FAQ's

Strategy

Material Sciences/General

PComP

CermaClad

Manufacturing Strategy

Finance

 

Why do you think this material sciences market is so attractive?

It's a big fragmented market (companies spent $89 billion dollars on coating materials last year) that isn't controlled by just a few major companies.

There has also been limited innovation in some of its subsectors – most of the technologies surrounding metals are decades old. However, there are three very compelling market forces that make this an attractive investment area:

1) Consumers are demanding longer lasting, corrosion-resistant products (50+ year life)

• Last year, US corrosion cost the US economy over 320 Billion dollars. Worldwide, that estimate jumps to $1.3 Trillion dollars.
• There are also tremendous energy and environmental costs of corrosion.

2) Many of the materials used today to prevent corrosion are now being banned by regulatory agencies worldwide. Consumers love the look of chrome on their cars but they probably don't realize the process used to create that chrome causes cancer. Replacement of hazardous materials alone represents an $8 billion market today for product innovators.

3) Raw materials prices continue to rise. There is limited supply of some raw materials like the precious and rare earth metals.

• Look at what's happened to the price of Gold, Indium, and rare earths.
• Manufacturers can't always raise their product prices in direct proportion to the cost of their raw materials/ parts that make that product-- so they are getting less margin on their sales and actively seeking alternatives as a result.
• Companies need innovative new materials that have the same or better properties than the base metals or coatings they are currently using to lower their overall product production costs and product liabilities.
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What made MesoCoat such an attractive investment?

There are several things about MesoCoat that make the company an attractive investment and all are detailed in the business plan:

• They have an experienced management team
• They have innovative disruptive products and processes
• These products can be sold into many markets
• They have multiple products capable of generating several hundred million dollars
• Their network of development partners who have been paying for funding are all potential customers
• They are not a one trick pony
• They have excellent university contacts to manage technical risk and add IP
• They have already had almost 30 million of funding prior to me getting involved
  

The list goes on and on- it's a great company.

Will there be any synergies to MesoCoat and Powdermet?

Right now, I'd like to think we could find new companies to invest in that are developing innovative technologies that could be applied to the same industry segments as MesoCoat's products so that we can leverage our business development efforts (i.e. inroads now into oil and gas segment).

However, we're more concerned that each investment stands on its own in merits. There are a lot of innovative solutions that we are looking at; our job is to make sure we understand how far they are away from market acceptance. We're more concerned about making sure we understand the market potential.

Why aren't other investors targeting this segment if you think you can get these types of returns?

There are other investors feverishly going after this sector but most aren't willing to invest in early stage deals like I am.

There are great opportunities to speak to some of the world's top scientists who are scrambling to find angels and other early stage investors now that VCs have pulled away from this stage of the market.

A high percentage of your revenue is forecasted from sales of cladding products to the oil industry. What happens to your company if you're not successful selling to this market?

Right now, we're very positive that we will be successful selling clad pipe and plate to the oil industry. The increase in oil and gas production from deep, hot, and corrosive fields has significantly increased the demand for clad equipment and we expect to see significant annual increases in demand. Customers and the supplier base are not happy with current technologies and are actively seeking alternatives. Cermaclad is one of the only new processes in overlay technology to be developed in the last decade. Because of this unhappiness, cost, and pain with current inadequate solutions, combined with large orders enabling quick progress to profitability, we have focused our initial efforts on this billion dollar market segment.

Our forecasts are conservative assuming that we will only be selling interior cladded pipe with CRA alloys.

• However, we're also actually developing a process to apply hard wear resistant coatings using the lamp, which opens entirely new markets in hardbanding, slurry pipe, and process equipment. Example: Syncrude alone replaces 100Km of 16-24” pipe routinely due to wear.
• Clad metal is also used in separators, glycol contactors, piping, heat exchangers and other related equipment. We will start selling our product to these other sectors too.
  

Many non-traditional energy production methods are potentially commercially viable for bringing natural gas to the market; Clad is commonly used in these facilities. Petroleum refining processes frequently are corrosive, are hot, and operate at high pressures. Clad metal is extensively used in a broad range of equipment including desulfurization hydro-treaters, coke drums, distillation columns, separators and heat exchangers. In the United States, refineries are running near their full capacity; and adding capacity and reducing costly down-time are a high priority. The increasing reliance upon low quality, high sulfur crude further drives additional demand for new corrosion resistant equipment. But there is growing demand for this type of steel in many industry segments not just oil and gas.

• The company is also qualifying clad reinforcements (rebar) for infrastructure and construction, and working with the marine and power generation industries to qualify additional products in these large markets.

 

How do you plan on diversifying risk at Abakan?

1. First, we will most likely invest in several companies so that returns will be generated from more than one entity
2. We will only invest in firms that have solutions which can address known problems from many markets so that we don't put all our eggs in one industry basket.
3. Third, we will be investing in companies that are in different stages of their growth to balance out R&D and commercialization risks.
4. We will be using our large network of professionals to identify people to support the management teams that we are backing. Essentially, we will help build their advisory and governance boards with selected talent that we feel they can rely on.
5. Most of our acquired firms will require partners to develop their go to market channels and we will help negotiate those alliances
6. We will take active roles in making sure we understand their financial and non-financial needs to take their products to market with a constant focus on moving these R&D companies into revenue producing entities.
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Many coating companies seem to be funded by the same defense agencies and yet very few of them actually seem to generate any real revenue post R&D; investment. Why will Abakan be different?

We think the government has a real need today for revolutionary products like the ones we have.

In the past, they invested in some “nice-to-have” technologies to see if they could advance a technology more than meet a market need that they really had. Cutbacks in defense budgets means the military is now more in the “repair and re-use” versus “buy everything new” mode of operations.

However, now that laws are changing and environmental groups are pushing the government to go green, they have a real need for better environmentally friendly coatings. There has actually been an change in federal regulations requiring all procurements actions to use environmentally sustainable alternatives where they exist. This then means that large markets exist as soon as alternatives are qualified, and Mesocoat is well down the path towards qualifiying their demonstrated and cost-effective solution into military systems. A lot is in the timing, as well as the cost-savings - MesoCoat's products can actually cost less than current alternatives.

The reason we think we will be different than other firms is that the army has already publicly endorsed us in their own commercialization brochures saying MesoCoat has the only product that they should be using to replace chrome. The government requires the use of chrome alternatives where they exist, and Chrome replacement is becoming a major PR nightmare for the US Government and every other firm right now and we have a solution.

We expect to be receiving orders soon from government agencies on many of our products. Our actual challenge is to get them to step up to the plate and be more creative about the way they test our products so that we can get revenue faster. Several of MesoCoat's and Powdermet's products are under consideration by 4 different armed services units.

Are you going to focus on Cermaclad or PComP sales initially?

We have actually developed a paying client with one PComP product so we'd have to say that is the first place we began commercialization efforts.

Our forecasts of Cermaclad sales dwarf PComP anticipated sales. However, we anticipate that we have another 16 months of testing and plant development to both get approved by a major oil player before and have a place where we can begin the commercialization effort before we can start to see significant revenues from Cermaclad. However, once we get approval from one major, we expect the flood gates to open on that product line.

But we do have an excellent revolutionary product to sell right now in the form of PComP-W and soon PComP-THH which are much needed and much better product than anything currently on the market so we have no reason not to focus immediate sales efforts on the PComP line to generate what we anticipate will still be a phenomenal revenue stream from those products. That income can help finance our other efforts.

What efforts are underway to try and commercialize your PComP product line?

Well we already have a paying client so we'd say one of our products is already in commercial process.

However, we have four major efforts underway:

1. We are hiring more product engineers to be able to build our products.
2. We are contracting with outside testing firms to provide credibility to our own internally tested product characteristics to help with the sales process.
3. We are breaking ground on the development of a new manufacturing plant in Ohio in one month so we will have more production capacity soon.
4. We are beginning a new branding and marketing process to gain more market recognition.
5. We are trying to increase the testing effort of our largest government partners. Our biggest efforts to date are to convince the Air Force to ramp up their testing schedule. In order to apply our materials on an air force plane, our materials have to be flight tested and undergo so many hours of flying time. We'd like them to use ten planes to test our products instead of one to reduce that testing time.
6. We have won new contracts to move along product development of a couple of products for new markets.

All in all, we have a lot of momentum right now and a lot of opportunity. But everyone is stretched thin so we need people to carry this momentum to a successful market introduction.

Why did you invest in Powdermet? It seems like a risky investment given their history.

We were presented an interesting opportunity to acquire a significant interest in Powdermet for a relatively small amount of money. This investment has two potential upsides.

1. First, it allowed us to increase our indirect ownership of MesoCoat (an additional 27%) beyond the shares that were available to us under our comprehensive three stage investment deal with MesoCoat.
2. Secondly, we recognized that several of the technologies that have been under development at Powdermet have tremendous market potential in their own right. We feel we can add some business insight into the firm to turn this business around from more of a lab and R&D facility into a successful commercial company.
3. This company has won 4 SBIR awards since we invested in it and has a backlog of grant funded projects that allow it to self fund their current R&D projects so it doesn't require much cash from Abakan at this time while we focus on raising funds for MesoCoat's expansion phase.
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How do you plan on allocating time to all your acquisitions given your current limited bandwidth for management?

We have a series of consultants who assist us with each acquisition each of whom plays a different role for us. It also helps that the first two entities have common lineage and we are familiar with the management teams of both firms so we don't need to spend a significant amount of time building trust levels with management like we would have to with some acquisitions.

Right now, we are focusing our attention on two key activities: raising funds and doing business development deals for MesoCoat. MesoCoat requires more of our immediate attention on the business development front as they have several late stage R&D products that will go to market soon.

Powdermet is probably 12-18 months behind MesoCoat in an overall commercialization strategy as they are still at early to mid stage R&D phases for their two primary product families. However we are beginning to look at the markets that they plan to address to make sure we are thinking comprehensively about how to position them for future success.

Will you be taking advantage of the “greening trend” occurring all over the world?

Most definitely. This trend will certainly help MesoCoat and Powdermet.

1. First, both companies are building new products that compete with but more importantly don't require the use of rare earth metals.
2. One of the primary purposes of building new harder, tougher materials is to extend the life of products through these advanced coatings which will cut back on the need for new steel production to replace those products hence reducing carbon emissions from steel production.
3. In the case of Powdermet, their MComP product in development has the opportunity to actually displace the need for more aluminum and steel in major building products thereby conserving our natural resources
4. In the case of MesoCoat, their PComP products are natural replacements to today's existing hazardous materials like hard faced chrome. As this product gets adopted by the market, we will be able to significantly reduce hazardous wastes.
5. MesoCoat's whole positioning of building 100-400 year life products supports the greening efforts all countries and companies are looking for.
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What additional resources will Abakan need as the firm successfully invests in other entities?

Our intent is to keep the management team at Abakan small and agile. However, we will add resources as needed to help manage the investments.

More likely than not, our growth will require us to bring on additional business development personnel to support the contracting and alliance development activities of the subsidiary investments. However, those resources may be placed within the operating companies themselves.

I've never heard of the discipline called "materials sciences" – what is it?

Well, it's a common expertise found in large industrial companies. Most people don't realize that manufacturers maintain a specialty engineering group that deals with all metallurgy issues. Once a product is designed to meet a certain level of function, material scientists then select the appropriate materials to be used in the manufacture that product. For instance when should steel be used instead of aluminum as a base metal for a product? Is a specialized thermal coating needed to allow the product to work in an extreme temperature environment? What type of corrosion protection does the product need based on where it is going to be used? These are the type of design questions materials scientists get involved with. In today's economy with rising raw metal prices, material scientists are becoming a very important and integral part of a product's market success.

What type of firms comprise this industry?

This industry is difficult to define as it is comprised of many different types of firms. Many companies have their own materials sciences departments with a whole host of experts. These departments are usually supplied by or supported by:

On the front end:

• coatings material providers, coating equipment providers, coating applicator firms
• cladding material providers, corrosion planning advisors

On the back end:

• corrosion detection firms, corrosion management firms, corrosion repair and removal firms

There are also some ancillary firms which support the sector including:

• distribution firms
• quality management firms
• project management firms, etc.

 

What does the term "surface engineering" actually mean?

Most products are comprised of many materials (pure base metals, composite alloys, plastics, etc.) and many different types of coatings (aesthetic, corrosion protection, thermal insulation, etc.). For cost and performance reasons, the structural or functional requirements are best met with a different material (such as carbon steel) while different surface characteristics (wear and corrosion resistance, color, etc.) are desired. Surface engineering is the discipline of modifying the surface to provide these desired properties. This process is called "surface engineering" or "surface modification" and it's a very profitable piece of the industry segment with very high value add. For example, in the pipeline sector, carbon steel costs around $1000/ton, where stainless steel costs $20,000/ton, or 20X as much. Using cladding technology, the cost of a stainless clad pipeline is only about $5000/ton, or 25-40% of a pure stainless steel alternative.

How many different ways are there to modify the surface of a substrate metal?

That depends on what type of expert you ask. An engineer, a corrosion expert and a materials scientist might all give you different answers. Typically, there different ways to modify a surface:

• Modifying the surface through a chemical or electrochemical (anodizing of aluminum) process;
• Modifying the surface without changing the surface chemistry (heating, machining, blasting, peening); and
• Modifying the surface by adding a new material onto the surface (painting, welding, plating, galvanizing, powder and thermal spray coating, tiling, and cladding).

Manufacturers often outsource this part of the product development process to third parties.

You mention that you are going after the "corrosion" and "wear" markets. I understand corrosion. How do you define wear and what causes a metal product to wear?

Wear results in premature removal of the surface. You can think of wear as two products rubbing together and one of them being removed because of that process.

Wear is generally affected by several factors, among them materials selection, friction, surface load, sliding distance, surface hardness, surface finish, and lubrication. Controlling these factors can contribute to a successful application by helping to prevent wear and premature product failure.

Alternatively, wear can be defined as both material loss and deformation at contact surfaces. Wear results in particle generation and surface degradation, and these byproducts often accelerate the wear process leading to rapid failure. Alternatively, wear can lead to high leakage, pumping losses, loss of capacity, and even catastrophic failure. Mesocoat has the ability to engineer materials for optimum performance in wear environments.

What do you mean by "your products are tough?"

Tough is synonymous with robust. Ceramics, like glass, are generally very wear resistant but are not tough (eg, they fail irrepairably by breaking). Metals, due to their ductiliuty, are tough - meaning they dent and deform, but do not break----- but are not as wear resistant as glass.

Toughness is the ability of a material or metal to resist fracture, plus the ability to resist failure after the damage has begun. A tough metal, such as cold chisel, is one that can withstand considerable stress, slowly or suddenly applied, and which will deform before failure.

Another definition is that toughness is the ability of a material to resist the start of permanent distortion plus the ability to resist impact shock (a hammer).

What does PComP mean?

PComP is the brand name given to a family of coating solutions developed by MesoCoat. The name stands for Particulate Microcomposite Powders which is kind of a fancy way of saying they are coating powders made out of more than one fine substance that are produced at a nanoscale and then aggregated into a micro scale to give them unique property characteristics like increased ductility , toughness and strength.

Mesocoat has engineered its PComP products to be both strong and wear resistance (like glass), but also tough (like metal). We do this by combining hard (wear resistant) and tough (metal) regions at a very fine scale, and in a patented manner.

Is there more than one type of PComP?

Yes, right now we have four PComP products getting ready for commercialization. Each of them addresses a very large marketplace.

Coating type	Trade name	Recommended applications
Nano-engineered lightweight cermet (blend is made from a low density ceramic whose composition and unique microstructure allows it to act as a solid lubricants)	PComP-ST	Tough, ductile, and lightweight replacement for EHC, WC-Co, and cermet WC-Co-Cr HVOF thermal spray coatings on landing gear and other aerospace components where weight and spallation resistance is at a premium
Nano-engineered nitride-based cermet	PComP-T 2 versions: THT - hard and tough THH - High hardness	Tough, ductile replacement for EHC and WC HVOF thermal spray coatings. Ideal coating for metal-seated ball valves, hydraulic cylinders, shaft seals, and any applications requiring improved corrosion resistance and wear characteristics. 3-20 times the wear and corrosion resistance of hard chrome plating.
Nano-engineered WC-Co coating (tungsten carbide cobalt).	PComP-W	Premium, High hardness, high toughness WC-Co Replacement for conventional HVOF WC coatings where improved Ductility, toughness, and hardness of the coating will extend the life of the component. Used in slurry and down-hole applications where cost of failure or replacement is very high.
Nano engineered carbide cermet (titanium carbide)	PComP-TC	Currently under development. Expected to provide higher hardness than WC, and maintain toughness characteristics.

Each PComP product is meant to replace an already best selling coating material in the market today.

We're not inventing new problems, we solving existing problems companies have with their materials by inventing next generation coatings that are better, longer lasting and more environmentally friendly.

Do you plan on developing new PComP products?

Yes, we will develop new products as long as we first determine that there is a very large market for a new product.

We are using SBIR funding to do that new research. However, we don't want any new research to take away from our current commercialization efforts of the first four products that are already in final stages of development.

That said, we recently won a grant where we are developing a new PComP product to address the need for new coatings in the zinc pot roll market which is a very large market, an using technology that which also serves the diesel and two stroke engine market. However, it's unlikely we will sell to that market within the next two to three years.

What is so unique about the PComP Product line?

Many companies know how to make products either "tough" or "hard." We have hit the holy grail by being able to manufacture a corrosive resistant product that has high strength, hardness and fracture toughness.

These are normally inversely proportional characteristics. Toughness normally decreases as hardness increases.

Note: The hardness of a metal limits the ease with which it can be machined. But PComP products have a smooth finish so they need minimal if any grinding to get a smooth finish.

Aside from hardness and toughness, is there anything else unique about your coatings that competitors can't match?

We have increased the ductility factor in our PComP products so basically we have not only made a harder object, we are allowing that harder object to bend more and not break (think of a pipe moving in the sea due to constant changes in ocean currents).

We also have increased spallation resistance. That's a big advantage to us when clients want really thick coatings. Our competitors will be limited to the thickness of coating they can apply because their coatings will break when bended if they get too thick.

Our PComP coatings can be applied in many different thicknesses ranging from 1 mils (1/1000 of an inch) up to 50 mils thick (1/32”) without spalling (peeling like paint chips) whereas our competitors can't. Current technology in chrome and carbides is limited to less than 10 mils. (this means we can repair and refurbish components that have more wear damage than our competitors).

Also, in addition to ductility, we have improved our materials overall product longevity, so our coating solutions will last allowing companies to increase the wear period warranties for their own products giving them a market advantage.

Lastly, we can machine ten times faster and get ten times more throughput through a finish grinder so we can produce finished product faster than our competition.

What is the most difficult obstacle for you to make a new PComP product?

Actually, it is determining the customer's needs and expectations for a new product. Once we have the property characteristics needed for an object, we have an excellent research platform to develop new products with fairly standardized processes. However we don't want to be in the custom product development business. We only want to target markets where there is a 50 million dollar minimum coating market that we think we can capture with each product.

Are all PComPs made the same way?

No, actually each PComP product represents a different type of product architecture. Although similar engineering techniques are used in a common platform, several process steps needed to create a particulate fine powder like the mixing and sintering steps differ for each coating powder we make. The steps and materials we use depend on the property characteristics we are trying to achieve.

Why can't other companies replicate what you do when you become successful in your sales efforts?

Many nanotechnology companies have failed because they haven't learned what we have over the last ten years.

It's important to make a product that can be consistently and easily applied through a cost effective application process. Thermal spray technology places demands on nano-scaled products where they disintegrate due to the high heat levels. We have overcome this in three ways.

First, we are called MesoCoat for a reason. Our products are made at the nanoscale but are aggregated to a larger (meso and micro) scale to be able to withstand the heat process.

Secondly, we have perfected the process of creating a ductile coating around our core materials that adds the ductile metal phase in an absolutely repeatable and uniform manner- otherwise it simply does not work. This is the basis for our outstanding combination of property characteristics and that is a patented process. –that gives us our repeatability.

Lastly our aggregation process involves a cladded outer shell which "seals" in the desired chemistry and allows us to withstand the heat applied through a thermal spray process. It's a more expensive manufacturing process but it works. It"s allowed us to create an ultra premium product compared to many of the nano companies that have failed in the last few years.

Will you only be using thermal spray as an application approach?

No we are actually planning on using our cladding process for some PComP materials to give a whole different type of high strength bond but this would be an added step used for specialized products and equipment.

We are also looking at newer cold spray techniques that eliminate the need to handle compressed gases like hydrogen, but this requires us to develop ultra fine powders. We are considering a business model where we will be the applicator for hot thermal spray artifacts and sell ultra fine powders to other applicators that do the cold spray technique. This cold spray technology is still being worked on today and we don't know if the application process will affect the overall product characteristics we can achieve with hot thermal spray. This is still on the drawing board.

We will be keeping up to date on new application technologies and hopefully be inventing some new application techniques as we progress.

Do you think companies will pay more for a premium product?

Yes, but we have to prove the benefits to them. We talk about a three-seven fold life improvement for our materials - but of course it depends on the application area. In some areas such as drilling, the cost of replacing a worn part may be hundreds of thousands of dollars, so cost is not an issue (this is the PComp-W ultra-premium target). Others want "good enough" at the lowest possible cost (PComP-T target).

But we have to show them results. We have one commercial client who was initially skeptical of our claims until they went out and tested our product; now three different divisions of that company are ordering products from us. Buyers are less concerned about the cost of our coatings as they are about the cost of their downtime when they have to switch out tools in their production process, or wait for product to be plated, ground, and returned two weeks later.

Our costs are minimal in relation to lost revenue when they have to shut down for a shift to switch out materials. We just need to do a better job of showing potential clients that cost benefit analysis.

What is limiting your sale of these products today?

Three major obstacles face us:

1. First, many companies have extremely stringent qualification programs with hurdles that new vendors must pass. In some cases, they won't give final authorization of approval until a company can show they have the manufacturing capability to produce a certain volume of powders to meet their buying needs.
2. We are in joint test protocol programs with the Navy and Air Force and we are trying to work with these DOD departments to speed up testing to be able to get sizeable orders from the military. The federal government (and DoD and DOT) is required by law to purchase alternatives to chrome if they are qualified for use.
3. We currently have limited production capacity with the size and type of equipment that we have. We believe we can still increase the efficiency of our production process to get more powder out of our existing equipment; but longer term we need to have a new production facility to house larger equipment. Our goal is to get up to 20,000 pounds of annual production in the near term.
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What do you think sales could be for these products?

Again, that's a loaded question. Government contracts alone could be very sizeable.

In the proformas that you might have seen, we are only forecasting $1.5 million in sales next year and growing that base to $30 million by 2015.

Again, we are trying to be conservative as one supply contract (marine corp or landing gear producer such as Goodrich) will be worth that much.

Abakan wouldn't be investing in new plant and equipment if we didn't think we could be doing much better than that in a few years. The markets we are addressing, like chrome replacement, are enormous, hard chrome is a $3B annual business and we believe we have the most economical alternative for a large percentage of the applications in oil and gas, aerospace, and automotive and general industrial applications.

What does it cost to build a PComP Plant?

We are still finalizing construction estimates for a standalone 12000 sf PComP plant. (The plant we are currently building in Ohio is a combined PComP and Cermaclad plant) However the best estimate we have for land, plant and equipment costs for a 3 full cubicle plant is $4.4 million. It will take another $1.2 million in fixed and variable annual operating costs to run that plant on a two shift schedule.

I have never heard of this "clad" product, is it widely used?

It is a small portion of the steel market but it is still a $3.7 billion dollar market.

Regular carbon steel is strong, easy to weld and inexpensive, but does not provide corrosion resistance. Stainless and alloy steel is very, very expensive (20-200X as much), not very strong (more is needed) difficult to fabricate and weld, but has the desired corrosion resistance.

Cladding is the process of placing a layer of the alloy steel on the surface of carbon steel to make that pipe or structure more resistant to corrosion from elements like sulfur, acids, bases, seawater, which are combined with oil that gets brought up to the surface from the deep sea pipelines. In this way, as product that meets both needs (strength and corrosion resistance) is produced at a cost much less than pure alloy material.

Because of the much lower cost, firms prefer to clad the surface of steel with an alloy instead of having to buy pipe made entirely out of that alloy. Clad can be made from plate (which has weaker welds), by co-extrusion (requiring hundred million dollar plant investments and having poor bonding), or in seamless pipe by weld overlay. The primary weld overlay production processes (laser and weld cladding) are very slow and make this product very expensive, and have very long leadtimes. In addition, the weld beads (surface roughness) and dendritic microstructure of welds leads to poor fatigue (mechanical) performance in caternary riser applications. Cermaclad is 100 times faster, lower cost, and produces smoother coatings with better performance than weld overlays.

Experts suggest that if market pricing could drop 15%, the market for clad would expand 30%. MesoCoat has that ability.

What is the market size for cladding and is it expected to grow?

The current market size based on reporting figures from the big ten players in the various segments of the industry (mechanical and metallurgical bonded pipe) is around $3.7 billion with $1.2B coming from sales of clad plate and $2.2 Billion coming from sales of clad pipe. Much of that pipe is derived from cladded plate that gets rolled into pipe. Another $.5B was directed from smaller projects.

What type of competition is in this field? Will you be competing against small players or large conglomerates?

Several multibillion dollar firms that sell clad are Japan Steel Works, Voelst Alpine and Ametek. Those three alone combine for about 1.1 billion in cladding product.

Other large name companies participate in this segment like Schulz AG, Tenaris and Corus. However they don't break out their clad sales so although the latter two companies both produce about $12B in revenue, we don't know which percent is derived from clad vs. other products.

Several firms under 1 billion in sales are ProClad, Cladtech and Butting; all three sell mechanical and metallurgical clad product and represent about a billion dollars in sales combined,with ProClad being the largest at $600M of clad sales.

One of our key senior managers worked for and set up ProClad's initial cladding facilities prior to joining MesoCoat.

Is clad product made out of just one type of material?

No there are definitely many materials to clad product with. First it should be pointed out that the materials used to fuse onto another metal substrates surface can be called cladding materials but the actual process to fuse them is called cladding too. That might be a little confusing to some.

Cladding materials are chosen based on whether they need to provide corrosion resistance, wear resistance or higher hardness, depending upon the end use of the base part (substrate) being clad. That said most of the market today uses some form of steel like stainless steel as the primary cladding material although 625 and 825 nickel alloys are also used.

How did MesoCoat get into this area given that the company's strengths were in micro powder production?

Mesocoat was always looking at new ways to apply their coating materials recognizing that the economics that could be achieved with a new materials and a new application process combined could be far more substantial than today's technology approaches. In relation to a need to apply metal coatings to a navy ship deck (5 acre application), they came upon a unique optical approach to fuse cermets with a technology that had been applied in another industry sector first. Just by being creative, they recognized a whole new market could be developed by a technology the government already sent over $30M developing. The cermaclad process was the result of their extensive university, industrial, and national lab technical network to identify and obtain the best technologies in existence as applied to industry problems.

Can you describe how the technology works?

The laymen's perspective at a high level but I invite you to talk to our engineering team to get a better detailed understanding of the uniqueness of the technology:

1. we clean a substrate
2. we apply a cladding material paste like nickel alloy or stainless steel
3. we melt and fuse the nickel to the steel substrate very quickly (around 10,000 sq feet per day, similar to the speed of painting) using a high density energy light beam (with the same heat level as the surface of the sun)
4. the high intensity and fast time of heating creates a unique bond that doesn't affect the strength of the substrate
5. there is very little intermixing of the two materials surfaces
6. it becomes an ultra strong piece of steel
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What do you think will allow you to compete against the incumbent players in this space?

We have several differentiators:

1. We can make clad product cheaper because of our process efficiencies so we can therefore undercut the market in pricing by almost 20% and still make a tremendous profit margin.
2. We can build to order and cut customer leadtimes and inventories by 80% because of this fast process. We can produce a mile of pipe in a month instead of in a year with one production line.
3. Our initial testing results show that we will have a better metallurgical bond then most every other player in the market with little to no dilution of the substrate, and without the cracking and dilution problems of weld overlay.
4. We are developing a whole new process to be able to coat inside the diameter of pipes- where there is a real market need today. Laser welding can do internal diameter too but it won't have as smooth a finish as our final clad pipe.
   - By doing the ID of the pipe, we won't leave a seam like the other technologies so there is less of a chance of future corrosion – big selling point.
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In the business plan you mention short arc versus long arc applications? What's the difference?

First, it should be said that we are only focusing on bringing our "long arc solution" to market right now. That's the CermaClad technology.

The short arc technology utilizes a lamp head that is approximately 1-3mm long (as compared to the 8 to 20 inch long arc lamp head design in cermaclad). It is actually an entirely different technology from the long arc lamp. However, the technology also uses high intensity light in a similar way that could be used in a cladding process. The intent of the short arc CermaClad solutions is to be able to clad smaller and more complex objects like valves, flanges, elbows and fittings that can't be addressed by the design of the long arc system.

MesoCoat is going to be seeking high power optics and laser system partners who can help develop this specialized equipment without diluting the Company's key employees from their current oil market focus for Cermaclad.

Is the strength of the bond produced different for Cermaclad as compared to the bond produced by laser cladding or weld cladding?

All three types of cladding can meet buyer specifications for property characteristics, so although we may have a better bond, a buyer could choose any of these manufactured products.

We think price will become a key differentiator over product quality. More and more companies would like to be using this product but we need to get the price down. Surprisingly, it's the cost of the cladding material that represents about 70% of the total cost structure for a production run.

Right now we plan on buying tried and tested cladding source material from an existing vendor to speed time to market but eventually we will have the capability to produce our own cladding materials and that will allow us to make an even better profit margin form this service. Our profit margins are already forecasted for about 65%.

Where will you manufacture this product- in Cleveland?

Even though we are building a Cermaclad production line in our new plant, the intent of that Ohio plant is to be a demonstration and R&D; facility. We'd like to move most of our current testing out of NASA and into the new plant once we get the new lamp head built.

We anticipate our first true pipeline production facility to be in Brazil or in the Houston markets dependent on where we sign our first deal and with whom. We do expect to convert the ohio plant into clad steel products for the infrastructure and construction market serving the northeastern states as the clad rebar and angle iron products receive AASHTO and DOT (highway and transportation officials and department of transportation) qualifications, and we are working with our state and national congressional delegation to modify the way DOT accounts (costs) for maintenance and repairs to help speed transition to metal-clad products where Cermaclad will dominate.

Will you have the same type of plant design as the PComP plant? Will the cost be more or less than that of the Euclid plant?

No, the size and type of plant design will be very different. Cermaclad is a continuous production line whereas PComP is run more like a batch manufacturing process. Due to the size of the steel pipes we will be coating, more space is needed for a Cermaclad plant for logistics.

A typical 4 line Cermaclad plant will be much more capital intensive than a PComP plant but the revenue that can be derived from it will be significantly more to.

• A 4 line plant is expected to cost about 10 million dollars with equipment
• Another 1.6 million in annual operations' labor costs for one shift
• 2.2 million in labor costs for 2 shift operations

 

What type of revenue can be generated from a single plant?

There are many factors that will determine the profitability of a plant. From a revenue perspective, it really depends on which type of corrosion resistant alloys or wear resistant materials are used (stainless steel, 625 or 825). Each cladding type has different expected profit margins. A typical plant should generate revenues of $80 million per plant per shift at full capacity for 625 clad pipe.

Why can't we sell this solution to the market now? What is the delay?

We need to be certified by a major oil vendor that our metallurgical bond is as good as the rest of the product in the industry. We are trying to do that with Petrobras and Chevron at this time.

However, we are still in R&D; phases on some of our approach. For instance we are still redesigning a new lamp head to be able to coat the interior of pipes. This solution still needs R&D; and some testing but we are quite confident that the solution will be market ready within the next 18 months.

What is your manufacturing execution strategy for PComP?

We will build out production capability as needed on the PComP line. The new facility in Cleveland can act as both a demonstration and production facility. However we won't have that much capacity for thermal spray application since it will only house one cubicle.

By increasing our powder production and working on improving powder efficiencies, we should be able to keep up with demand on the powder sales side (government contracts only); however, we may fall short on thermal spray application if we get large orders. Order size and location will determine whether we invest in a new plant for PComP production. It's unlikely we will have a non US production facility for PComP's.

What is your manufacturing execution strategy for Cermaclad?

We have a different viewpoint on the Cermaclad business. This is going to be a global business for us immediately. We plan on building 4 key facilities to support global sales. Most likely they will be one each in the USA, Brazil, and Saudi Arabia to Kazakhstan coast area and lastly one in Singapore to India southeast Asia corridor. These regions will allow us to meet demand in any region.

Since 10 million plus in capital is needed for each new building, we will most likely be taking a partnering strategy to go into most of these markets and help develop the potential of that market where MesoCoat provides the technology expertise and the backing partner provide the capital to get the plant up and running.

Who is responsible for buying the base carbon steel prior to cladding it?

If MesoCoat goes direct to market without a middleman like a Tenaris, MesoCoat would be responsible for buying the steel. They have to finance the steel purchase and generally oil companies take that into account in terms of how they pay installments on contracts. A mile of steel pipe could cost $400,000 or more.

If MesoCoat went through a middleman, then that company would pay for the base steel costs and all shipping costs.

It is possible to mark up the base cost of steel prior to applying cladding and make a profit on that part of the transaction. However, it will require additional capital on the part of MesoCoat (or another entity like Abakan Financial Services Corp.) to float that steel's purchase prior to order execution

How difficult is it to add a second shift onto a plant?

It is standard practice to either extend the hours of the first shift personnel (from 8 to 9 or 12 hours) or add a whole new shift of personnel. Detailed work plans have been done identifying which positions are variable for second shift hiring.

An additional $618,000 in labor costs would be added per shift.

What risks are there to your forecasted revenue in the business plan?

We try to outline most risks in our business plan but the 2 biggest risks would probably be:

1. The time it takes to get approved by a new customer. That could delay the planned timing of our revenues, and
2. getting a new customer to sign a $20 Million deal with a company our size that has our balance sheet

We feel comfortable in our technology but there is always the risk that customers won't switch to a new supplier or feel as comfortable with a new technology process as compared to the one they currently use. The biggest risk is that they will require additional rounds of testing, or they will devise new tests or hoops that we must jump through that current suppliers do not. We are managing this risk through partnerships with key industry consultants, and with the formation of technical working groups where we get key technical validator buy-in on the testing schedule and testing labs before completing certification testing.

However there is no guarantee that all required customer buy-in on the test plan is obtained in advance.

Once they test our materials and see that the actual process is faster and the actual end product has a more cohesive bond than existing laser methods, We think we can convince our prospects that we're a reliable company and can attract the financing necessary to allow us to grow but we're very cognizant that our growth will require additional capital for new plant capacity.

Why should I take the risk of investing in this round instead of waiting until the technology is completed and tested on an actual client?

We're looking for investors who expect some level of risk in their investments. For that risk, they will be rewarded with exceptional returns.

Once a deal is signed with a major, this will no longer be a speculative company.

We anticipate many investment companies will be seeking us out to work with us on different forms of secured debt financing especially if we get the types of long term contracts we are expecting and have been discussing with the majors like Petrobras, Exxon, and Chevron.

Assume we will need later round equity funds as this company takes off but those investors will be offered good returns, not the great returns we are expecting for this round of investors.

How many additional rounds of capital will be needed to execute your plant strategy?

A Cermaclad plant will have a payback period of less than 4 months running at 80% utilization. Once we finance the first plant, we could use the cash flow to finance additional plants. However that may slow down our market penetration.

The amount of capital we need will be dependent on many factors:

• Our ability to keep our existing plants running at full capacity
• Our success at generating partnerships in different world regions where our partners invest all the money in the plant
• Our success at getting state supported grants to partially fund new plants
• Our cash distribution strategy
• Our timing to enter into new markets outside the initial planned markets
• Etc.