemental Disclosures:

Cash paid for income taxes

$

-     $

-     $

-

Cash paid for interest

$

-     $

-     $

964

Supplemental Non-cash Disclosures:

Notes and accounts payable converted to stock

Accounts payable - related parties

$

-     $

-     $

(205,971)

Loans payable

-

-

(650,169)

Accrued interest

-

-

(4,331)

Notes payable - related parties

-

-

(99,515)

Accrued interest - related parties

-

-

(9,724)

Common stock

-

-

974,460

Subscription payable

-

-

(3,000)

Subscription receivable

-

-

(1,750)

$

-     $

-     $

-

Stock issued for assignment agreement - MesoCoat

Assignment agreement - MesoCoat

$

-     $

-     $

(150,000)

Common stock

-

-

150,000

$

-     $

-     $

-

Capital lease equipment acquired

Property, plant and equipment

$

-     $

-     $

126,907

Capital lease payable

-

-

(126,907)

$

-     $

-     $

-

Non-cash write off of balances

Accounts payable - related parties

$

-     $

-     $

52,030

Loans payable

-

-

(156)

Accrued interest

-

-

(553)

Notes payable - related parties

-

-

(52,260)

Accrued interest - related parties

-

-

(811)

Subscription receivable

-

-

1,750

$

-     $

-     $

-

Beneficial  conversion valuation

Additional paid-in capital

$

-     $

505,873     $

1,241,449

Discount on convertible debts

-

(505,873)

(1,241,449)

$

-     $

-     $

-

Controlling interest purchase - Mesocoat

Accounts receivable

$

-     $

171,457     $

171,457

Property and equipment, net

-

1,899,598

1,899,598

Deferred financing fees

-

3,607

-

Patents and licenses, net

-

2,170,391

7,938,206

Total assets

-

4,245,053

10,009,261

Accounts payable

-

(268,398)

(268,398)

Capital leases

-

(42,906)

(42,907)

Loans Payable and accrued interest

-

(2,415,469)

(2,233,474)

Other accrued liabilities

-

(65,545)

(65,545)

Total liabilities

-

(2,792,318)

(2,610,324)

Net assets

-

1,452,735

7,398,937

Non-controlling interest equity

-

(1,468,023)

(3,412,500)

Goodwill

-

4,335,646

364,384

Investment  in Mesocoat

-

(1,849,665)

(1,849,665)

MesoCoat net assets received

$

-     $

2,470,694     $

2,501,156

SEE ACCOMPANYING  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7




ABAKAN INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended August 31, 2012 and 2011

NOTE 1 BUSINESS

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

Waste to Energy Group Inc., a wholly-owned  subsidiary of Your Digital Memories Inc., was incorporated

in the state of Nevada on August 13, 2008. Waste to Energy Group Inc. and Your Digital Memories Inc.

entered into an Agreement and Plan of Merger on August 14, 2008. The board of directors of Waste to

Energy Group Inc. and Your Digital Memories Inc. deemed it advisable and in the best interest of their

respective companies and shareholders that Waste to Energy be merged with and into Your Digital

Memories Inc. with Your Digital Memories Inc. remaining as the surviving corporation under the name

Waste to Energy Group Inc.

Abakan Inc., a wholly-owned subsidiary of Waste to Energy Group Inc., was incorporated in the state of

Nevada on November 6, 2009. Abakan Inc. and Waste to Energy Group Inc. entered into an Agreement

and Plan of Merger on November 6, 2009. The board of directors of Abakan Inc. and Waste to Energy

Group Inc. deemed it advisable and in the best interest of their respective companies and shareholders that

Abakan Inc. be merged with and into Waste to Energy Group Inc.  with Waste to Energy Group Inc.

remaining as the surviving corporation under the name Abakan Inc.

Unless the context indicates otherwise, all references herein to  Abakan, we, us, and our refer to

Abakan Inc. and its consolidated subsidiaries. Abakan is in the development stage as defined  under FASB

ASC 915-10, "Development Stage Entities."

On December 10, 2009 Abakan purchased a thirty-four percent (34%) interest in MesoCoat, Inc.

("MesoCoat"), and on July 13, 2011 purchased an additional seventeen percent (17%), for an aggregate

total of fifty-one percent (51%) of the outstanding stock of MesoCoat.

MesoCoat (formerly Powdermet Coating Technologies,  Inc.) was incorporated in Nevada as a wholly

owned subsidiary of Powdermet, Inc. (Powdermet) on May 18, 2007. Operations began in 2008 and

effective March 31, 2008 it was renamed as MesoCoat. Future success of operations is subject to several

technical hurdles and risk factors, including satisfactory product development, regulatory approval and

market acceptance of MesoCoats products and its continued ability to obtain future funding. MesoCoat is

currently in the development stage, as operations consist primarily of research and development

expenditures, and revenues from planned principal operations that have not yet been realized. MesoCoat

has invested heavily in intellectual property, machinery and equipment to initiate the research and

development of its core technology. Currently, MesoCoats revenue consists almost entirely of

government grants and cooperative reimbursement agreements.

On March 21, 2011, Abakan purchased 596,813 shares of Powdermet from Kennametal,  Inc., an

unrelated party, equal to a fully diluted 41% interest in Powdermet.

Powdermet was formed in 1996 as an Ohio corporation and has since developed a product platform of

advanced materials solutions derived from nano-engineered particle agglomerate technology and derived

hierarchically structured materials.  Powdermet also owns 49% of MesoCoat.

On June 8, 2011, Abakan formed a wholly owned subsidiary company named, AMP Distributors, Ltd.

(AMP Distributors), a Grand Cayman corporation.  AMP Distributors was formed to distribute

MesoCoat products to consumer markets.

8




ABAKAN INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended August 31, 2012 and 2011

NOTE 1 BUSINESS - continued

On July 27, 2012, Abakan formed a wholly owned subsidiary company named, AMP Distributors, Inc.

(AMP  FL), a Florida corporation. AMP Distributors was formed to distribute MesoCoat products to

consumer markets.

Abakans plan of operation is to acquire interests in early stage companies. Since those firms are typically

pre-commercialization, it is anticipated that each firm Abakan decides to acquire will need successive

rounds of financing to fund research & development, lengthy qualification periods, sales and marketing

efforts. However, this may not necessarily be the case if Abakan acquires a new technology company

with existing sales or we agree to a licensing strategy.

Abakans acquisition strategy is to make sure it negotiates upfront future ownership based on a series of

value creating steps whereby we have the right to continue or discontinue investing based on an investee

meeting those milestone steps. Our approach allows management to forecast potential financing needs of

any given firm in stages to plan for present and future fundraising efforts.  Further, our approach also

enables Abakan to hedge its investing if it feels a company is not performing up to the goals that were

anticipated during the negotiating process. By taking this approach, each investee company is expected to

reach certain operating milestones prior to receiving the next round of fundraising or us exercising our

next round of acquisition.

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

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

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

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

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

considered necessary for a fair presentation of Abakans financial position as of August 31, 2012, and the

results of its operations and cash flows for the three months ended August 31, 2012, have been made.

Operating results for the three months ended August 31, 2012 are not necessarily indicative of the results

that may be expected for the year ended May 31, 2013.

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

statements and notes for the year ended May 31, 2012, thereto contained in Abakans Form 10-K.

9




ABAKAN INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended August 31, 2012 and 2011

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Consolidation Policy

The accompanying August 31, 2012 financial statements include Abakans accounts and the accounts of its

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

Abakans ownership of its subsidiaries as of August 31, 2012 is as follows:

Name of Subsidiary

Percentage of Ownership

AMP Distributors (Cayman)

100%

AMP Distributors (Florida)

100%

MesoCoat, Inc.

51%

Earnings (Loss) Per Common Share

Abakan computes net loss per share in accordance with FASB ASC 260-10, "Earnings per Share". FASB

ASC 260 requires presentation of both basic and diluted earnings per share (EPS) on the face of the

statement of operations. Basic  EPS  is  computed   by  dividing  net  loss  available to common

stockholders  (numerator)  by  the   weighted  average  number  of  shares outstanding (denominator)

during the period.  Diluted EPS gives effect to all potentially dilutive common shares outstanding during

the period. Diluted EPS excludes all potentially dilutive shares if their effect is anti-dilutive.  The only

potentially dilutive common shares outstanding are stock options and warrants from inception (Note 11).

Non-Controlling Interest

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

Inc.   Abakans controlling interest in MesoCoat requires that its operations be included in the

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.

Development Stage Enterprise

At August 31, 2012, Abakans business operations had not fully developed and it is highly dependent

upon funding and therefore is considered a development stage enterprise.

Accounts Receivable

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

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

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

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

not probable. As of August 31, 2012 management has determined that no allowance for doubtful accounts

is required.

10




ABAKAN INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended August 31, 2012 and 2011

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Notes Receivable

Notes receivable are stated at face value, plus any accrued interest earned. Abakan analyzes each note

receivable each period for probability of collectability. Notes are considered in default 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 August 31, 2012 management has determined that no occurrence of

default exists.

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation and amortization.

Maintenance and repairs are charged to operations as incurred. Depreciation and amortization are based

on the straight-line method over the estimated useful lives of the related assets. When assets are retired or

otherwise disposed of, the cost and accumulated depreciation and amortization are removed from the

accounts, and any resulting gain or loss is reflected in operations in the period realized.

Asset Construction in Progress

Construction in progress assets, represent assets that are in process of construction and rehabilitation in

order to bring them to operational status. All costs are captured in a separate Construction in Progress

account, and are included in the Property, plant and equipment net amounts, and when the asset is

ready to enter service, the total costs are capitalized and depreciation commences per the schedule below.

Depreciation is computed on the straight-line method net of salvage value with useful lives as follows:

Computer equipment and software

3 - 5 years

Office furniture and equipment

5 - 7 years

Machinery and equipment

7 - 10 years

Leasehold improvements

balance of lease term

Patent and Technology Licenses

Patent costs are recorded at the cost to obtain the patent and are amortized on a straight-line basis over their estimated

useful lives up to 20 years, beginning when the patent is secured by Abakan. License costs are recorded at the

cost to obtain the license and are amortized on a straight-line basis over effective term of the license, up to 15

years.

Indefinite-Lived Intangible Assets

In accordance with GAAP, Intellectual Property Research and Development in the amount of $6,120,200

related to the acquisition of MesoCoat, will not be amortized and will be reviewed for impairment on an annual

basis starting fiscal year ending May 31, 2013, due to its indefinite life.

Goodwill

In accordance with GAAP, goodwill in the amount of $364,384 related to the acquisition of MesoCoat will be

evaluated for impairment on an annual basis starting fiscal year ending May 31, 2013.

11




ABAKAN INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended August 31, 2012 and 2011

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Revenue Recognition

Abakan recognizes revenue when there is persuasive evidence of an arrangement, delivery has occurred

or services have been rendered, the sales price if fixed or determinable, and collectability is reasonably

assured.

Grant Revenue

Revenue from grants is generally recorded when earned as defined under the terms of the agreements. Each

grant document sets the timing of amounts that are allowed to be billed and how to bill those amounts. We generally

look at a two week time period to bill from and work on the incurred costs for the same time period and bill according

to preset amounts that are allowed to be billed for per the grant documents. This is then billed through a government

billing system, reviewed by the government department, and then payment is sent to us.

Research and Development Costs

Research and development costs are charged to expense as incurred and are included in operating expenses. Total

research and development costs were $293,608 and $133,248 for the three months ended August 31, 2012 and

2011, respectively.

Advertising Expenses

Advertising costs are expensed as incurred. Advertising expenses are included in general and

administrative expense in the accompanying statement of operations. Total advertising expenses were

$1,125 and none for the three months ended August 31, 2012 and 2011, respectively.

Shipping and Handling Costs

Abakans shipping and handling costs are included in cost of sales for all periods presented.

Use of Estimates in  the Preparation of Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make

estimates and assumptions that affect the reported amounts of assets, the disclosure of contingent assets

and liabilities at the date of the financial statements and the reported amounts of revenues and expenses

during the reporting periods. The more significant areas requiring the use of estimates include asset

impairment, stock-based compensation, beneficial conversion features on debt instruments,  and future

income tax amounts. Management bases its estimates on historical experience and on other assumptions

considered to be reasonable under the circumstances.  Actual results may differ from the estimates.

12




ABAKAN INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended August 31, 2012 and 2011

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Income Taxes

Income taxes are provided for using the liability method of accounting. A deferred tax asset or liability

is recorded for all temporary differences between financial and tax reporting. Deferred tax expense

(benefit) results from the net change during the year in deferred tax assets and liabilities.  Valuation

allowances are established when necessary to reduce deferred tax assets to the amount expected to more

likely than not be realized in future tax returns. Tax law and rate changes are reflected in income in the

period such changes are enacted.

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 17).

NOTE 3 GOING CONCERN

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

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

August 31, 2012, of $7,729,748, and a working capital deficit of $3,166,957.  These conditions raise

substantial doubt about Abakans ability to continue as a going concern. Abakans continuation as a

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

profitable operations and positive cash flows.  Managements plan is to aggressively pursue its present

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

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

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

result from the outcome of this uncertainty.

NOTE 4 PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following:

August 31, 2012

May 31, 2012

Machinery and equipment

$

643,726

$

427,641

Construction in progress

2,681,354

2,617,196

Computer equipment and office furniture

37,208

35,369

Leasehold improvements

53,818

53,818

3,416,106

3,134,024

Less accumulated depreciation and amortization

(134,461)

(112,936)

$

3,281,645

$

3,021,088

Depreciation and amortization expense was $21,525 and $7,098 for the three months ended  August 31,

2012 and 2011, respectively.

13




ABAKAN INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended August 31, 2012 and 2011

NOTE  5  -  PATENTS  AND LICENSES

Patents and licenses consist of the following:

August 31, 2012

May 31, 2012

Patents

$

76,967    $

72,991

Website

21,000

21,000

Intellectual Property Research and Development

6,120,200

6,120,200

Licenses

1,850,582

1,843,200

8,068,749

8,057,391

Less accumulated amortization

(335,185)

(281,076)

$

7,733,564    $

7,776,315

Amortization expense was $54,109 and $74,961 for the three months ended August 31, 2012 and 2011,

respectively.  In the three months ended August 31, 2012 and 2011, we have capitalized an additional

$11,358 and $2,195, respectively, on patents and licenses, and have begun amortizing those according to our

policy.

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

For the years ended May 31,

2013

$

234,289

2014

288,398

2015

288,398

2016

288,398

2017 and beyond

502,523

$   1,602,006

Patent license agreement

Abakan has an exclusive commercial patent license agreement with a third party which requires it to

invest in the research and development of technology and the market for products by committing to a

certain level of personnel hours and $350,000 of expenditures.

The patent license agreement required a total of $50,000 in execution fees which are included in

intangible assets. The patent license agreements requires royalty payments equal to 2.5% of net sales of

the product sold by Abakan beginning after the first commercial sale. For the first calendar year after the

achievement of a certain milestone and the following two calendar years during the term of the

agreement, Abakan will pay a minimum annual royalty payment of $10,000, $15,000 and $20,000

respectively.

14




ABAKAN INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended August 31, 2012 and 2011

NOTE 6 ASSIGNMENT AGREEMENT MESOCOAT

On March 25, 2011, Abakan entered into an assignment agreement (the Agreement) whereby it would

assume the exclusive rights to distribute MesoCoats products intended for applications specific to the oil

and gas pipeline industry in consideration of $250,000.  The Agreement was entered into with a company

who entered into an exclusive distribution agreement with MesoCoat dated October 10, 2008 which was

in effect for 10 years following the original date of the exclusive distribution agreement.  On May 31,

2011, Abakan completed the transfer of consideration and assumed all rights to the agreement.  We have

commenced amortization over the remaining term of 76 months, and have recorded $9,866 in

amortization expense as of August 31, 2012.

NOTE 7 PREPAID EXPENSES

Prepaid expenses consisted of the following at August 31, 2012:

Name

Description

Amount

Better Investing

Prepayment retainer for services

$

3,000

IPFS Corporation

Prepayment  for insurance

6,052

Optiminera SA

Prepayment retainer for services

51,000

Financial Insights

Prepayment retainer for services

6,000

Crystal Research Associates

Prepayment retainer for services

26,042

Hall, Lamb, & Hall

Prepayment retainer for legal fees

29,572

Deposits

Prepayment retainer for services

11,495

Total

$

133,161

Prepaid expenses consisted of the following at May 31, 2012:

Name

Description

Amount

Steven Ferris

Prepayment retainer for services

$

7,500

Better Investing

Prepayment retainer for services

4,125

Urish Popeck & Co

Prepayment retainer for valuation

8,000

Optiminera SA

Prepayment retainer for services

76,500

The Money Channel

Prepayment retainer for services

8,775

Crystal Research Associates

Prepayment retainer for services

41,667

Hall, Lamb, & Hall

Prepayment retainer for legal fees

29,572

Deposits

Prepayment retainer for services

6,995

Total

$

183,134

15




ABAKAN INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended August 31, 2012 and 2011

NOTE 8 INVESTMENT IN NON-CONTROLLING INTEREST

Powdermet, Inc.

Under the terms of our September 7, 2010 amendment to our stock purchase agreement dated June 28,

2010, Abakan entered into a stock purchase agreement with Kennametal Inc. (Kennametal) to purchase

from Kennametal five hundred and ninety six  thousand eight hundred and thirteen (596,813) shares,

representing a forty one percent (41%) interest in Powdermet,  Inc. (Powdermet), in exchange for one

million six hundred fifty thousand dollars ($1,650,000).

The terms and conditions of the stock purchase agreement required Abakan to pay an initial payment of

five hundred thousand dollars ($500,000) to Kennametal on September 7, 2010, and the remainder on or

before September 30, 2010. The stock purchase agreement contains additional terms related to monthly

liquidated damages in the amount of fifty thousand ($50,000) per month starting October 1, 2010. The

transaction was to close no later than December 31, 2010.

We made the initial payment of $500,000 on September 7, 2010 and did not make the payment on the

balance as agreed; accordingly we recorded liquidating damages of $50,000 per month beginning October

1, 2010, for a total of $250,000 as of the period ended February 28, 2011.

On January 19, 2011, we amended the Stock Purchase Agreement with Kennametal to complete the

purchase of Powdermet shares from Kennametal no later than February 15, 2011 for $1,150,000. We did

not make our payment on the balance as agreed. On March 21, 2011, we entered into an accord and

satisfaction agreement to fulfill the terms of our agreement and settled our debt in full to Kennametal in

the amount of $1,200,000.

Powdermet was the parent company of MesoCoat, owning 66% of MesoCoat at May 31, 2011. Andy

Sherman serves as the chief executive officer of both Powdermet and MesoCoat in addition to his duties

as a member of Abakans board of directors. Through Abakans purchase of 41% of Powdermet, we also

gain indirect ownership of the additional shares that Powdermet owns.

We have analyzed our investment in accordance of Investments Equity Method and Joint Ventures

(ASC 323), and concluded that when the stock purchase agreement was completed our 41% minority

interest investment gave us significant influence over Powdermets business actions, board of directors,

and its management, and therefore we account for our investment using the Equity Method. The table

below reconciles our investment amount and equity method amounts to the amount on the accompanying

balance sheet.

March 21, 2011, initial investment

$   1,650,000

Equity in profit for period of March 21

through May 31, 2011

71,656

Investment balance, May 31, 2011

$   1,721,656

Equity in profit for year ended May 31, 2012

988,533

Investment balance, May 31, 2012

$   2,710,189

Equity in profit for three months ended August 31, 2012

41,175

Investment balance, August 31, 2012

$   2,751,364

16




ABAKAN INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended August 31, 2012 and 2011

NOTE 8 INVESTMENT IN NON-CONTROLLING INTEREST continued

Powdermets ownership in MesoCoat was diluted when Abakan exercised its initial option to purchase

86,156 shares of common stock from MesoCoat. Powdermets ownership in MesoCoat as of August 31,

2012 is 47.50%.

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

Powdermet Inc.

For the three months

For the three months

ended

ended

August 31, 2012

August 31, 2011

Equity Percentage

41%

41%

Condensed income statement information:

Total revenues

$

685,432     $

580,664

Total cost of revenues

280,499

216,847

Gross margin

404,933

363,817

Total expenses

304,507

251,502

Net profit

$

100,426     $

112,315

Abakans equity in net profit

$

41,175     $

46,049

Condensed balance sheet information:

August 31, 2012

May 31, 2012

Total current assets

$

677,283     $

578,725

Total non-current assets

4,991,443

4,234,600

Total assets

$

5,668,726     $

4,813,325

Total current liabilities

$

327,483     $

395,614

Total non-current liabilities

2,928,476

2,105,370

Total equity

2,412,767

2,312,341

Total liabilities and equity

$

5,668,726     $

4,813,325

17




ABAKAN INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended August 31, 2012 and 2011

NOTE 9 LOANS PAYABLE

As of August 31, 2012 and May 31, 2012, the loans payable balance comprised of:

Description

August 31,

May 31,

2012

2012

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

$

424,795    $

400,231

13, 2013. The note is shown net  of a discount of $75,205 and $99,769, respectively, attributable to the

beneficial  conversion feature, and an  effective interest rate of 30.19%.

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

1,292,900

1,214,917

March 17, 2013. The note is shown net of a discount of $207,100 and $285,083, respectively,

attributable to the beneficial conversion feature, and an effective interest rate of 31.19%.

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

55,189

38,531

7, 2013. The note is shown net of a discount of $144,811 and $161,469, respectively, attributable to the

beneficial  conversion feature, and an  effective interest rate of 175.84%.

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

113,628

70,671

14, 2013. The note is shown net  of a discount of $386,372 and $429,329, respectively, attributable to

the beneficial conversion feature, and an effective interest rate of 142.77%.

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

303

303

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 an unrelated  entity bearing 8% interest per annum

71,000

-

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

60,000

-

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

55,248

56,043

matures on July 10, 2018.

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

105,921

115,175

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

Uncollateralized demand note to an unrelated  entity for royalties shown net  of discount of $64,621 and

1,600,279

1,717,546

$82,454, respectively.

$      3,892,463    $

3,726,617

Less  current liabilities

2,738,520

2,508,164

Total long term liabilities

$      1,153,943    $

1,218,453

We also owed $221,045 and $183,106 in accrued interest for the above notes as of August 31, 2012 and

May 31, 2012, respectively. We also amortized $181,128 and $123,535 in discount on debt as of August

31, 2012, and 2011, respectively.

As of August 31, 2012 and May 31, 2012, we had no restrictive covenants attached to any of the above

referenced notes.

Future maturity of our notes payable is presented in the table below:

For the years ended May 31,

2013

$

2,738,520

2014

864,418

2015

228,969

2016

29,563

2017 and beyond

30,993

$   3,892,463

18




ABAKAN INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended August 31, 2012 and 2011

NOTE 10 STOCKHOLDERS' EQUITY

Common Shares Authorized

Abakan has 2,500,000,000 common shares authorized at a par value of $0.0001 per share and

50,000,000 shares of preferred stock, par value $0.0001 per share.  All common stock shares have equal

voting rights, are non-assessable and have one vote per share.  Voting rights are not cumulative and,

therefore, the holders of more than 50% of the common stock could, if they choose to do so, elect all the

directors of Abakan.

Common Stock Issuances

Private placements

For the three months ended August 31, 2012, we issued the following shares:

On July 30, 2012, we closed a private placement for $525,000, or 300,000 units consisting of one share of

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

stock, with a purchase price of $2.00 per share and an expiration date of two years from the closing.  In

connection with this placement we had no offering costs for a net of $525,000.

Share based compensation

For the three months ended August 31, 2012, we issued the following shares for compensation:

On July 9, 2012, we issued 10,000 shares of our common stock for services performed valued at $20,000.

On June 1, 2012, we issued 12,500 shares of our common stock for services performed valued at $32,625.

On June 1, 2012, we issued 12,500 shares of our common stock for services performed valued at $27,750.

On July 1, 2012, we issued 12,500 shares of our common stock for services performed valued at $25,000.

On August 7, 2012, we issued 10,000 shares of our common stock for services performed valued at

$19,000.

19




ABAKAN INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended August 31, 2012 and 2011

NOTE 10 STOCKHOLDERS' EQUITY - continued

Common Stock Warrants

In connection with the above private placement we valued the common stock warrants granted during

the three months ended August 31, 2012, using the Black-Scholes model with the following

assumptions:

July 30, 2012

Expected volatility (based on

154.31%

historical volatility)

Expected dividends

0.00

Expected term in years

2.00

Risk-free rate

0.23%

The expected volatility assumption was based upon historical stock price volatility measured  on a daily

basis. The risk-free interest rate assumption is based upon U.S. Treasury bond interest rates appropriate

for the term of Abakans warrants. The dividend yield assumption is based on our history and

expectation of dividend payments. All warrants are immediately exercisable upon granting.

A summary of the common stock warrants granted during the three months ended August 31, 2012 is

presented below:

Weighted

Average

Weighted

Remaining

Average

Contractual

Aggregate

Number of

Exercise

Terms

Intrinsic

Options

Price

(In Years)

Value

Balance at  June 1, 2011

2,670,233

$

0.85

Granted

1,696,063

1.67

Exercised

-

-

Forfeited or expired

(2,300,000)

0.75

Balance at  May 31, 2011

2,066,296

$

1.64

2.00 years

$

--

Exercisable at  May 31, 2012

2,066,296

$

1.64

2.00 years

$

--

Weighted average  fair  value of

options granted during the  year

ended May 31, 2011

$

1.64

Balance at  June 1, 2012

2,066,296

$

1.64

Granted

150,000

2.00

Exercised

-

-

Forfeited or expired

-

-

Balance at  August  31, 2012

2,216,296

$

1.66

2.00 years

$

--

Exercisable at  August  31, 2012

2,216,296

$

1.66

2.00 years

$

--

Weighted average  fair  value of

options granted during the three

months ended  August  31, 2012

$

1.66

20




ABAKAN INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended August 31, 2012 and 2011

NOTE 10 STOCKHOLDERS' EQUITY - continued

The following table summarizes information about the warrants outstanding at August 31, 2012:

Options Outstanding

Options Exercisable

Range

Number

Weighted

Weighted

Number

Weighted

of

Outstanding

Average

Average

Exercisable

Average

Aggregate

Exercise

at August

Remaining

Exercise

Intrinsic

at August

Exercise

Intrinsic

Price

31,  2012

Contractual Life

Price

Value

31, 2012

Price

Value

$     1.25

706,600

2.00 Years

$    1.25

$

--

706,600     $    1.25

$

--

$     1.50

410,233

2.00 Years

$    1.50

$

--

410,233     $    1.50

$

--

$     2.00

1,099,463

2.00 Years

$    2.00

$

--

1,099,463     $    2.00

$

--

2,216,296

2.00 Years

$    1.66

$

--

2,216,296     $    1.66

$

--

NOTE 11 EARNINGS-PER-SHARE CALCULATION

Basic earnings per common share for the three months ended August 31, 2012 and 2011 are calculated by

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

per common share for the three months ended August 31, 2012 and 2011 are calculated by dividing net

income by weighted-average common shares outstanding during the period plus dilutive potential

common shares, which are determined as follows:

For the three

For the three

months ended

months ended

August 31, 2012

August 31, 2011

Net earnings (loss) from operations

$

(1,407,383)

$  649,868

Weighted-average common shares

61,615,065

59,330,468

Effect of dilutive securities:

Warrants

-

2,710,233

Options to purchase common stock

-

5,445,000

Dilutive potential common shares

61,615,065

67,485,701

Net earnings per share from operations:

Basic

$

(0.02)

$   0.01

Diluted

$

(0.02)

$   0.01

21




ABAKAN INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended August 31, 2012 and 2011

NOTE 11 EARNINGS-PER-SHARE CALCULATION - continued

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 Abakans common stock.

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

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

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

dilutive:

For the three months

ended August 31,

2012

Common Stock Equivalents:

Warrants

2,216,296

Options to purchase common stock

5,860,000

Total of Common Stock Equivalents:

8,076,296

NOTE 12 RELATED PARTY TRANSACTIONS

Due to the common control between Abakan and its related parties, Abakan is exposed to the potential

that ownership risks and rewards could be transferred among the parties.

In addition to related party transactions mentioned elsewhere, we have the below agreements and

transactions:

Board of Advisors

On June 1, 2012, we appointed a new member to our Board of Advisors and granted him 100,000 stock

options for his service. The stock options have an exercise price of $2.30 per share of common stock, and

expire ten years from the date of grant.  These options vest in equal one-third parts beginning on June 1,

2013, and every grant date anniversary for the next two years.  The term of the Board of Advisors

Agreement will be in force until June 1, 2013, and shall renew automatically on an annual basis unless

terminated in writing. We also agreed to reimburse the advisor for all reasonable business expenses.

On June 20, 2012, we appointed a new member to our Board of Advisors and agreed to pay him $5,000

per month for his services beginning July 1, 2012. We also granted him 50,000 stock options for his

service. The stock options have an exercise price of $2.05 per share of common stock, and expire ten

years from the date of grant. These options vest in equal one-third parts beginning on June 20, 2013, and

every grant date anniversary for the next two years. The term of the Board of Advisors Agreement will be

in force until May 31, 2013, and shall renew automatically on an annual basis unless terminated in

writing. We also agreed to reimburse the advisor for all reasonable business expenses.

22




ABAKAN INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended August 31, 2012 and 2011

NOTE 12 RELATED PARTY TRANSACTIONS continued

Board of Advisors - continued

On August 1, 2012, we appointed a new member to our Board of Advisors and agreed to pay him $3,000

per month for his services beginning August 1, 2012. We also granted him 75,000 stock options for his

service. The stock options have an exercise price of $1.95 per share of common stock, and expire ten

years from the date of grant. These options vest in equal one-third parts beginning on August 1, 2013, and

every grant date anniversary for the next two years. The term of the Board of Advisors Agreement will be

in force until August 1, 2013, and shall renew automatically on an annual basis unless terminated in

writing. We also agreed to reimburse the advisor for all reasonable business expenses.

Board of Directors

On June 15, 2012, we appointed a new member to our Board of Directors. We agreed to pay him $15,000

per annum, payable in four equal payments.  We also agreed to issue him 10,000 restricted  shares of our

common stock and granted him 150,000 stock options for his service. The stock options have an exercise

price of $2.30 per share of common stock, and expire ten years from the date of grant. These options vest

in equal one-third parts beginning on September 15, 2012, and every September 15 after that. We also

agreed to pay for continuing education classes and related travel expenses, for a maximum of $4,500.

This agreement will be in force until May 31, 2015, unless terminated with a sixty day notice. We also

agreed to reimburse the advisor for all reasonable business expenses.

On August 7, 2012, we appointed a new member to our Board of Directors. We agreed to issue him

10,000 restricted shares of our common stock and granted him 150,000 stock options for his service.  The

stock options have an exercise price of $1.90 per share of common stock, and expire ten years from the

date of grant. These options vest in equal one-third parts beginning on August 7, 2013 and every August 7

after that. This agreement will be in force until August 7, 2015, unless terminated with a sixty day notice.

We also agreed to reimburse the advisor for all reasonable business expenses.

Notes Payable Related Party

For the three months ended August 31, 2012, we entered into two uncollateralized demand notes with a

company controlled by our Chief Executive Officers spouse, Proper Financial, bearing 8% interest per

annum for an aggregate total of $66,200. On August 31, 2012, we applied $6,200 of principal in

addition to $59.24 of accrued interest to advances owed to us by the same company. As of August 31,

2012 we owed $60,000, and no accrued interest.

23




ABAKAN INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended August 31, 2012 and 2011

NOTE 13 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,

which provides for the granting and issuance of up to 10 million shares of our common stock.

On June 12, 2012, we granted 175,000 stock options to two consultants at an exercise price of $2.30 per

share. The options will expire ten years from the grant date, and will vest in equal one third  parts on the

anniversary of the option grant date.

On June 1, 2012, we granted 100,000 stock options to two consultants at an exercise price of $0.75 per

share. The options will expire ten years from the grant date, and will vest in completely on March 15,

2013.

On June 15, 2012, we granted 150,000 stock options to a consultant at an exercise price of $2.30 per

share. The options will expire ten years from the grant date, and will vest in equal one third  parts

beginning on September 15, 2012, and then every September 15th for the next two years.

On June 20, 2012, we granted 50,000 stock options to a consultant at an exercise price of $2.05 per share.

The options will expire ten years from the grant date, and will vest in equal one third parts on the

anniversary of the option grant date.

On July 27, 2012, we granted 75,000 stock options to a consultant at an exercise price of $1.95 per share.

The options will expire ten years from the grant date, and will vest in equal one third parts on the

anniversary of the option grant date.

On August 7, 2012, we granted 150,000 stock options to a consultant at an exercise price of $1.90 per

share. The options will expire ten years from the grant date, and will vest in equal one third  parts on the

anniversary of the option grant date.

After these grants there will be 4,140,000 available for future grant.

Our board of directors administers our Plan, however, they may delegate this authority to a committee

formed to perform the administration function of the Plan. The board of directors or a committee of the

board has the authority to construe and interpret provisions of the Plan as well as to determine the terms

of an award.  Our board of directors may amend or modify the Plan at any time.  However, no

amendment or modification shall adversely affect the rights and obligations with respect to outstanding

awards unless the holder consents to that amendment or modification.

The Plan permits us to grant Non-Statutory stock options to our employees, directors and consultants.

The options issued under this Plan are intended to be Non-Statutory Stock Options exempt from Code

Section 409A.

The duration of a stock option granted under our Plan cannot exceed ten years.  The exercise price of an

incentive stock option cannot be less than 100% of the fair market value of the common stock on the

date of grant.

24




ABAKAN INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended August 31, 2012 and 2011

NOTE 13 STOCK BASED COMPENSATION - continued

2009 Stock Option Plan Abakan - continued

The Plan administrator determines the term of stock options granted under our Plan, up to a maximum

of ten years, except in the case of certain events, as described below.  Unless the terms of an optionee's

stock option agreement provide otherwise, if an optionee's relationship with us ceases for any reason

other than disability or death, the optionee may exercise any vested options for a period of ninety days

following the cessation of service.   If an optionee's service relationship with us ceases due to disability

or death the optionee or a beneficiary may exercise any vested options for a period of 12 months in the

event of disability or death.

Unless the Plan administrator provides otherwise, options generally are not transferable except by will,

the laws of descent and distribution, or pursuant to a domestic relations order.  An optionee may

designate a beneficiary, however, who may exercise the option following the optionee's death.

The value of employee and non-employee stock warrants granted during the three months ended August

31, 2012 was estimated using the Black-Scholes model with the following assumptions:

June 1, 2012

June 12, 2012

June 15, 2012

June 20, 2012

Expected volatility (based

200.15%

154.39%

154.39%

154.39%

on historical volatility)

Expected dividends

0.00

0.00

0.00

0.00

Expected term in years

10

10

10

10

Risk-free rate

0.95%

1.67%

1.60%

1.65%

July 27, 2012

August 7, 2012

Expected volatility (based on historical volatility)

154.39%

154.39%

Expected dividends

0.00

0.00

Expected term in years

10

10

Risk-free rate

1.58%

1.66%

The expected volatility assumption was based upon historical stock price volatility measured  on a daily

basis. The risk-free interest rate assumption is based upon U.S. Treasury bond interest rates appropriate

for the term of Abakans employee stock options. The dividend yield assumption is based on our history

and expectation of dividend payments.

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

the year ended May 31, 2012 and the three months ended August 31, 2012 is presented below:

25




ABAKAN INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended August 31, 2012 and 2011

NOTE 13 STOCK BASED COMPENSATION - continued

2009 Stock Option Plan The-Abakan- continued

Weighted

Average

Weighted

Remaining

Average

Contractual

Aggregate

Number of

Exercise

Terms

Intrinsic

Options

Price

(In Years)

Value

Balance at June 1, 2011

5,420,000

$

0.75

Granted

520,000

1.06

Exercised

-

-

Forfeited or expired

(780,000)

-

Balance at May 31, 2012

5,160,000

$

0.77

9.00 years

$

185,000

Exercisable at May 31, 2012

2,980,829

$

0.71

9.00 years

$

--

Weighted average fair value of

options granted during the year

ended May 31, 2012

$

1.06

Balance at June 1, 2012

5,160,000

$

0.77

Granted

700,000

1.93

Exercised

-

-

Forfeited or expired

-

-

Balance at August 31, 2012

5,860,000

$

0.90

9.00 years

$

185,000

Exercisable at August 31, 2012

2,980,829

$

0.71

9.00 years

$

--

Weighted average fair value of

options granted during the year

ended August 31, 2012

$

1.06

26




ABAKAN INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended August 31, 2012 and 2011

NOTE 13 STOCK BASED COMPENSATION - continued

2009 Stock Option Plan Abakan - continued

The following table summarizes information about employee stock options under the 2009 Plan

outstanding at August 31, 2012:

Options Outstanding

Options Exercisable

Weighted

Range

Number

Average

Weighted

Number

Weighted

of

Outstanding

Remaining

Average

Exercisable

Average

Aggregate

Exercise

at August

Contractual

Exercise

Intrinsic

at August

Exercise

Intrinsic

Price

31,  2012

Life

Price

Value

31, 2012

Price

Value

$     0.60

1,945,000

8.00 Years

$

0.60

$

--

1,900,040     $    0.60

$

--

$     0.65

1,400,000

8.00 Years

$

0.65

$

120,000

394,968     $    0.65

$

--

$     0.75

200,000

9.00 Years

$

0.75

$

15,000

100,000     $    0.75

$

--

$     1.00

50,000

10.00 Years

$

1.00

$

--

--     $    0.00

$

--

$     1.01

225,000

9.00 Years

$

1.01

$

--

106,656     $    1.01

$

--

$     1.02

650,000

10.0 Years

$

1.02

$

50,000

116,660     $    1.02

$

--

$     1.03

50,000

4.00 Years

$

1.03

$

--

--     $    0.00

$

--

$     1.05

270,000

10.0 Years

$

1.05

$

--

83,330     $    1.05

$

--

$     1.07

95,000

10.00 Years

$

1.07

$

--

12,500     $    1.07

$

--

$     1.20

100,000

5.0 Years

$

1.20

$

--

100,000     $    1.20

$

--

$     1.25

25,000

10.0 Years

$

1.25

$

--

--     $    0.00

$

--

$     1.30

250,000

10.0 Years

$

1.30

$

--

166,675     $    1.30

$

--

$     1.90

150,000

10.0 Years

$

1.90

$

--

--     $    0.00

$

--

$     1.95

75,000

10.0 Years

$

1.95

$

--

--     $    0.00

$

--

$     2.05

50,000

10.0 Years

$

2.05

$

--

--     $    0.00

$

--

$     2.30

325,000

10.0 Years

$

2.30

$

--

--     $    0.00

$

-

5,860,000

9.0 Years

$

0.90

$

185,000

2,980,829     $    0.71

$

--

The total value of employee and non-employee stock options granted during the three months ended

August 31, 2012 and 2011, was $1,315,619 and $30,553, respectively. During three months ended

August 31, 2012 and 2011 Abakan recorded $459,784 and $338,517, respectively, in stock-based

compensation expense relating to stock option grants.

At August 31, 2012 and 2011 there was $2,187,116 and $2,471,408, respectively, of total unrecognized

compensation cost related to stock options granted under the plan.  That cost is expected to be

recognized pro-rata through August 7, 2015. The following table represents the stock options expense

for the each of the next four fiscal years ended  May 31:

For years ended May 31,

Expense

2013

$

1,062,144

2014

706,184

2015

408,568

2016

10,220

$

2,187,116

27




ABAKAN INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended August 31, 2012 and 2011

NOTE 13 STOCK BASED COMPENSATION - continued

Stock Option Plan - MesoCoat

MesoCoat accounts for equity awards using the grant-date fair value.

Abakans stock option plan (the Stock Option Plan) is intended to advance the interest of Abakan and its

shareholders. Options granted under the Stock Option Plan can be either incentive stock options or non-

qualified stock options. The Stock Option Plan authorized the issuance of a maximum of 9,000 shares of

Abakans common stock. These options have a term  of six years and will expire beginning August 2014

through November 2014.

A summary of Abakans stock option plan as of August 31, 2012, and the changes during the period then

ended is presented in the table below:

Options Outstanding

Number of

Weighted

Shares

Average Exercise

Price

Outstanding at May 31, 2012

4,450    $

2.68

Granted

-

Exercised

-

Forfeited

-

Outstanding at  August 31, 2012

4,450    $

2.68

Options exercisable at August 31, 2012

3,150    $

1.95

NOTE 14 COMMITMENTS

Leases

In August 2011, Abakan entered into a non-cash leasing arrangement where services are provided in

exchange for an asset. Abakan has an obligation to provide 600 hours of services at a fair value of

$120,000 as consideration during the period from August 2011 to August 2017. Abakan has recorded this

capital lease at its fair value.

Abakan leases its office space in Miami on a month to month basis at a cost of $2,213 a month paid to

Prosper Financial,  Inc., a related party. Abakan is also committed to a non-cancellable operating lease for a

vehicle that expired in March 2012.

MesoCoat subleases its research and development and laboratory space, in Ohio, from Powdermet, a related

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

28




ABAKAN INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended August 31, 2012 and 2011

NOTE 14 COMMITMENTS - continued

Leases -continued

MesoCoat also leases machinery and equipment under various capital lease arrangements,  which expires

through September 2016. These leases are included in long-term and short-term debt and the related assets have

been capitalized.

Total expense related to the operating leases was $37,990 and $12,375 for the three months ended August

31, 2012 and 2011. Interest expense for the leases for the three months ended August 31, 2012 and for the

period of July 13 through August 31, 2012 was $383 and $1,173.

Minimum annual rental commitments are as follows at August 31, 2012:

For the years ended May 31,

Capital Leases

Operating Leases

2013

$

37,331      $

48,110

2014

23,181

80,400

2015

22,197

80,400

2016

21,273

80,400

2017 and thereafter

7,951

328,300

Total minimum lease payments

$

111,933      $

617,610

Less amount representing interest

(6,012)

Present value of net minimum capital lease payments

105,921

Less current maturities

(39,808)

Long-term obligations under capital leases

$

66,113

NOTE 15 - EMPLOYEE BENEFIT PLANS

Abakan has a 401(k) Plan (the Plan) covering substantially all of its employees who are at least age 21

and have completed three months of service.  Participating employees may elect to contribute, on a tax

deferred basis, a portion of their compensation in accordance with Section 401(k) of the Internal Revenue

Code. Additional matching contributions may be made to the Plan at the discretion of Abakan. For the

three months ended August 31, 2012, Abakan contributed $3,972.

NOTE 16 RECENT ACCOUNTING PRONOUNCEMENTS

We have examined all recent accounting pronouncements and believe that none of them will have a

material impact on the financial statements of Abakan.

29




ABAKAN INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended August 31, 2012 and 2011

NOTE 17 SUBSEQUENT EVENTS

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

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

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

Consulting agreement

On September 18, 2012, we entered into a consulting agreement commencing September 18, 2012, with

an unrelated individual to provide investor public relations consulting. The terms of the consulting

agreement are that the consultant is paid $5,000 per month; in addition the consultant was issued 25,000

shares of our restricted common stock for the initial three month period. Then commencing December

18, 2012 and each quarter after Abakan will issue shares of our restricted common stock valued at

$60,000 per quarter. We also agreed to reimburse the consultant for all reasonable business expenses

incurred by him in the performance of his duties, with a term expiring September 18, 2013.

Private Placement

On September 28, 2012, we closed a private placement for $262,500, or 150,000 units consisting of one

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

common stock, with a purchase price of $2.00 per share and an expiration date of two years from the

closing.  In connection with this placement we had no offering costs for a net of $262,500.

Development Loan - MesoCoat

On October 2, 2012 we began drawing against a development loan from the State of Ohio with a

maximum amount of $1,000,000, and bearing an interest rate of one percent the first year after the

disbursement date, and then for years two through seven, the interest rate is seven percent. On October 2,

2012, we received our first payout from this loan of $584,066, and then we received on October 5, 2012 a

second payout of $316,477, for a total of $900,543. The loan is to be repaid over seven years, and is

collateralized the project equipment, one CermaClad system and automated pipe blasting equipment, and

all inventory, equipment, all fixtures, all intangibles and accounts receivables owned by MesoCoat.

30




ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

This Managements Discussion and Analysis of Financial Condition and Results of Operations and other

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

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

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

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

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

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

Results and Financial Condition below. The following discussion should be read in conjunction with our

financial statements and notes thereto included in this quarterly report. Our fiscal year end is May 31.

Abakan

Abakan intends to become a leader in the multi-billion dollar advanced coatings and metal formulations

markets by assembling controlling interests in a small number of next generation technology firms. We

expect to achieve this goal by investing in R&D firms and technology start-ups that have the potential to

substantially impact the surface engineering and energy management needs of Fortune 1000 companies

and government entities.  Abakan is actively involved in supporting the R&D, market development, and

commercialization efforts of those entities in which it has invested.

Abakan has to date acquired a 51% controlling interest in MesoCoat, Inc. (MesoCoat) and a 41% non-

controlling interest in Powdermet,  Inc. (Powdermet). Since Powdermet owns 49% of MesoCoat,

Abakans interest in Powdermet represents a 20% indirect interest in MesoCoat.

MesoCoat

MesoCoats 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 designed to address

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

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

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

commercialization of Powdermets nanocomposite coatings technologies. The company was renamed as

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

31




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

manufacturing support agreement.

MesoCoat has exclusively licensed and developed a proprietary metal cladding application process as

well as advanced nano-composite coating materials that combine corrosion and wear resistant alloys, and

nano-engineered cermet materials with proprietary high-speed application systems. The result is

protective cladding applications that will be offered on a competitive basis with existing market solutions.

The coating materials unite high strength, hardness, fracture toughness, and a low coefficient of friction

into one product structure. MesoCoats products are currently undergoing extensive testing by the U.S.

Air Force, U.S. Navy and Marine Corp, oil field service companies, and original equipment

manufacturers (OEMs).

CermaCladTM cladding applications are nearing commercialization and commercial sales of PComP TM, a

cermet-metallic composite powder for thermal spray applications have commenced.

CermaClad

CermaClad is a premier metallurgically bonded clad carbon steel solution 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, ships, and bridges.  In corrosive environments, including seawater, road salt, mining slurry transport

lines, unprocessed oil containing water and carbon dioxide, 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 run up costs.  CermaClad offers a competing,

lower cost solution allowing the owner  or operator to clad their carbon steel with a corrosion resistant

alloy coating at typically less than ½ the cost of using solid CRA. Cladding solutions such as

CermaClad can save up to 80% of the cost of using solid alloys, while providing equivalent

maintenance free corrosion lifetimes equal to the life of the asset. Clad metals are widely used in oil and

gas exploration and production, marine transportation, mining, petrochemical processing and refining,

nuclear, paper and pulp, desalination, and power generation industries. Each industry sector has slightly

different needs and requirements. For instance, to meet growing global energy demands, oil companies

continue to extend their offshore drilling efforts into deeper seas. The higher temperatures and corrosivity

(carbon dioxide and hydrogen sulfide content) of these deeper reserves eliminate plastics and other

competing material solutions from consideration, resulting in a significantly increased use of corrosion

resistant alloys -  and lower-cost clad pipe alternatives.

CermaClad is MesoCoats proprietary cladding process which utilizes a high density infrared fusion

heat source an arc lamp to melt, fuse, and metallurgically bond (make inseparable) metals, corrosion

resistant alloys and/or cermets onto metal substrates such as plate, pipe, or large components. Using this

process, products like risers and flowlines can be protected against harsh operating environments with

great efficiency and speed compared to competing weld overlay products. Today, clad steel is a

specialized segment of the steel industry where it is projected that demand will outstrip supply in the next

few years.   The CermaClad process and equipment offers the lowest capital cost per unit production,

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

The competitive advantages of CermaClad over current competing technologies and products are:

    CermaClad and other clad overlays can be produced at a 50-80% lower cost than alternative

solid alloy products.

32




    CermaClad produces a metallurgically bonded overlay, reducing the risk of catastrophic failure

and the buckling of mechanically lined pipes such as those supplied by industry leader Butting in

its BuBi bimetallic pipe.

    CermaClad can be applied to seamless pipe, or after pipe welding, eliminating 90% of special

metal welds which are difficult, expensive, and also a common source of early failure.

    CermaClad application technology occurs with a 30-40cm wide infrared torch compared to

less than 1 cm wide for laser or inert gas welding torches, resulting in application rates over an

order of magnitude faster than current weld overlay technologies.

    Due to its high productivity compared to traditional weld overlay, and the elimination of the need

for deformation processing (steel mill) of bulk metals, CermaClad capital and start-up costs are

two to ten times lower than competing technologies.

    Compared to weld overlay, CermaClad produces a smooth overlay that is virtually free of base

metal dilution, improving inspectability and corrosion resistance. This characteristic enables the

use of thinner, even lower cost cladding alternatives in many applications.  Smooth surfaces also

decrease flow resistance, enabling reduced friction losses in pipeline applications.

The CermaClad product line in development today is as follows:

    CermaClad CR (Corrosion Resistant Alloys). Product line that offers a lower cost alternative to

solid nickel and stainless steel alloys for oil and gas, pulp and paper, and chemical process

industry vessels, pipes, flowlines, risers, jumpers, valves, and components.

    CermaClad WR (Wear Resistant). Product line of metal matrix composite and nanocomposite

wear resistant materials to extend life of steel structures such as hydrotransport slurry lines,  pump

components, valve components, spools, Ts, and elbows for mining, mineral processing, and oil

sands/heavy oil production.

    CermaClad HT (High Temperature). Product line of high temperature claddings for heat

exchanger tubing, boiler, and other energy production components offering greater compositional

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

    CermaClad LT (Low Thickness). Exploits the unique high purity capabilities of the

CermaClad process to provide thin (less than 0.5mm) claddings for providing 50-200 year

corrosion free life in atmospheric and seawater corrosion environments and applicable to marine

structures, fuel and cargo tanks, bridges, architectural steel, and transportation structures.

PComP

PComP is a series of nanocomposite cermet coatings that are used to impart wear and corrosion

resistance, and to restore dimensions, of metal components.  PComP competes against chrome and

nickel plating, and tungsten carbide in the multibillion dollar inorganic metal finishing market.

Competing materials like hexavalent chrome, carbides and tungsten carbide cobalt have become major

headaches for industrial producers in the metal finishing industry since these materials are on the EPAs

hazardous materials watch list and are legally banned in several countries.  Industry currently spends

billions annually on these hazardous materials, and MesoCoats customers can gain a competitive

advantage while mitigating environmental liabilities by adopting green products and processes such as

PComP thermal spray coatings into their product offerings. While businesses grapple with the need to

transition away from these harmful products, MesoCoat has developed a performance leading solution

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

performance testing.

PComP, named for its particulate composite powders, is one of the few economically viable industry

replacement solutions for hard chrome and carbides due to the product lines advanced corrosion, friction,

wear and thermal barrier properties.

33




MesoCoat scientists have developed and patented a family of corrosion resistant coating solutions that

combine extreme wear resistance, fracture toughness (resiliency), and a low friction coefficient all in one

product. In conventional materials science toughness normally decreases as hardness and wear resistance

increase. By combining nano-level structure control and advanced ductile phase toughening materials

science, MesoCoat has developed a patented coating structure that can be both very tough and very wear

resistant. Equally important, the hardness of a wear coating normally limits the ease with which it can be

machined. The unique nanostructural design of the PComP coating solutions results in a coatings that

can be machined through a finish grinder much faster than a product with a traditional carbide coating.

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

metal finishing operations.

The unique nano-structure of the PComP coatings also result in friction properties approaching those of

diamond-like carbon films and solid lubricants, but with the ability to be used structurally and applied to

large components at a fraction of the cost of coatings such as diamond-like carbon.  The low friction

reduces wear, and improved energy efficiency and life in sliding components such as drilling rotors,

plungers, mandrels, ball and gate valves, and metal processing equipment.

The PComP product line is currently positioned to compete with two dominant product alternatives:

hard chrome plating and tungsten carbide thermal spray coatings. The PComP family of nanocomposite

coatings consists of five products, all of which have shown, in testing by third parties, to provide better

wear, corrosion and mechanical properties at a lower life cycle cost than most of todays alternatives.

The PComP product platform, combined with the CermaClad large area weld overlay technologies

provide a high degree of product differentiation and a sustainable competitive advantage in the $10 billion

inorganic metal finishing markets, which include OEM components and the maintenance, repair, and

overhaul of industrial assets and machinery in the components and coatings segment of MesoCoats

business (as opposed to the clad steel business lines discussed under the CermaClad product line

above).

MesoCoat is selling these products through different channels appropriate to the specific market. The

majority of commercial sector accounts will have access to these advanced coatings and coating processes

by buying coating application services from MesoCoat.  This is generally a regional business. Large

OEMs and Government agencies like the U.S. Air Force would procure raw powders and apply them for

their specific products under license as they are vertically integrated to do their own thermal spray and

coating applications using dedicated maintenance and repair depots. Recently, several defense

organizations have been given congressional mandates to make better use of their existing equipment

(planes, helicopters, jets, tanks and other armored vehicles, etc.) as budgets for the purchase of new

equipment will be limited over the next few years. MesoCoats low-cost, long-life coating materials

should appeal to government buyers striving to meet budgetary restrictions.  Finally, to achieve more

rapid penetration of a territorial (geographic) market for coating services, MesoCoat is actively qualifying

licensed application partners in certain territories (Houston, Alberta, and Los Angeles as three examples)

to provide services in territories it is not currently able to service.  This strategy will lead eventually to

acquisition or market entry into these markets,  while supporting economies of scale for the powder

production needed to meet product cost targets.

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The competitive advantages of PComP for each of its initial target markets are as follows:

    Wear and corrosion resistance and dimensional restoration

    PComP T-HT (High Toughness) is a titanium carbon-nitride based high corrosion/wear

resistant, low friction high velocity oxygen fuel (HVOF) coating that competes with hard

chrome and diamond like carbone 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 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 provide life multiples over chrome (80 times in cylinder

liner application in testing reported by Caterpiller).  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.   PComP T-HT has

significantly higher build-up rates than that of carbides, and grinding and finishing can be

done faster and cheaper with conventional grinding techniques compared to the

expensive diamond finishing process used for competing carbide coatings.

    PComP T-HH (High Hardness) is a higher wear resistance, cobalt based version of

PComP T-HT coating for hard chrome replacement in environments that need better

wear resistance but have less severe corrosion requirements. PComP T-HH also

provides good corrosion resistance in non-water environments and its low coefficient of

friction and lack of coarse by-products also protects seals and mating surfaces from

premature wear.

    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.

    PComPW is MesoCoats nano-engineered tungsten carbide coating solution that

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 replaces 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 such as alumina-titania. PComPW is also

significantly more robust and lower cost than competing detonation gun and alternate

coatings, achieving excellent results with much higher throughput and lower operating

cost equipment such as standard HVOF guns.

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    Metals processing equipment

    PComP-MB is a metal boride coating designed for use in molten metal processing.

PComP-MB has completed laboratory testing showing greater than two and one half

times the life of the state of the art molybdenum boride coatings in galvanizing lines, and

ten times the resistance of conventional WC coatings to molten metal erosion and wear.

PComP-MB is preparing for market launch in the $60 million zinc pot roll and bearing

coatings market, while also of interest to the diecasting, paper and pulp, and other related

industries

    Thermal barrier coatings

    ZComP is MesoCoats nanocomposite thermal barrier coatings that offer 50% lower

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

conventionally structured thermal barrier coatings in the $500 million thermal barrier

coatings market.  MesoCoat is actively forming partnerships to introduce these

performance-leading materials into the turbine engine market, working with both the U.S.

Department of Defense as well as supply chain partners in the turbine industry.

Stage of Development

None of MesoCoats materials are currently produced on a full-scale commercial production basis even

though some materials have been produced on a small scale. Even though some of the materials are in

limited release, certain of MesoCoats materials are expected to be ready for commercial market entry and

production within the next twelve months. The following table indicates our estimated timeline for the

commercial introduction of those products that are most imminent:

PRODUCT

COMMERCIAL TIMELINE

TIME (MONTHS)

PComP T

Initial Partner Sales

Current

PComP  W

Initial Partner Sales

Current

PComPMB

Market Entry

5

PComP Coating Services

Market Entry

3

CermaClad CR

Market Entry

5

CermaClad CR

Full Scale Production

14

CermaClad WR

Market Entry

8

CermaClad WR

Full Scale Production

18

License agreement with Powdermet, Inc.

On July 22, 2008, MesoCoat entered into a license agreement with Powdermet. The agreement gives

MesoCoat a royalty-free, exclusive, perpetual license to PComP intellectual property, certain

equipment, and contracts and business lists, including seven supporting patents, the trademark, and

supporting confidential and trade secret information, including formulations, processes, customer lists and

contracts, for all Powdermet technologies in the field of wear and corrosion resistant coatings. MesoCoat

was at the time of licensing a wholly owned subsidiary of Powdermet, and Powdermet currently retains a

49% ownership position in MesoCoat.  The agreement also includes Powdermets commitment to provide

manufacturing expertise and technical capabilities supporting PcomP powders on a priority basis.

Powdermet retains the exclusive manufacturing rights for the first 50 tons of PComP powders through

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July 1, 2013. The license agreement will end upon the last valid claim of licensed patents to expire, unless

terminated earlier within the terms of the agreement.

MesoCoat's exclusivity agreement with Mattson Technology,  Inc.

Mattson Technology,  Inc. (Mattson) is the developer and manufacturer of the Vortek high power

plasma arc lamps, and is a high energy plasma arc lamp developer.  The principal provisions of an

exclusivity agreement dated April 7, 2011 between MesoCoat and Mattson Technology, Inc. are as

follows:

    Mattson has provided the exclusive right and license to MesoCoat to use the high intensity Vortek

lamp in MesoCoats products in the wear reducing and corrosion resistant coatings, claddings and

related surface treatments market.

    The exclusivity period runs to the end of 2017 and is conditional on an escalating minimum

number of 5 lamps being ordered on an annual basis starting in 2012.

    In return for these rights MesoCoat will pay to Mattson a fee of $2 million in five equal

instalments starting from the date of the successful performance of the first unit.

    Included in this agreement is a sliding scale price discount based upon the number of units to be

ordered each year.

    A supply agreement between the two parties is currently being negotiated to fully complete some

of the detailed commercial points of this relationship.

MesoCoats exclusive patent license agreement with UT-Battelle LLC.

MesoCoat has obtained a two stage, exclusive license from UT-Battelle, LLC to utilize two  patents in its

processes to develop products for wear and corrosion applications. The initial non-commercial exclusive

license was entered into on September 22, 2009, which enabled MesoCoat to conduct development work

to prove out the technology within the field of use. The second stage of the agreement comprises a

commercial exclusive license, executed on March 7, 2011, that permits MesoCoat to conduct commercial

sales utilizing the licensed process and technology. The license is valid through the expiration of the last

patent in 2024 and required that MesoCoat invest in additional research and development of the

technology and the market for products that stem from the technology by committing to a certain level of

personnel hours and $350,000 in expenditures. MesoCoat has met the aforesaid conditions of the license

agreement.

Stage I and II license fees of $50,000 have been paid against the agreement and a royalty of $15,000 or

2.5% of revenues generated in the United States that utilize the technology, minus allowable costs as

defined by contract, whichever is greater, are due March 31 on an annual basis beginning after the first

commercial sale. For the first calendar year after the achievement of a certain milestone and the following

two calendar years during the term of the agreement, MesoCoat is obligated to pay a minimum annual

royalty payment of $10,000, $15,000 and $20,000 respectively.

Cooperation agreement with Petroleo Brasileiro S.A

MesoCoat entered into a cooperation agreement dated January 7, 2011, with Petroleo Brasileiro S.A

(Petrobras) for the purpose of carrying out development work and conducting validation tests in

connection with applying the CermaClad process to coating the internal surfaces of pipes for use in the

oil and gas industry. The term of the cooperative agreement was initially for 18 months during which

time MesoCoat, with the assistance of Petrobras, carried out development work and a series of tests

divided into two phases with the prospect of a third phase. Phase I was designed to verify that the

CermaClad process and the resultant materials for compliance with industry standards and acceptability

for clad pipe use in order to modify the existing system for the internal coating of pipes. Phase II was

37




designed to develop a prototyping facility that could coat the inner surface of a 10 inch diameter pipe and

verify that the CermaClad process was suitable for application to line pipe in accordance with current

industry standards. The prospective third phase would be designed to finalize the design and construction

of a coating facility in Brazil with the capacity for producing cladding on the interior diameter of pipes

and tubes with section lengths of at least 12 meters.

The immediate objective of the cooperation agreement, subject to obtaining successful results, in each of

Phase I and  II, is that the materials and processes tested result in American Petroleum  Institute (API) and

Det Norte Veritas (DNV) approval for the CermaClad process. API and DNV approvals would,

assuming the completion of a suitable manufacturing facility as anticipated by the prospective third

phase, permit MesoCoat market entry into the oil and gas industry and cause full scale production

activities.

MesoCoat has successfully completing Phase I of the cooperation agreement by demonstrating that the

CermaClad process is capable of producing pipe products that meet API 5LD -Specifications for CRA

clad steel pipe on flat coupons. Phase II seeks to demonstrate the suitability of the CermaClad process

for producing a superior pipe product by meeting or exceeding the requirements of API-5LD and DNV

OS-F-101 submarine pipeline systems which achievement would verify the manufacturing process and

exhibit the risk reduction assurances required to fulfill Petrobras requirements for clad pipe.

Phase II has caused MesoCoat and its partners, including Mattson, to redesign and manufacture a

miniaturized CermaClad fusing system that is able to operate inside an 8 diameter pipe that is

integrated into a pipe manipulation and coating control system.  The completion of Phase II still requires

MesoCoat to verify the parameters for CRA material deposition and produce short pipe prototypes that

meet the verified parameters. Due to the challenges associated with manipulating a complex design at

very high temperatures within a confined fume-laden environment MesoCoats process development,

debugging and coating system integration efforts took more time than originally anticipated. A four

month extension to the project timeline was requested of Petrobras and approved.  Phase II is now

expected to be successfully completed by the end of the second fiscal quarter with the tool mechanism

operating successfully while producing acceptable coatings.

Additional cooperative efforts with Petrobras are envisioned as a means to reduce product insertion risk

and qualify MesoCoat as a supplier for Petrobras project needs, including collaboration in the areas of

quality assurance, secondary operations, process improvement, product production and cost reduction.

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Powdermet

Powdermets Business

Powdermet was formed in 1996 and has since developed a product platform of advanced materials

solutions derived from nano-engineered particle agglomerate technology and derived hierarchically

structured materials. These advanced materials include energy absorbing ultra-lightweight syntactic- and

nano-composite metals in addition to the PComP nanocomposite cermets exclusively licensed to

MesoCoat. The business has historically financed itself through corporate engineering consulting fees,

government contracts and grants (over 90), and recently through partnerships with prime contractors and

systems integrators. Powdermet now expects to transition from an engineered nano-powder R&D

laboratory and toll powder manufacturer into a commercial sector company.

While MesoCoats product focus is on developing advanced cermets to address corrosion and wear

coating needs, Powdermets product differentiation is based on its ability to build advanced  nano-

structured metal formulations to address energy efficiency, reduction in hazardous materials,  and life

cycle cost reduction. Powdermets technologies are particularly useful in crash and ballistic energy

management markets since they offer weight reduction and the ability to dissipate substantially more

impact energy than the aluminum alloys and foamed metals currently available.

Powdermet has four materials solution families under development:

    SComP - A family of syntactic metal composites known for their light weight properties and

ability to absorb more impact energy than any other known material. SComP can provide

weight savings over aluminum and magnesium alloys without magnesiums corrosion and wear

limitations, reducing structural weight by 10-30% in targeted aerospace, consumer electronics,

and transportation applications.

    MComP - A family of hierarchically structured, rare earth free, nanocomposite metal and metal

matrix composites that provide higher strength and temperature capability compared to traditional

aluminium and magnesium allows. MComP is designed to be a market replacement for

beryllium, aluminum and magnesium in structural applications, without relying on scare and

expensive rare earths to produce high strength and thermal stability. Targeted applications include

aerospace and defense and transportation market segments, as well as electrical transmission and

distribution.

    EnComP - A diverse family of nano-engineered particle based solutions for energy

storage. Current developments include record setting energy density nanoparticle filled films for

capacitors, structured nanocomposite anode and cathode materials for thermal and lithium ion

batteries, and inflatable hydrogen storage media capable of energizing power fuel cells down to -

34C.

    SynFoam - A family of structural, thermally insulating syntactic ceramic composites

combining strength, high temperature functionality and low thermal conductivity into one

multifunctional material. Applications include rocket propulsion and re-entry vehicle systems,

and structural insulation for high temperature energy production and use including flowlines and

heat treatment furnaces.

39




Powdermets two developmental products closest to commercialization are SynFoam and  EnComP.

Powdermet also produces custom-engineered powders and nanopowders, provides advanced materials

contract research and development services, and derives significant revenues from tolls and contract

development and manufacturing services.

AMP  Distributors Ltd./AMP Distributors, Inc.

AMP Distributors Ltd. (AMP) and AMP Distributors,  Inc. (AMP FL) were formed by Abakan in

June of 2011  and July 27, 2012 respectively as a Cayman Island company and a Florida corporation for

the primary purpose of negotiating, executing and administrating international sales of MesoCoat's

products. AMP and AMP FL will also be tasked with acquiring equipment and coating materials for

Abakans international transactions.  AMP  has appointed a managing director with over 15 years of

experience in the offshore financial services industry and retained Kariola Limited, a consultancy

organization, to assist it with technical advice and entry into the Far East markets.

Future Acquisition Targets

Abakan utilizes multiple resources to identify future acquisition targets in addition to a professional

network of senior management and relationships with national laboratories, such as the Oak Ridge

National Laboratory .We also use the methods below to search for innovative technologies and

companies, which could lead us to additional acquisitions:

    Patent Search We conduct bi-monthly searches for provisional patents and published patents on

the U.S. Patent and Trademark Office and World Intellectual Property Organization patent

websites to keep a track on any new patents published or licensed by our competitors and

partners, and also any new patents filed/published by universities and early stage companies that

might be of interest to us.

    Conferences, Events, and Tradeshows Teams from Abakan, MesoCoat, and Powdermet attend

close to 50 technology conferences, tradeshows, and events every year. We have found these to

be an excellent resource for learning about new technologies, especially since these events center

on our interests and expertise as well as that of potential acquisitions.

    Universities We are on the mailing list of several universities that focus on research in

nanotechnology, advanced materials, surface engineering, and advanced processing. These

universities send us regular updates on the technologies currently in development, as well as any

new patents or products that culminate from the research work. In addition to interacting with

universities tech transfer departments,  we are in regular contact with professors that manage

research projects in our areas of interest who are certain that their technology has high potential

but their universities patent offices have insufficient budgets.

    Press Releases Our most recent press releases have begun to generate external interest in our

firms and operations. As such, outside parties proactively engage us in a dialogue about their

technology and/or company.

    LinkedIn We are active participants in several LinkedIn groups related to new technologies,

venture capital, angel investors, and early stage capital. We regularly evaluate new technologies

in the surface engineering arena that are posted on various LinkedIn groups and then continue

further discussion with them.

40




Every future opportunity will be evaluated based on several investment criteria. Prospective companies

must have individual market solutions intended to solve critical industry problems and have the potential

to generate at least a $100 million in revenue within five years of investment. Most companies that are

ultimately included in Abakans investments will have more than one market solution. We are therefore

restricted to firms that have established R&D programs, with a preference for firms that have solutions in

final stages of R&D or in pilot-scale production. Abakan is directing its attention to owners that are

willing to accept a multi-phased investment option while guaranteeing operational control. We plan to

support these technology-centric R&D opportunities and investments with our own corporate strategy,

market development, licensing and contracted  support.

Plan of Operation

Abakans plan of operation for the coming year is to assist MesoCoat to succeed in commercialization

efforts focused on its CermaClad and PComP products. To achieve this success Abakan aims to:

    Establish overseas subsidiaries and plants while supporting their management teams.

    Gain market entry by creating awareness and establishing relationships with key investors.

    Increase  its  investment  in  MesoCoat  and  acquire  a  controlling  interest  in  Powdermet  by  fiscal

year-end 2013.

    Target  existing  coating  companies  to   qualify  and   use   powders  produced   by  MesoCoat  and

Powdermet.

    Assist MesoCoat in achieving the following objectives:

o     Becoming American Petroleum  Institute (API) compliant for CermaClad corrosion and

wear  resistant  alloys  products  through  a  joint  development  agreement  with  Petrobras  and

ongoing development work.

o     Gaining  another  joint  venture  agreement  with  one  other  major  oil  corporations  by  fourth

quarter 2012.

o     Completing  construction  of  its  first  operating  plant  in  Euclid,  Ohio  by  the  fourth  quarter

of  2012  and  begin  producing  work  samples  for  certification  and  approval  by  potential

clients  by  the  first  quarter  2013,  with  work  to  be  split  60%/40%  between  samples  and

commercial sales.

o     Continuing   a   plan   of   constructing   CermaClad   and   PComP   operating   plants   in

strategic market locations (Houston, Alberta, Brazil and the Far East).

o     Continuing  the  formation  of  strategic  partnerships  and  a  pipeline  of  potential  clients  for

the CermaClad and PComP product lines.

Growth Strategy

Abakan intends to grow MesoCoat over the next five years by applying the expertise of its board of

directors and board of advisors to the expansion of operations on a global basis. Management will rely on

both project and investor financing to build new production facilities in emerging markets in a manner

dedicated to capturing market share and enhancing shareholder value.

41




The accomplishment of these objectives relies on either of two growth strategies: i) a conservative or

organic strategy that requires an additional $16,000,000 in financing and ii) a moderate strategy which

requires early market acceptance and an additional $45,000,000 to $50,000,000 in financing (dependent

on the level of cash flow achieved and the level of project debt financing secured). On realizing sufficient

financing, MesoCoat plans to launch between six and fifteen operating plants worldwide. Given the wide

range of Abakans assumptions, the growth strategy depends largely upon the successful execution of

both marketing plans and plant openings for CermaClad and PComP. Given our strategy of targeting

strategic global regions with multiple potential clients with multiple product lines, we believe that it is

feasible for us to meet our expectations. Nonetheless, Abakan will carefully monitor the risks associated

with achieving the goals in each growth scenario to ensure that MesoCoat can meet client expectations.

MesoCoat believes that its first offshore plant will be constructed on a build to suit basis in agreement

with a full service construction company, which arranges architectural designs, permits, and  offers a

leasing or financing arrangement for the cost of the land and the building.  Abakan has also had

discussions with State Development Boards in several jurisdictions which have indicated interest in

attracting high technology companies like MesoCoat to their respective areas, with the possibility of

offering incentives such as grants and loan guarantees. Another key component of plant location lies in

strategic global positioning. We expect to construct production facilities in locations where we can

service multiple corporations in multiple industry sectors.  We have identified Brazil as a region of focus

due to the significant oil and mining sectors in that country. West Africa is another part of the world that

would benefit significantly from the application of MesoCoats products since the oil industry in that

region has problems of corrosion and high pressure that are similar to those encountered in offshore

Brazilian oil fields.  Locations in the Far East will offer additional opportunities for MesoCoat.

While Abakan explores each opportunity it is aware of the inherent risks that often come with operating

in offshore markets. Risks might include those associated with politics, currency or even the environment

about which we will seek advice from experienced professionals in each offshore jurisdiction. Further, we

expect that recent additions to our board of directors and our board of advisors will assist us in

successfully navigating these prospective pitfalls based on years of experience within the international

arena.

Operational Logistics

CermaClad, PComP SComP, MComP and ENComP are platform technologies with extensive

product potential in multiple large market verticals. Abakan and related operations will play a major role

in six distinct product segments of the value chain: raw materials/consumables, application equipment,

coating (cladding) services, casting, fabrication, and maintenance & repair of existing assets. By playing a

major role in these six segments of the value chain, Abakan and its partners may prove to be an influential

player in defining market prices and trends in the structural composites, steel plate, sheet, bar, and tubular

products industries. Our vision is to form partnerships, and set up captive or regional facilities with the

power players in the target industry. Most of these large manufacturers have project management and

installation capabilities besides fabrication, and thus partnerships with these companies would help us

build one-stop-shops for customers,  where the customers define the specifications/requirements and we,

and our value chain partners would take care of the steel fabrication, coating/cladding operations, casting,

assembly integration, and inspection activities. We intend to partner with a major suppliers or end users

within geographic regions. Depending on the amount of financing available, we are considering three

approaches to this market:

42




    High Capital Intensity:  Abakan will continue to self-finance and act as owner-operator.

    Medium Capital Intensity: Abakan intends to enter into joint venture partnerships, with it being

the operator at 51% ownership and the partner at 49% ownership.

    Low  Capital  Intensity:  Abakan  expects  to  enter  into  joint  ventures  with  supply  chain  partners

which  would  act  as  operators  and  financiers  with  51%  ownership  while  it  would  act  as  the

technology  supplier  with  49%  ownership.  Within  these  arrangements  we  do  not  intend  to  be  a

licensor but rather participate in the operations and service end of the businesses.

Additional Funding

MesoCoat will require additional funding over the next twelve months to fulfill its business plan. Not all

of the funding sought is currently available though MesoCoat expects to receive additional funding from

Abakan. Should MesoCoat be unable to secure additional financing from outside sources or Abakan,

MesoCoat will most likely be unable to meet its milestones and may need to scale back operations.  Any

shortfall in minimum funding will adversely affect MesoCoats ability to expand or even continue

operations.

Results of Operations

During the three month period ended August 31, 2012:

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

We focused our efforts on our interest on the continued development of MesoCoat products.

     We completed equity financing in the amount of $525,000.

     We continued negotiations with prospective joint venture partners in regions, such as Russia, in

which we do not intend to operate on our own.

     We continued negotiations with prospective joint venture partners in respect to technological

applications that we do not intend to develop on our own.

We added another independent director to the board of directors and adopted corporate

governance charters.

     We continued our due diligence in respect to determining a suitable site for an additional

MesoCoat manufacturing facility in Brazil.

Secured a $1 million low interest loan from the State of Ohio to partially fund equipment for the

new 11,000 sq. ft CermaClad clad piping manufacturing plant in Euclid, Ohio.

Revenues

For the period from June 27, 2006 (inception) until August 31, 2012, Abakan realized revenues of

$3,776,407. Revenues for the three month period ended August 31, 2012 were $835,383 as compared to

$348,388 for the three month period ended August 31, 2011. Revenues over the comparative three month

periods can be wholly attributed to the operations of MesoCoat. Revenue in the current three month

period was derived from commercial revenues of $19,300 as compared to $6,177 in the prior comparative

period, contract and grant revenues of $574,327 as compared to $298,114 in the prior comparative period,

and other income of $268,756 as compared to $44,097 in the prior comparative period. Other income in

the respective three month periods is primarily comprised of amounts paid by Petrobras under the terms

and conditions of the Cooperation Agreement.

43




We expect revenue to continue to increase over the next twelve months as MesoCoats commercial and

government sponsored contracts that commenced in the last part of 2011 are completed and new products

under development are brought on line for commercial sales.

Gross Profit

For the period from June 27, 2006 (inception) until August 31, 2012, Abakan realized a gross profit of

$2,390,435. Gross profit for the three month period ended August 31, 2012 was $498,609 compared to

$178,304 for the three month period ended August 31, 2011. Gross profits in the current three month

periods can be wholly attributed to the operations of MesoCoat. The calculation of gross profit in the

current three month period offset revenue of $835,383 against cost of revenue of $336,774, as compared

to offset revenue of $348,388 against cost of revenue of $170,084 in the prior comparative three month

period.

We expect gross profits to continue to increase over the next twelve months as the business moves

towards the commercialization of its product which when produced to scale is expected to decrease our

relative cost of sales.

Net Losses/Income

For the period from June 27, 2006 (inception) until August 31, 2012, Abakan incurred net losses of

$7,729,748. Net losses for the three month period ended August 31, 2012 were $1,407,383 as compared

to net income of $649,868 for the three month period ended August 31, 2011. The transition to net losses

in the current three month period as compared  to net income in the prior comparative three month period

can be primarily attributed to a book entry gain of $1,764,345 in the prior comparative three month period

that did not affect net losses relative to actual cash used  due to an unrecognized gain on the acquisition of

MesoCoat. We do not expect to return to net income in the near term as anticipated increases in revenue

and gross profit are likely to be parried by increases in operational expenses associated most significantly

with increases in general and administrative expenses, professional fees, payroll expenses, research and

development costs and depreciation and amortization of existing assets.

Despite managements focus on ensuring operating efficiencies we do expect to continue to operate at a

loss through fiscal 2013.

Expenses

For the period from June 27, 2006 (inception) until August 31, 2012, Abakan incurred operating expenses

of $11,684,027. Operating expenses for the three month period ended August 31, 2012 were $1,782,218

as compared to $1,189,346 for the three month period ended August 31, 2011. The increase in operating

expenses over the comparative three month periods can be primarily attributed to increases in general and

administrative expenses which increased to $161,687 for the three month period ended August 31, 2012

from $106,205 over the comparative prior period, professional fees which increased to $120,304 for the

three month period ended  August 31, 2012 from $74,761 over the comparative prior period, consulting

costs which increased to $363,932 for the three month period ended August 31, 2012 from $225,372 over

the comparative prior period, related party consulting costs which increased to $99,427 in the three month

period ended August 31, 2012 from $76,577 over the comparative prior period, payroll and benefits

expense which increased to $182,976 in the three month period ended August 31, 2012 from $137,607

over the comparative prior period, research and development costs which increased to $293,608 in the

three month period ended August 31, 2012 from $133,248 over the comparative prior period and a book

entry expense due to stock options that increased to  $459,784 in the three month period ended August 31,

2012 that did not affect net losses relative to actual cash used as compared to $338,517 over the

comparative prior period.

44




We expect that operating expenses will continue to increase as our aggressive growth strategy over the

next five years will require significant increases in personnel and facilities along with significant research

and development to ensure that products nearing commercialization are brought to market as quickly and

as effectively as possible.

Other Income/Expense

For the period from June 27, 2006 (inception) until August 31, 2012, Abakan realized other income of

$1,489,400. Other expenses for the three month ended August 31, 2012 were $240,028 as compared to

other income of $1,607,018 for the three month period ended August 31, 2011. The transition to other

expense in the current three month period over other income in the prior three month period can be

primarily attributed to a book entry gain of $1,764,345 in the prior comparative three month period that

did not affect other income relative to actual cash used  due to an unrecognized gain on the acquisition of

MesoCoat.

We expect to continue to incur other expense in future periods due to the interest accruing on convertible

debt and the anticipated increase in the amortization of discount on debt over the next twelve months.

Income Tax Expense (Benefit)

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

start up costs that will offset any future operating profit.

Impact of Inflation

Abakan believes that inflation has not had a material effect on operations for the period from June 27,

2006 (inception) to August 31, 2012.

Capital Expenditures

Abakan has spent significant amounts on capital expenditures for the period from June 27, 2006

(inception) to August 31, 2012 on plant, property and equipment in the construction of the manufacturing

facility in Euclid, Ohio, which amount was $988,053 as of August 31, 2012.

Liquidity and Capital Resources

Abakan has been in the development stage since inception, and has experienced significant changes in

liquidity, capital resources, and stockholders equity.

As of August 31, 2012 Abakan had current assets of $909,983 consisting of cash and cash equivalents of

$608,818, accounts receivable of $163,928, a note receivable from a related party of $4,076, and prepaid

expenses of $133,161. Abakan had total assets of $15,281,074 consisting of current assets, property, plant

and equipment of $3,281,645, patents  and licenses of $7,733,564, an assignment agreement of $240,134,

an investment in Powdermet of $2,751,364, and goodwill of $364,384.

As of August 31, 2012 Abakan had current liabilities of $4,076,940, consisting of accounts payable of

$616,383, accounts payable to related parties  of $99,360, capital leases of $39,808, loans payable of

$2,638,712, accrued interest of $221,045, loan payable to related parties of $60,000 and accrued liabilities

of $401,632. Abakan had total liabilities of $5,230,883 consisting of current liabilities, loans payable of

$1,087,830 and capital leases of $66,113.

45




Abakan had stockholders equity of $10,050,191 and a working capital deficit of $3,166,957 at August

31, 2012.

For the period from June 27, 2006 (inception) to August 31, 2012, Abakans net cash used in

development stage activities was $3,426,107.  Net cash used in development stage activities for the three

month period ended August 31, 2012 was $466,972 as compared to $334,524 for the three month period

ended August 31, 2011. Net cash used in development stage activities in the current three month period

can be attributed primarily to a number of items that are book expense items which do not affect the total

amount relative to actual cash used including depreciation, amortization of discount on debt, stock issued

for services and stock option expense offset by equity in investee profit. Actual cash items used, that are

not income statement related items, include accrued liabilities, accounts payable, accrued interest on loans

payable, and prepaid expenses offset by changes in accounts receivable.

We expect to continue to generate negative cash flow in operating activities until such time as net losses

transition to net income.

For the period from June 27, 2006 (inception) until August 31, 2012, Abakans net cash used in investing

activities was $6,098,835. Net cash used in investing activities for the three months ended August 31,

2012, was $293,440 as compared to net cash provided by investing activities of $16,462 for the three

month period ended August 31, 2011. Net cash used in investing activities in the current period can be

primarily attributed to  the purchase of property, plant and equipment, and capitalized patents and licenses.

We expect to continue to generate negative cash flow in investing activities as Abakan increases its

investment in property, plant and equipment through MesoCoat.

For the period from June 27, 2006 (inception) until August 31, 2012, Abakans net cash provided by

financing activities was $10,133,760. Net cash provided by financing activities for the three months

ended August 31, 2012 was $509,664 as compared to $1,088,744 for the three months ended August 31,

2011. Net cash flow provided by financing activities in the current period is attributable to proceeds from

the sale of common stock and loans payable, including related party loans, offset by payments on loans

payable, including those to related parties, and repayments on capital leases.

We expect to continue to generate positive cash flow from financing activities as Abakan seeks new

rounds of financing to build its business.

Our current assets are insufficient to meet our current obligations or to satisfy our cash needs over the

next twelve months and as such Abakan will require additional debt or equity financing. We had no

commitments or arrangements for financing at August 31, 2012 though we are pursuing a number of

prospective sources that include shareholder loans, the sale of equity, the procurement of long term debt

or the settlement of additional debt for equity. We face certain financial obstacles to attracting new

financing due to our historical record of net losses and working capital deficits. Therefore, despite our

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

stated objectives or even to continue as a going concern.

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

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

commitments with all of its officers and directors.

46




Abakan has plans for the significant purchase or sale of any plant or equipment in connection with the

completion of the manufacturing facility under construction in Euclid, Ohio. MesoCoat has obtained

verbal commitments for future capital expenditures from Abakan and Powdermet to fund any shortfalls

(including plant and equipment) in the construction of the Euclid facility should it not be able to raise

funds in the normal course of business. Further, MesoCoat has secured a $1,000,000 loan from the Ohio

Third Frontier program that can be drawn down at any time in connection with the new manufacturing

facility. MesoCoat had drawn down $0 in connection with the loan as of August 31, 2012. Subsequent to

the period to date, October 12, 2012, MesoCoat has drawn down $900,543 of the $1,000,000 loan from

the Ohio Third Frontier program.

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

Euclid, Ohio manufacturing facility.

Off Balance Sheet Arrangements

As of August 31, 2012, Abakan had no off-balance sheet arrangements that have or are reasonably likely

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

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

stockholders.

Going Concern

Abakans auditors have expressed an opinion as to its ability to continue as a going concern as a result of

net losses of $7,729,748 and a working capital deficit of $3,166,957 as of August 31, 2012. Our ability to

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

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

plan to address Abakans ability to continue as a going concern includes: (i) obtaining funding from the

private placement of debt or equity; (ii) net income from operations; (iii) realizing a gain from its

investment in Powdermet; (iv) converting debt to equity; and (v) obtaining loans and grants from

financial or government institutions. Management believes that it will be able to obtain funding to allow

Abakan to remain a going concern through the methods discussed above, though there can be no

assurances that such methods will prove successful.

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

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

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

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

quarterly report. Forward looking statements reflect our current expectations and beliefs regarding our

future results of operations, performance, and achievements. These statements are subject to risks and

uncertainties and are based upon assumptions and beliefs that may or may not materialize.  These

statements include, but are not limited to, statements concerning:

         our anticipated financial performance;

         uncertainties  related  to  the  commercialization  of  proprietary  technologies  held  by  entities  in  which

we have an investment interest;

         our ability to generate revenue from operations or gains on investments;

         our ability to raise additional capital to fund cash requirements for operations;

         the volatility of the stock market; and

         general economic conditions.

47




We wish to caution readers that our operating results are subject to various risks and uncertainties that

could cause our actual results to differ materially from those discussed or anticipated including the factors

set forth in the section entitled Risk Factors included elsewhere in this report.

We also wish to advise readers not to place any undue reliance on the forward looking statements

contained in this report, which reflect our beliefs and expectations only as of the date of this report. We

assume no obligation to update or revise these forward looking statements to reflect new events or

circumstances or any changes in our beliefs or expectations, other that is required by law.

Critical Accounting Policies

The notes to the audited financial statements for Abakan for the years ended May 31, 2012 and 2011,

included in Abakan's Form 10-K filed with the Commission, discusses those accounting policies that are

considered to be significant in determining the results of operations and financial position. Our

management believes that their accounting principles conform to accounting principles generally (GAAP)

accepted in the United States of America.

The preparation of financial statements in conformity with GAAP requires management to make

estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of

contingent assets and liabilities at the date of the financial statements and the reported amounts of

revenues and expenses during the year. The more significant areas requiring the use of estimates include

asset impairment, stock-based compensation, beneficial conversion features on debt instruments, and

future income tax amounts. Management bases its estimates on historical experience and on other

assumptions considered to be reasonable under the circumstances. Actual results may differ from the

estimates.

Stock-Based Compensation

We have adopted Accounting Standards Codification Topic (ASC) 718, Share-Based Payment, which

addresses the accounting for stock-based payment transactions in which an enterprise receives employee

services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair

value of the enterprises equity instruments or that may be settled by the issuance of such equity

instruments.

Recent Accounting Pronouncements

We have examined all recent accounting pronouncements and believe that none of them will have a

material impact on our financial statements.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

In connection with the preparation of this quarterly report, an evaluation was carried out by Abakans

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

effectiveness of Abakans disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-

15(e) under the Securities Exchange Act of 1934 (Exchange Act)) as of August 31, 2012. Disclosure

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

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

periods specified in the Commissions rules and forms, and that such information is accumulated and

48




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

allow timely decisions regarding required disclosures.

Based on that evaluation, Abakans management concluded, as of the end of the period covered by this

report, that Abakans disclosure controls and procedures were effective in recording, processing,

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

Commissions rules and forms, and such information was accumulated and communicated to

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

decisions regarding required disclosures.

Changes in Internal Control over Financial Reporting

Since the end of Abakans prior reporting period on Form 10-K it has adopted an audit committee charter,

formed an audit committee comprised of independent members of its board of directors, and involved

said audit committee in overseeing the completion of this periodic report on Form 10-Q, thereby effecting

a change in internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act)

during the period ended August 31, 2012, that materially affected, or is reasonably likely to materially

affect, our internal control over financial reporting.

PART II OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

None.

ITEM 1A.

RISK FACTORS

Abakans operations and securities are subject to a number of risks. Below we have identified and

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

49




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

price and/or the value of our securities.

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

Abakan incurred net losses of  $7,729,748 for the period from June 27, 2006 (inception) to August 31,

2012. Since we have been without significant revenue since inception and have only recently transitioned

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

may continue into the future.

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

Abakans audits for the periods ended May 31, 2012 and 2011 expressed an opinion as to its ability to

continue as a going concern as a result of net losses of $6,322,365 and a working capital deficit of

$2,438,854 as of May 31, 2012 which had increased to $7,729,748 and $3,166,957 respectively as of

August 31, 2012. Unless Abakan is able to produce net revenue over successive future periods its ability

to continue as a going concern will be in jeopardy.

Abakans success is dependent on its ability to assist MesoCoat and Powdermet to commercialize

proprietary technologies to the point of generating sufficient revenues to sustain and expand operations.

Abakans near term future operation is dependent on its ability to assist MesoCoat and Powdermet in the

commercial application of proprietary technologies to produce sufficient revenue to sustain and expand

operations. The same successful efforts criteria will be required for any additional targets that are

acquired by Abakan. The success of these endeavors will require that sufficient funding be available to

assist in the development of its business interests. Currently, Abakans financial resources are limited,

which limitation may slow the pace at which proprietary technologies can be commercialized and deter

the prospect of additional acquisitions. Should we be unable to improve our financial condition through

debt or equity offerings, our ability to successfully advance our business plan will be severely limited.

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

50




there is a significant likelihood that our ability to successfully advance our business will be severely

limited.

The coatings industry is likely to undergo technological change so our products and processes could

become obsolete at any time.

Evolving technology, updated industry standards, and frequent new product and process introductions are

likely to characterize the coatings industry going forward so our products or processes could  become

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

finish development of new technologies in advance of our research and development, or be more

successful at marketing new products or processes, any of which factors may hurt our prospects for

success.

MesoCoat and Powdermet compete with larger and better financed corporations.

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

each of MesoCoat and Powdermets products are distinguished by next-generation innovations that are

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

number of entities and new competitors may enter the market in the future.  Some of MesoCoats and

Powdermets existing and potential competitors have longer operating histories, greater name recognition,

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

including well known multi-national corporations. Accordingly, MesoCoats and Powdermets products

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

finish development of new technologies in advance of either MesoCoats or Powdermets research and

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

prospects for success.

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

growth.

We expect to generate revenue and realize a gain on our interest in Powdermet from the development and

sale of products and processes produced by MesoCoat and Powdermet. Market acceptance of those

products is therefore critical to our growth. If  our customers do not accept or purchase those products or

processes produced by MesoCoat and Powdermet, then our revenue, cash flow and operating results will

be negatively impacted.

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.

51




MesoCoat and Powdermet rely on a combination of patent applications, trade secrets, trademarks,

copyrights and licenses, together with non-disclosure and confidentiality agreements, to establish and

protect proprietary rights to technologies they develop. Should either of MesoCoat or Powdermet be

unable to adequately protect their intellectual property rights or become subject to a claim of

infringement, their businesses and that of Abakan may be materially adversely affected.

MesoCoat and Powdermet expect to prepare patent applications in accordance with their respective

worldwide intellectual property strategies on acquiring new technologies. However, neither they nor

Abakan can be certain that any patents will be issued with respect to future patents pending or future

patent applications. Further, neither they nor Abakan know whether any future patents will be upheld as

valid, proven enforceable against alleged infringers or be effective in preventing the development of

competitive patents. Abakan believes that MesoCoat and Powdermet have each implemented a

sophisticated internal intellectual property management system to promote effective identification and

protection of their products and know-how in connection with the technologies they have developed and

may develop in the future

We may not be able to effectively manage our growth.

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

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

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

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

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

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

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

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

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

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

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

loss of future customers.

Environmental laws and other governmental legislation may affect our business.

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

with applicable environmental laws then Abakans business and financial results could be seriously

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

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

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

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

Abakan and those subsidiaries in which it holds an interest may face liability claims on future products.

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

potential material defects in technology they develop, any undetected defects could harm their reputation

and that of Abakan, diminish their customer base, shrink revenues and expose themselves and us to

product liability claims. Any imposition of liability that is not covered by insurance or is in excess of

insurance coverage could have a material adverse effect on our business, results of operations and

financial condition.

The market for our stock is limited and our stock price may be volatile.

52




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.

Abakans common stock is currently deemed to be penny stock, which makes it more difficult for

investors to sell their shares.

Abakans common stock is and will be subject to the penny stock rules adopted under section 15(g) of

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

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

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

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

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

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

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

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

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

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

for our securities. If the Abakans securities are subject to the penny stock rules, investors will find it

more difficult to dispose of our securities.

The elimination of monetary liability against Abakans directors, officers and employees under Nevada

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

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

employees.

Abakans certificate of incorporation contains a specific provision that eliminates the liability of directors

for monetary damages to us and our stockholders; further, Abakan is prepared to give such

indemnification to its directors and officers to the extent provided by Nevada law.  Abakan may also have

contractual indemnification obligations under its employment agreements with its executive officers. The

foregoing indemnification obligations could result in our incurring substantial expenditures to cover the

cost of settlement or damage awards against directors and officers, which Abakan may be unable to

recoup. These provisions and resultant costs may also discourage us from bringing a lawsuit against

directors and officers for breaches of their fiduciary duties and may similarly discourage the filing of

derivative litigation by our stockholders against the Abakans directors and officers even though such

actions, if successful, might otherwise benefit the us and our stockholders.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On September 28, 2012, Abakan authorized the issuance of 150,000 restricted common shares and 75,000

share purchase warrants, each warrant convertible into an additional share at an exercise price of $2.00 for

a two year period from the date of issue, for $262,500 or $1.75 a share to Ammon & Associates, Inc. in

reliance upon the exemptions from registration provided by Section 4(2) and Regulation D of the

Securities Act of 1933, as amended (Securities Act).

Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the

following factors: (1) the issuance was an isolated private transactions by Abakan which did not involve a

53




public offering; (2) the offeree had access to the kind of information which registration would disclose;

and (3) the offeree is financially sophisticated.

Abakan complied with the requirements of Regulation D of the Securities Act by: (i) foregoing any

general solicitation or advertising to market the securities; (ii) offering only to an accredited offeree; (iii)

having not violated antifraud prohibitions with the information provided to the offeree; (iv) being

available to answer questions by the offeree; and (v) providing restricted common shares and warrants to

the offeree.

On September 18, 2012, Abakan authorized the issuance of  62,500 shares of restricted common shares to

the following entities for investor relations services rendered, in reliance upon the exemption from

registration provided by Section 4(2) of the Securities Act:

Name

Consideration      Basis

Shares

Exemption

Financial Insights

$85,375

Services

37,500

Sec 4(2)

Red Chip Companies, Inc.

$42,750

Services

25,000

Sec 4(2)

Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the

following factors: (1) the issuance was an isolated private transactions by Abakan which did not involve a

public offering; (2) the offeree had access to the kind of information which registration would disclose;

and (3) the offeree is financially sophisticated.

On August 7, 2012, Abakan authorized the issuance of 10,000 shares of its restricted common shares

valued at $19,000 and the grant of  150,000 stock options with an exercise price of $1.90 per share that

expire ten years from the date of grant vesting  in equal one-third parts annually beginning on August 7,

2013 to Jeffrey Webb for services rendered as a director, in reliance upon the exemption from registration

provided by Section 4(2) of the Securities Act.

Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the

following factors: (1) the issuance was an isolated private transactions by Abakan which did not involve a

public offering; (2) the offeree had access to the kind of information which registration would disclose;

and (3) the offeree is financially sophisticated.

On July 30, 2012 Abakan authorized the issuance of 300,000 restricted common shares and 150,000 share

purchase warrants, each warrant convertible into an additional share at an exercise price of $2.00 for a

two year period from the date of issue, for $525,000 or $1.75 a share to Ammon & Associates, Inc. in

reliance upon the exemptions from registration provided by Section 4(2) and Regulation D of Securities

Act.

Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the

following factors: (1) the issuance was an isolated private transactions by Abakan which did not involve a

public offering; (2) the offeree had access to the kind of information which registration would disclose;

and (3) the offeree is financially sophisticated.

Abakan complied with the requirements of Regulation D of the Securities Act by: (i) foregoing any

general solicitation or advertising to market the securities; (ii) offering only to an accredited offeree; (iii)

having not violated antifraud prohibitions with the information provided to the offeree; (iv) being

available to answer questions by the offeree; and (v) providing restricted common shares and warrants to

the offeree.

54




On July 27, 2012, Abakan authorized the grant of 50,000 stock options with an exercise price of $2.05 per

share that expire ten years from the date of grant vesting in equal one-third parts annually beginning on

July 27, 2013 to Sam Thomas for services rendered as a member of the board of advisors, in reliance

upon the exemption from registration provided by Section 4(2) of the Securities Act.

Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the

following factors: (1) the issuance was an isolated private transactions by Abakan which did not involve a

public offering; (2) the offeree had access to the kind of information which registration would disclose;

and (3) the offeree is financially sophisticated.

On July 9, 2012, Abakan authorized the issuance of 10,000 shares of its restricted common shares valued

at $20,000 and the grant of  150,000 stock options with an exercise price of $2.30 per share that expire ten

years from the date of grant vesting in equal one-third parts annually beginning on September 15, 2012, to

David Charbonneau for services rendered as a director, in reliance upon the exemption from registration

provided by Section 4(2) of the Securities Act.

Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the

following factors: (1) the issuance was an isolated private transactions by Abakan which did not involve a

public offering; (2) the offeree had access to the kind of information which registration would disclose;

and (3) the offeree is financially sophisticated.

On June 20, 2012, Abakan authorized the grant of 50,000 stock options with an exercise price of $2.05

per share that expire ten years from the date of grant vesting in equal one-third parts annually beginning

on June 20, 2013 to David Diehl for services rendered as a member of the board of advisors,  in reliance

upon the exemption from registration provided by Section 4(2) of the Securities Act.

Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the

following factors: (1) the issuance was an isolated private transactions by Abakan which did not involve a

public offering; (2) the offeree had access to the kind of information which registration would disclose;

and (3) the offeree is financially sophisticated.

On June 12, 2012, Abakan authorized the grant of 75,000 stock options with an exercise price of $2.30

per share that expire ten years from the date of grant vesting in equal one-third parts annually beginning

on June 1, 2013 to Anupam Ghildyal for employee services rendered, in reliance upon the exemption

from registration provided by Section 4(2) of the Securities Act.

Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the

following factors: (1) the issuance was an isolated private transactions by Abakan which did not involve a

public offering; (2) the offeree had access to the kind of information which registration would disclose;

and (3) the offeree is financially sophisticated.

On June 12, 2012, Abakan authorized the grant of 100,000 stock options with an exercise price of $2.30

per share that expire ten years from the date of grant vesting in equal one-third parts annually beginning

on June 1, 2013 to Morris Reid for services rendered as a member of the board of advisors, in reliance

upon the exemption from registration provided by Section 4(2) of the Securities Act.

Abakan complied with the exemption requirements of Section 4(2) of the Securities Act based on the

following factors: (1) the issuance was an isolated private transactions by Abakan which did not involve a

public offering; (2) the offeree had access to the kind of information which registration would disclose;

and (3) the offeree is financially sophisticated.

ITEM 3.

DEFAULTS ON SENIOR SECURITIES

55




None.

ITEM 4.

MINE SAFETY DISCLOSURE

Not applicable.

ITEM 5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS

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

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

56




SIGNATURES

Abakan Inc.

Date

/s/ Robert H. Miller

______________________

October 15, 2012

By: Robert H. Miller

Its: Chief Executive Officer, Chief Financial Officer, Principal

Accounting Officer and Director

57




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.

58




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.)

14*

Code of Business Conduct & Ethics adopted on June 13, 2012 incorporated hereto by

reference to the Form 10-K filed with the Commission on September 13, 2012.

21*

Subsidiaries of Abakan incorporated hereto by reference to the Form  10-K filed with the

Commission on September 13, 2012.

31

Certification of the Chief Executive Officer and 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

Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18

U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,

attached.

99*

Powdermet audited financial statements for the period ended  May 31, 2012 incorporated

hereto by reference to the Form 10-K filed with the Commission on September 13, 2012.

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.

59



PINX:ABKI Abakan Inc Quarterly Report 10-Q Filling

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