November 13, 2014
EXHIBIT 10.1
November 13, 2014
Mr. Xxxxxx Xxxxxx
Director and CEO
Abakan Inc.
0000 X. Xxxxxxxx Xxxxx,
Xxxxx 000, Xxxxx,
Xxxxxxx 00000
X.X.X.
Dear Xx. Xxxxxx:
UP Scientech Materials Corp. ("UP Scientech") is pleased to present Abakan Inc. ("Abakan") this letter
agreement regarding its proposed capital injection and business cooperation with respect to Abakan's and
its subsidiary MesoCoat, Inc.'s ("MesoCoat's") PCompP™ and CermaClad™ technologies. For purposes
of this letter, Abakan and MesoCoat shall be hereinafter jointly referred to as the "Company."
For purposes of this letter:
a) "PCompP™" shall mean coatings employing nano-structured ceramic-metal composites formed with
a nano-composite core and binder coating.
b) "CermaClad™" shall mean the use of a high intensity light source captured in a reflector to rapidly
fuse CRA, metal and ceramic coatings on steel pipe, plate, bar and other surfaces.
c) "CermaClad™ for Plate" shall mean CermaClad™ for coating steel plates.
d) "CermaClad™ for Other Applications" shall mean CermaClad™ for coating surfaces other than steel
plates such as steel pipes and bars.
e) "CermaClad™ for Pipes" shall mean CermaClad™ for coating steel pipes.
f) References to PCompP™ and CermaClad™ shall include future Company products and technologies
which fall within these definitions but shall not include other products or technologies.
We believe that this strategic alliance of UP Scientech and the Company constitutes a compelling
opportunity to commercialize and expand the markets for the unique and valuable technology developed
by the Company.
UP Scientech welcomes the prospect of working with the Company in order to consummate a mutually
beneficial transaction. This letter sets forth the basis upon which UP Scientech proposes, subject to
execution of definitive agreements, receipt of internal/regulatory approvals and satisfaction of certain
other conditions as described herein or in the definitive agreements, to proceed with such a transaction.
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1.
UP Scientech Purchase of Abakan Shares
UP Scientech and Abakan intend to enter into a share subscription agreement (the "SSA"), pursuant to
which UP Scientech shall purchase 7,500,000 voting common restricted shares of Abakan (constituting
9.52% of the total issued and outstanding voting shares of Abakan on a fully diluted basis, post the
issuance of the 7,500,000 shares to UP Scientech or 8.95% of the fully diluted total shares post the
issuance of the 7,500,000 shares) at a price of US$0.40 per share for an aggregate purchase price of
US$3,000,000.
The Company proposes to use the proceeds from this share subscription agreement as outlined below.
Description of Use of Proceeds
Amount Raised
$3,000,000
MesoCoat G&A, Taxes & Utilities
450,000
MesoCoat PComP Capex & Consumables
925,000
MesoCoat Cermaclad Budget
220,000
MesoCoat AP (including amounts owed to Powdermet)
810,000
Alberta
35,000
Abakan G&A, AP
560,000
TOTAL
$3,000,000
2.
Director Appointment
(a)
On the closing of the SSA, Abakan's 1) Board of Directors shall appoint one individual, tabled by
UP Scientech, to serve as a member of Abakan's Board of Directors for a term that shall end the
earlier of 3 years from the date of appointment or the date on which UP Scientech's fully diluted
ownership of Abakan falls below 6.0%; 2) over the duration of the term in which the director
tabled by UP Scientech serves on Abakan's Board of Directors, Xxxxxx Xxxxxx, Xxxxx Maz, The
Xxxxxx and Xxxxx Xxxxxx Family Trust and the Tarija Foundation (the "Shareholders") shall
agree to vote in favour of the director tabled by UP Scientech at any annual or special meeting of
Abakan's shareholders called for the election of directors; and 3) Abakan shall cause the
Shareholders to issue a letter prior to or simultaneously upon execution of the SSA, undertaking
that they shall vote in favour of the director tabled by UP Scientech at any annual or special
meeting of Abakan's shareholders called for the election of directors during the term mentioned
above. Such appointed director shall have all rights that a non-executive director normally has,
including but not limited to discussion and approval at Board of Directors and committee
meetings of the budgets that are present by management, and the right to receive biweekly cash
flow statements.
(b)
Subsequent to the closing of the SSA, if the term of service of the individual, tabled by UP
Scientech, as a director expires, or such individual is not elected as a director at an annual or
special meeting of Abakan's shareholders, then Abakan's Board of Directors shall permit UP
Scientech to designate an observer to attend regularly scheduled or special meetings of the Board
of Directors and committee meetings, having access to any documents available to a non-
executive director, including but not limited to, the budgets that are presented by management
and biweekly cash flow statements, so long as UP Scientech holds no less than 6% of the voting
shares of Abakan.
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3.
Information to be Provided to UP Scientech
(a)
The Company shall further provide to UP Scientech necessary information and reasonable
resources and assign necessary people to assist UP Scientech to understand and evaluate the
strength and edge of the PComPTM products, including but not limited to providing product
manuals, brochures and information, delivering sufficient product samples for testing, and
furnishing training of UP Scientech's sales and technical representatives.
(b)
The Company has furnished UP Scientech with its plan to expand the production capacity of
PComPTM products to 18 tons (1.5 tons per month), and shall provide monthly updates of the
execution status to UP Scientech for its information.
4.
Agreement to Enter into Additional Transactions
UP Scientech and the Company intend to enter into the following additional transactions described in this
Section 4. The parties anticipate that to facilitate the proposed transactions, both parties need to further
negotiate, finalize, execute and deliver the following definitive agreements (containing customary
representations, warranties, covenants, indemnities and conditions to closing, as appropriate):
(a)
PCompP™ Exclusive Sales Agency Agreement. An exclusive agency agreement (the "Sales
Agency") for the PComPTM products between UP Scientech and the Company for the sale of
PComPTM products in Japan, Korea, China and Taiwan ("Jurisdictions").
(i)
UP Scientech shall earn a sales agency commission equal to 10% of the revenue
generated from the sale of PComPTM products in the Jurisdictions during the first year of
the term of the Sales Agency and a percentage to be negotiated for the period following
the first year of the Sales Agency.
(ii)
The Sales Agency shall have a three-year term, starting from the date on which the
Company can deliver to UP Scientech PComP™ W104, W333 and W611, PComP™ T45
and T48, PComP™ M144 and MB05™.
(iii)
Upon expiration of the initial three years, the Sales Agency Agreement shall be
automatically renewable for an additional one year renewal term upon the election of UP
Scientech, subject to satisfaction of the Minimum Sales Volumes for the initial three
years as shown on Exhibit A. The terms and conditions for renewal after such additional
one year renewal term shall be determined by the parties hereto.
(b)
Exclusive PComp™ License. After UP Scientech exercises its right to establish a PComP™ Joint
Venture and upon such PComP™ JV Company being duly incorporated under Section 5, the
Company shall grant to the PComP™ JV Company an indefinite exclusive non-royalty bearing
technology license agreement to use PCompP™ technology to engineer, build, own, operate and
maintain a plant to manufacture PComPTM powder products in Taiwan for sale in the
Jurisdictions.
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(c)
Exclusive CermaClad™ for Plate License. (i) Upon the CermaClad™ for Plate JV Company in
Taiwan being duly incorporated under Section 5 and/or (ii) after UP Scientech exercises its right
to establish a CermaClad™ for Plate Joint Venture Outside of the Jurisdictions (defined as those
territories outside of the Jurisdictions) and upon the CermaClad™ for Plate JV Company Outside
of the Jurisdictions being duly incorporated under Section 5, the Company shall grant to such
CermaClad™ for Plate JV an indefinite exclusive non-royalty bearing license agreement to use
CermaCladTM technology (i) to engineer, build, own, operate and maintain a production plant to
coat plate in Taiwan for sale globally (or globally but excluding the jurisdiction where such plant
is located if the CermaClad™ for Plate Joint Venture Outside of the Jurisdictions is established)
and/or (ii) to engineer, build, own, operate and maintain a production plant to coat plate Outside
of the Jurisdictions for sale in the jurisdiction where such plant is located unless otherwise agreed
by the parties, as applicable.
(d)
Exclusive CermaClad™ for Pipe License. After UP Scientech exercises its right to establish a
CermaClad™ for Pipe Joint Venture, and upon such CermaClad™ for Pipe JV Company being
duly incorporated under Section 5, the Company shall grant to the CermaClad™ for Pipe JV an
indefinite exclusive non-royalty bearing license agreement to use CermaCladTM technology to
engineer, build, own, operate and maintain a production plant to coat pipe in Taiwan for sale in
the Jurisdictions.
5.
Agreement to Establish Joint Ventures
UP Scientech and the Company shall establish a CermaClad™ for Plate Joint Venture in Taiwan. UP
Scientech shall have the right to require the Company to establish another up to two joint venture
companies in Taiwan and one joint venture company Outside of the Jurisdictions (together with the
CermaClad™ for Plate Joint Venture in Taiwan, "JV Companies") to build and operate plants to
manufacture PComPTM and CermaCladTM products. The primary terms of the joint ventures shall be as
follows:
PComPTM JV Plant
(a)
UP Scientech shall have two years to exercise its right to require the Company to establish a
PComP™ Joint Venture from the date the Company completes the expansion of its production
capacity of PComP™ to 18 tons per year (1.5 tons per month) and notifies UP Scientech in
writing (the "Initial Date") of the increased production capacity.
(b)
UP Scientech shall subscribe to 80% of the shares of the PComP™ JV Company in cash, which
subscription shall pay for 100% of the startup costs associated the PComP™ JV Company plant,
and the Company shall license the know-how and technology to the PComP™ JV Company in
exchange for 20% of the shares of the PComPTM JV Company.
(c)
The plant can only be built in Taiwan.
(d)
UP Scientech shall contribute operating expertise, sales channels for the product and assist the
PComP™ JV Company to protect PComPTM related technology.
(e)
The PComPTM JV Company shall be licensed to sell PComPTM products only within the
Jurisdictions, unless otherwise agreed by the Company.
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(f)
UP Scientech and the Company shall in good faith negotiate, agree on and execute a joint venture
agreement and the license agreement within three months of UP Scientech's exercise of its right
to form a PComP™ Joint Venture.
CermaCladTM Plate JV Plant - Taiwan
(a)
Within two (2) months after this letter is executed by Abakan, UP Scientech and the Company
shall in good faith and with best efforts (i) complete the financial projection and the timeline to
establish the CermaClad™ for Plate Joint Venture - Taiwan and the timeline to engineer, build,
own, operate and maintain the CermaClad™ Plate JV Company Plant – Taiwan, (ii) negotiate,
agree on and execute a joint venture agreement and the license agreement, and (iii) proceed with
establishment of the CermaClad™ for Plate Joint Venture - Taiwan.
(b)
UP Scientech shall subscribe to 51% of the shares of the CermaClad™ for Plate JV Company -
Taiwan in cash, which subscription shall pay for 51% of the startup costs associated with the
CermaClad™ Plate JV Company Plant – Taiwan, and the Company shall license without royalty
the know-how and technology to the CermaClad™ for Plate JV Company – Taiwan and shall pay
for 49% of the startup costs associated with the CermaClad™ Plate JV Company Plant – Taiwan
in exchange for 49% of the shares of the CermaClad™ Plate JV Company - Taiwan.
(c)
The plant can only be built in Taiwan.
(d)
UP Scientech shall contribute operating expertise, sales channels for the product and assist the
CermaClad™ for Plate JV Company - Taiwan to protect CermaCladTM Plate related technology.
(e)
The CermaClad™ Plate JV Company - Taiwan shall be licensed to sell CermaCladTM Plate
products globally, until such time, if ever, that UP Scientech exercises its right to require the
Company to establish the CermaClad™ for Plate Joint Venture – Outside of the Jurisdictions, and
upon then the CermaClad™ Plate JV Company – Taiwan's license to sell CermaCladTM Plate
products would be excluding the jurisdiction where such CermaClad™ Plate JV Company –
Outside of the Jurisdictions is located, unless otherwise agreed upon by UP Scientech and the
Company.
CermaCladTM Plate JV Plant – Outside of the Jurisdictions
(a)
UP Scientech may exercise its right to require the Company to establish the CermaClad™ for
Plate Joint Venture – Outside of the Jurisdictions until the later of two years from the Initial Date
or from the date that the Company opens its first CermaClad™ Plate plant.
(b)
UP Scientech shall subscribe to 49% of the shares of the CermaClad™ for Plate JV Company–
Outside of the Jurisdictions in cash, which subscription shall pay for 49% of the startup costs
associated with the CermaClad™ for Plate JV Plant– Outside of the Jurisdictions, and the
Company shall license without royalty the know-how and technology to the CermaClad™ for
Plate JV Company – Outside of the Jurisdictions and pay for 51% of the startup costs associated
with the CermaClad™ for Plate JV Plant– Outside of the Jurisdictions in exchange for 51% of the
shares of the CermaClad™ Plate JV Company – Outside of the Jurisdictions.
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(c)
UP Scientech shall contribute operating expertise, sales channels for the product and assist the
CermaClad™ for Plate JV Company – Outside of the Jurisdictions to protect CermaCladTM Plate
related technology.
(d)
The CermaClad™ Plate JV Company – Outside of the Jurisdictions shall be licensed to sell
CermaCladTM Plate products in the jurisdiction where such CermaClad™ Plate JV Company –
Outside of the Jurisdictions is located, unless otherwise agreed by UP Scientech and the
Company.
(e)
UP Scientech and the Company shall in good faith negotiate, agree on and execute a joint venture
agreement and the license agreement within three months of UP Scientech's exercise of its right
to form a CermaClad™ for Plate Joint Venture – Outside of the Jurisdictions.
CermaCladTM Pipe JV Plant
(a)
UP Scientech may exercise its right to require the Company to establish the CermaClad™ for
Pipe Joint Venture until the later of two years from the Initial Date or from the date that the
Company opens its first commercial four-line CermaClad™ pipe plant.
(b)
UP Scientech shall subscribe to 40% shares of the CermaClad™ for Pipe JV Company in cash,
which subscription shall pay for 50% of the start up costs associated with the CermaClad™ for
Pipe JV Plant, and the Company shall subscribe to 50% of the shares of the CermaClad™ for
Pipe JV Company in cash, which subscription shall pay for 50% of the start up costs associated
with the CermaClad™ Pipe JV Plant and license the know-how and technology to the
CermaClad™ for Pipe JV Company in exchange for another 10% shares of the CermaClad™ for
Pipe JV Company.
(c)
The plant can only be built in Taiwan.
(d)
UP Scientech shall contribute operating expertise, sales channels for the product and assist the
CermaClad™ for Pipe JV Company to protect CermaCladTM Pipe related technology.
(e)
The CermaClad™ for Pipe JV Company shall be licensed to sell CermaCladTM Pipe products only
in the Jurisdictions, unless otherwise agreed to by the Company.
(f)
UP Scientech and the Company shall in good faith negotiate, agree on and execute a joint venture
agreement and the license agreement within three months of UP Scientech's exercise of its right
to form the CermaClad™ Pipe Joint Venture.
6.
Ownership of Intellectual Property
Each party shall own its background intellectual property.
Any new improvements, derivatives or new methods to produce or deliver PCompP™ or CermaClad™
products or services developed by any of the respective JV Companies (“New IPs”) shall be owned
equally by UP Scientech and the Company and assigned to a new company, to be formed by the parties
hereto with equal equity ratio, and licensed to the respective JV Companies for no additional
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consideration. The new IPs shall not be assigned, entrusted, licenced, pledged, or abandoned without the
consent of both parties.
Both parties hereto shall have complete access to all JV facilities, equipment, books and records at all
times.
7.
Notices
Any and all notices or other communications or deliveries required or permitted to be provided hereunder
shall be in writing and shall be deemed given and effective on the earliest of (a) the date of transmission,
if such notice or communication is delivered via facsimile (provided the sender receives a machine-
generated confirmation of successful transmission) at the facsimile number specified in this Section prior
to 6:30 p.m. (Florida time) on a Business Day, (b) the next Business Day after the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile number specified in this Section
on a day that is not a Business Day or later than 6:30 p.m. (Florida time) on any Business Day, (c) the
Business Day following the date of mailing, if sent by U.S. nationally recognized overnight courier
service, or (d) upon actual receipt by the party to whom such notice is required to be given. The address
for such notices and communications shall be as follows:
If to Abakan:
0000 X. Xxxxxxxx Xxxxx, Xxxxx 000
Xxxxx, Xxxxxxx 00000
Attn: Xxxxxx Xxxxxx
Telephone: 0 000 000-0000
Fax: 0 000 000-0000
Email: xxxxxx.xxxxxx@xxxxxxxxx.xxx
If to UP Scientech:
UP Scientech Materials Inc.
Xx. 0-0, Xxxxxxx Xxxx
Xxxxxxx Xxxxxxxx
Xxxxxxx Xxxxxx, 00000
Xxxxxx R.O.C.
Attn: Xxxxxx Xxxxx
Telephone: 000 0 0000000
Fax: 000 0 0000000
Email: Xxxxxx@xxxxxxx.xxx
8.
Arbitration
Any controversies incurred or related to this letter of intent shall be resolved in an amicable way,
provided that any controversies that cannot be resolved shall be submitted to the Hong Kong International
Arbitration Centre in Hong Kong for arbitration.
9.
Due Diligence
From time to time before and/or after closing of the capital injection of US$3 million under the SSA, UP
Scientech may need to conduct certain due diligence or require certain information, which may include
but not limited to the provision of information covering the technology owned, used, developed, and to be
developed by the Company and/or their affiliates as well as the technology licensed by any third parties to
the Company and/or their affiliates and the technology licensed by the Company and/or their affiliates to
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any third parties. The Company agrees to fully cooperate and provide such information as requested by
UP Scientech subject to those obligations of confidentiality attendant to any such information.
10.
Required Approvals and Others
The above proposal shall be subject to corporate and regulatory approvals required by UP Scientech,
including but not limited to the Board of Directors' approval and the approval of or report to the Central
Bank of Republic of China (Taiwan).
Abakan will hold a meeting of the Board of Directors prior to execution of this letter to duly approve the
terms and conditions of this letter, including but not limited to provision of the observer position to UP
Scientech under Section 2(b) hereof. Abakan shall cause MesoCoat to perform its obligations hereunder.
11.
Fees and Expenses
UP Scientech and the Company shall pay their respective costs and expenses related to the proposed
transactions, including the costs and expenses related to preparation and negotiation of the definitive
agreements.
12.
Legal and Confidentiality
Subject to provision by Abakan of a copy of Abakan's meeting minutes of its Board of Directors duly
approving the terms and conditions of this letter, including but not limited to provision of the observer
position to UP Scientech under Section 2(b) hereof, this letter shall be binding on the parties hereto,
subject to execution of definitive agreements, receipt of internal/regulatory approvals and satisfaction of
certain other conditions as described herein or in the definitive agreements, to proceed with such a
transaction.
This letter is governed by and construed in accordance with Taiwan laws, without regard to principles of
conflicts of laws thereof.
UP Scientech requests that neither the Company, its directors, officers and employees nor its advisors
make any announcement or disclosure to third parties of UP Scientech's interest in this proposed
transaction or of the contents of this letter unless otherwise required by applicable laws and regulations,
under which the content of the announcement or disclosure shall be agreed by UP Scientech in advance.
We look forward to working with you on this transaction.
Yours faithfully
for and on behalf of
UP SCIENTECH MATERIALS CORP.
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/s/ Xxxxxx Xxxxx
Xxxxxx Xxxxx, Chairman
Agreed and accepted this 13th day of
November, 2014 for and on behalf of:
ABAKAN INC.
/s/ Xxxxxx Xxxxxx
Xxxxxx Xxxxxx, Director and CEO
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