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EX-10.1 - EXHIBIT 10.1 - BRAINTECH INCex101.htm
EX-10.6 - EXHIBIT 10.6 - BRAINTECH INCex106.htm
EX-10.3 - EXHIBIT 10.3 - BRAINTECH INCex103.htm
EX-10.7 - EXHIBIT 10.7 - BRAINTECH INCex107.htm
EX-10.2 - EXHIBIT 10.2 - BRAINTECH INCex102.htm
EX-10.8 - EXHIBIT 10.8 - BRAINTECH INCex108.htm
EX-10.9 - EXHIBIT 10.9 - BRAINTECH INCex109.htm
EX-10.5 - EXHIBIT 10.5 - BRAINTECH INCex105.htm
EX-10.4 - EXHIBIT 10.4 - BRAINTECH INCex104.htm
EX-10.11 - EXHIBIT 10.11 - BRAINTECH INCex1011.htm
EX-10.10 - EXHIBIT 10.10 - BRAINTECH INCex1010.htm
EX-32.2 - EXHIBIT 32.2 - BRAINTECH INCex322111309.htm
EX-31.2 - EXHIBIT 31.2 - BRAINTECH INCex312111309.htm
EX-32.1 - EXHIBIT 32.1 - BRAINTECH INCex321111309.htm
EX-31.1 - EXHIBIT 31.1 - BRAINTECH INCex311111309.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q


x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number 000-24911
 
BRAINTECH, INC.
(Name of small business issuer in its charter)

Nevada
98-0168932
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

1750 Tysons Boulevard
Suite 350
McLean, VA 22102
(Address of principal executive offices)
(703) 637-9780
(Issuer’s telephone number)


Securities registered pursuant to Section 12(b) of the Act:
None
(Title of class)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value
(Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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    x    No    ¨
 
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    x    No    ¨
 
Indicate by check mark whether the registrant is a large accelerated files, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer    ¨                                                                                     Accelerated filer    ¨
 
Non-accelerated filer    ¨                                                                           Smaller reporting company   x
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨
 
As of November 12, 2009, there were 69,826,860 shares of the registrant’s common stock, par value $.001 per share, outstanding.
 
 

 

Form 10-Q
TABLE OF CONTENTS
 
PART I
FINANCIAL INFORMATION
1
     
Item 1.
Financial Statements
1
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
2
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
9
     
Item 4.
Controls and Procedures
9
     
PART II
OTHER INFORMATION
9
     
Item 1.
Legal Proceedings
9
     
Item 1A.
Risk Factors
10
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
15
     
Item 3.
Defaults Upon Senior Securities
15
     
Item 4.
Submission of Matters to a Vote of Security Holders
15
     
Item 5.
Other Information
15
     
Item 6.
Exhibits
17

 


 
 

 

PART I - FINANCIAL INFORMATION
 
Item 1.   Financial Statements
 
Each of the following items is contained in our Condensed Consolidated Financial Statements and form part of this quarterly report.
 
(i)  
Condensed Consolidated Balance Sheets (unaudited) as of September 30, 2009 and December 31, 2008;
 
(ii)  
Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2009 and 2008;
 
(iii)  
Condensed Consolidated Statement of Stockholders’ Deficiency (unaudited) for the nine months ended September 30, 2009;
 
(iv)  
Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2009 and 2008; and
 
(v)  
Notes to Condensed Consolidated Financial Statements (unaudited) for the nine months ended September 30, 2009 and 2008.
 

 
1

 
 
 

 

 
Condensed Consolidated Financial Statements
(Expressed in United States dollars)
 
BRAINTECH, INC.

 
Three and Nine months ended September 30, 2009 and 2008
 
(Unaudited – Prepared by Management)


 



 
F-1

 

BRAINTECH, INC.
 
Condensed Consolidated Balance Sheets
(Unaudited – Prepared by Management)
(Expressed in United States dollars)
 
 
September 30, 
2009 
December 31, 
2008 
     
Assets (note 6)
   
     
Current assets:
   
 
Cash and cash equivalents
$
169,756 
$
2,446,538 
 
Restricted cash (note 6)
1,392,577 
 
Accounts receivable
290,190 
1,317,798 
 
Inventory
4,242 
13,705 
 
Prepaid expenses
27,208 
23,556 
 
1,883,973 
3,801,597 
     
Intangible assets and goodwill (note 3)
     
Fixed assets
52,045 
50,743 
     
 
$
1,936,018 
$
3,852,340 
     
Liabilities and Stockholders’ Deficiency
   
     
Current liabilities:
   
 
Accounts payable
$
1,096,809 
$
1,048,205 
 
Accrued liabilities (note 10)
1,651,985 
1,184,583 
 
Deferred revenue (note 4)
1,212,110 
1,260,510 
 
Due to related party (note 5)
139,914 
 
Due to letter of credit providers (note 6)
1,391,253 
 
Bank loan (note 6)
1,405,693 
2,104,376 
 
6,897,764 
5,597,674 
     
Stockholders’ deficiency:
   
 
Common stock (note 7):
   
   
Authorized: 200,000,000 shares, with $0.001 par value
   
   
Issued: 69,606,104 shares
69,606 
56,502 
   
(December 31, 2008 – 56,502,245)
   
 
Additional paid-in capital
36,222,214 
35,627,161 
 
Accumulated deficit
(41,253,566)
(37,428,997)
 
(4,961,746)
(1,745,334)
     
 
$
1,936,018 
$
3,852,340 

Description of Business and Future Operations (note 1)
Commitments and Contingencies (notes 10 and 11)
See accompanying notes to condensed consolidated financial statements.
 
 
F-2

 
 
BRAINTECH, INC.
 
Condensed Consolidated Statements of Operations
(Unaudited – Prepared by Management)
(Expressed in United States dollars)
 
     
 
Nine Months Ended
September 30,
Three Months Ended
September 30,
2009
2008
2009
2008
         
Sales
 
$
375,769 
$
3,581,679 
    $
281,680 
   $
1,375,309 
Cost of sales
4,761 
360,456 
(461)
140,143 
         
Gross margin
371,008 
3,221,223 
282,141 
1,235,166 
         
Operating expenses:
       
 
Research and development
476,677 
402,739 
145,361 
89,640 
 
Selling, general and administration
3,621,411 
3,797,523 
822,583 
829,670 
   
4,098,088 
4,200,262 
967,944 
919,310 
           
Operating (loss)/income
(3,727,080)
(979,039)
(685,803)
315,856 
           
Non-operating:
       
 
Interest income
1,263 
673 
25 
209 
 
Loss on disposition of fixed assets
(2,316)
(1,999)
(1,999)
 
Gain on settlement of debt
25,750 
 
Interest and financing expenses
       
   
Interest on bank loan
(76,917)
(60,828)
(36,312)
(18,862)
   
Fair value of equity issued as
       
     
compensation to bank loan guarantors
(2,440,705)
(2,440,705)
   
Other financing expenses
(13,042)
(25,075)
(11,038)
(19,490)
   
Bank loan guarantee expenses
(6,477)
(18,469)
(2,938)
(12,514)
   
(97,489)
(2,520,653)
(50,263)
(2,493,361)
         
Net loss and comprehensive loss for the period
$
(3,824,569)
$
(3,499,692)
$
(736,066)
   $
(2,177,505)
         
Loss per share information:
       
 
Basic and diluted
$
(0.07)
$
(0.08)
$
(0.01)
   $
(0.05)
           
           
Weighted average number of
       
 
Common shares outstanding
55,296,017 
46,053,031 
55,618,547 
47,146,302 
           

See accompanying notes to condensed consolidated financial statements.
 
 
F-3

 

BRAINTECH, INC.
 
Condensed Consolidated Statements of Stockholders’ Deficiency
(Unaudited – Prepared by Management)
(Expressed in United States dollars)
 
         
 
Common stock
   
Total
 
Number
 
Additional
Accumulated
stockholders
 
of shares
Amount
paid-in capital
deficit
deficiency
           
Balance, December 31, 2008
56,502,245 
$
56,502 
$
35,627,161 
$
(37,428,997)
$
(1,745,334)
           
Common stock transactions
         
 
(net of share issue costs)
         
 
Shares issued at $0.01 pursuant to
         
   
Bonus Stock Plan
14,750,000 
14,750 
132,750 
147,500 
 
Shares purchased for cancellation
         
   
pursuant to non-achievement
         
   
of performance milestones
(4,750,000)
(4,750)
(42,750)
(47,500)
 
Shares issued for services rendered
1,603,859 
1,604 
154,762 
156,366 
 
Shares issued and held in escrow
         
   
as security for payment
1,500,000 
1,500 
(1,500)
 
Release from escrow of 100,000 shares
         
   
held as security for payment
   
10,000 
10,000 
Forgiveness of promissory note for
         
 
subscription of common stock
   
100,000 
100,000 
Fair value of stock options expensed
-
-
241,791 
241,791 
Loss for the period
(3,824,569)
(3,824,569)
                   
Balance, September 30, 2009
69,606,104 
$
69,606 
$
36,222,214 
$
(41,253,566)
$
(4,961,746)

See accompanying notes to condensed consolidated financial statements.

 
F-4

 

BRAINTECH, INC.
 
Condensed Consolidated Statements of Cash Flows
(Unaudited – Prepared by Management)
(Expressed in United States dollars)
 
 
 
Nine months ended September 30,
   
2009
 
2008
         
Cash flows from operations:
       
 
Loss for the period
$
(3,824,569)
$
(3,499,692)
 
Items not involving cash:
       
   
Amortization
 
26,212 
 
22,533 
   
Loss on disposition of fixed assets
 
2,316 
 
1,999 
   
Fair value of warrants issued for services rendered
 
 
17,082 
   
Fair value of shares issued for services rendered
 
166,366 
 
   
Fair value of stock options expensed
 
241,791 
 
282,267 
   
Fair value of warrants and common shares issued
       
     
as compensation to loan guarantors
 
 
2,440,705 
   
Fair value of shares earned pursuant to bonus stock plan
 
 
1,290,000 
   
Forgiveness of promissory note for subscription of common stock
 
100,000 
 
   
Cancellation of shares pursuant to non-achievement of milestone
 
(17,500)
 
 
Changes in non-cash operating working capital:
       
   
Accounts receivable
 
1,027,608 
 
(378,843)
   
Inventory
 
9,463 
 
(11,124)
   
Prepaid expenses
 
(3,652)
 
30,886 
   
Accounts payable and accrued liabilities
 
516,006 
 
200,257 
   
Due to related party
 
139,914 
 
(4,478)
   
Deferred leasehold inducements
 
 
(14,327)
   
Deferred revenue
 
(48,400)
 
480,072 
 
Net cash (used in) provided by operations
 
(1,664,445)
 
857,337 
             
Cash flows from investments:
       
   
Proceeds of disposition of fixed assets
 
 
5,161 
   
Purchase of fixed assets
 
(29,830)
 
(22,762)
 
Net cash used in investments
 
(29,830)
 
(17,601)
           
Cash flows from financing:
       
   
Common shares issued, net of issue costs
 
147,500 
 
   
Repurchase of bonus stock
 
(30,000)
 
   
Advances from letter of credit providers
 
1,391,253 
 
   
Bank Loan advance
 
 
1,207,163 
   
Repayment of bank loan
 
(698,683)
 
(855,000)
   
Restricted cash
 
(1,392,577)
 
 
Net cash (used in) provided by financing
 
(582,507)
 
352,163 
           
(Decrease)/increase in cash, cash equivalents and restricted cash
 
(2,276,782)
 
1,191,899 
         
Cash and cash equivalents, beginning of period
 
2,446,538 
 
921,367 
         
Cash and cash equivalents, end of period
$
169,756 
$
2,113,266 
         
Supplemental information:
       
 
Non-cash financing:
       
   
Warrants issued for services rendered
$
 
17,082 
   
Shares issued for financing services and financing expenses
$
1,248 
 
   
Shares issued for debt
$
 
122,080 
   
Shares and warrants issued to bank loan guarantors
$
 
2,440,705 
   
Shares issued for Shafi Inc. acquisition
$
 
990,000 
   
Shares issued for compensation
$
156,366 
 
   
Forgiveness of promissory note for subscription of common stock
$
100,000 
 
   
Release from escrow of shares held for security
 
10,000 
 
   
Cancellation of shares pursuant to non-achievement of milestone
$
(17,500)
 
 
Cash interest paid
$
43,269 
$
60,828 

See accompanying notes to condensed consolidated financial statements.

 
F-5

 


BRAINTECH, INC.

Notes to Condensed Consolidated Financial Statements
(Unaudited – Prepared by Management)
(Expressed in United States dollars)

Nine months ended September 30, 2009 and 2008

 
1.  Description of business and future operations:

Braintech, Inc. (the “Company”) together with its wholly owned subsidiaries develops advanced software for the vision guidance of robotic and other systems.

These condensed consolidated financial statements have been prepared on the going concern basis under which an entity is considered to be able to realize its assets and satisfy its liabilities in the ordinary course of business.  The Company’s operations have resulted in losses of $3,824,569 for the nine months ended September 30, 2009, an accumulated deficit of $41,253,566 at September 30, 2009 and a working capital deficiency of $5,013,791 at September 30, 2009.  Operations to date have been primarily financed by sales to one major customer, ABB, Inc. (“ABB”), pursuant to an agreement which expired December 31, 2008, and by equity and debt transactions.  During the nine months ended September 30, 2009, the Company generated approximately 85% of its revenues from new customers and approximately 15% from the recognition of previously deferred revenue from ABB.  For the nine months ended September 30, 2008, 98% of sales revenue was generated from ABB.  In the quarter ended September 30, 2009, the Company began to generate new revenue under a government subcontract.  The Company owes certain individuals (“LC Providers”) $1,464,267 plus interest as a result of their payment on the Company’s behalf of the Company’s former loan with the Royal Bank of Canada on October 6, 2009 (September 30, 2009 - $1,391,253).  One LC Provider has converted his debt to equity, and the Company, with a new $3,000,000 credit facility from Silicon Valley Bank (“SVB”), expects to pay off the other LC Providers in full during November 2009.  If the Company fails to pay the amounts due to the remaining LC Providers, the LC Providers could enforce their rights in default.  The Company is actively pursuing new sales contracts but there is a risk that the Company will not be able to generate sufficient revenue to cover its expenses.  These factors raise substantial doubt about the Company’s ability to continue as a going concern.  The Company believes that the new SVB credit facility, which is described greater detail in note 6 below, together with arrangements to settle outstanding debt with equity, will allow the Company to continue as a going concern for the immediate future.

The Company’s future operations and its continuation as a going concern are dependent upon its ability to raise additional capital and to sell its products and services to new customers, generate positive cash flows from operations and ultimately attain profitability.

Financing transactions may include the issuance of equity securities, obtaining additional credit facilities, or other financing mechanisms.  However, the trading price of the Company’s common stock and the downturn in the U.S. stock markets could make it more difficult to obtain financing through the issuance of equity securities.

If none of these events occur, there is a risk that the business will fail.  The consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.

 
F-6

 

BRAINTECH, INC.

Notes to Condensed Consolidated Financial Statements
(Unaudited – Prepared by Management)
(Expressed in United States dollars)

Nine months ended September 30, 2009 and 2008

 
2.  Basis of presentation:

(a)  Unaudited financial information:

These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and reflect all adjustments (all of which are normal and recurring in nature) that, in the opinion of management, are necessary for fair presentation of the interim financial information.  The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year ending December 31, 2009. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These unaudited condensed consolidated financial statements and notes included herein have been prepared on a basis consistent with and should be read in conjunction with the Company’s audited consolidated financial statements and notes for the year ended December 31, 2008, as filed in its annual report on Form 10-K.

(b)  
Principles of consolidation:

These condensed consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiaries Braintech Canada, Inc., Braintech Government & Defense, Inc., Braintech Consumer & Service, Inc., Braintech Industrial, Inc., and Shafi Inc.  All material inter-company balances and transactions have been eliminated.

(c)  
Use of estimates:

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.  Significant areas requiring the use of estimates relate to the collectability of accounts receivable, the impairment of assets and rates for amortization, amount of income tax balances, the assumptions used in the determination of the fair value of stock-based compensation, the valuation of accrued liabilities, and the valuation of intangible assets and goodwill.  The Company has recorded liabilities under dispute which are subject to measurement uncertainty.  Any adjustment may have a material effect on net loss and will be recognized in the consolidated financial statements as they become known.  Actual amounts may differ from these estimates.


(d)  
Stock based compensation:

The Company estimates the fair value of share-based payment awards on the date of grant using an option pricing model.  The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service period in the Company’s financial statements.  Stock-based compensation recognized during the period is based on the value of the portion of the stock-based payment awards that are ultimately expected to vest during the period.  The Company estimates the fair value of stock options using the Black-Scholes valuation model.  The Black-Scholes valuation model requires the input of highly subjective assumptions, including the option’s expected life and the price volatility of the underlying stock.  The expected stock price volatility assumption was determined using historical volatility of the Company’s common stock.

 
F-7

 

BRAINTECH, INC.

Notes to Condensed Consolidated Financial Statements
(Unaudited – Prepared by Management)
(Expressed in United States dollars)

Nine months ended September 30, 2009 and 2008

 
2.  Basis of presentation (continued):

(e)  
Loss per share:

Loss per share is calculated based on the weighted average number of common shares outstanding during the period.

As the effect of all outstanding stock options (note 8) and share purchase warrants (note 9) is anti-dilutive, diluted loss per share equals basic loss per share.

The number of shares used to calculate loss per share for the three month and nine month periods ended September 30, 2009 and 2008 was reduced by 300,000 shares in each year for shares issued and held by the Company.  The number of shares used to calculate loss per share for the three month and nine month periods ended September 30, 2009 was reduced by 17,650,000 shares (2008 – 4,750,000 shares) for shares issued and held in escrow pending completion of performance milestones (note 7(b)) or other escrow restrictions.

(f)  
Revenue recognition:

The Company recognizes revenue when there is persuasive evidence of an arrangement, the fee is fixed or determinable, collectability is reasonably assured, and there are no substantive performance obligations remaining.

Cash received or accounts receivable recorded in advance of meeting the revenue recognition criteria are recorded as deferred revenue and the costs related to that revenue are recorded as deferred costs.

(g)  
Business combinations and intangible assets including goodwill:

The Company accounts for business combinations using the purchase method of accounting and, accordingly, the assets and liabilities of the acquired entities are recorded at their estimated fair values at the date of acquisition.  Goodwill represents the excess of the purchase price over the fair value of the net assets, including the amount assigned to identifiable intangible assets.


(h)  Recently issued accounting pronouncements

Codification

In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial accounting Standard (SFAS) No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of SFAS No. 162” (the Codification).  The Codification is the single source of authoritative nongovernmental U.S. accounting and reporting standards, superseding existing FASB, AICPA, EITF and related literature. The Codification eliminates the hierarchy of generally accepted accounting standards (“GAAP”) and establishes one level of authoritative GAAP. All other literature is considered non-authoritative. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009, which for the Company is September 30, 2009.  There was no change to our consolidated financial statements upon adoption.  All accounting references have been updated. SFAS references have been replaced with Accounting Standard Codification (“ASC”) references.

 
F-8

 

BRAINTECH, INC.

Notes to Condensed Consolidated Financial Statements
(Unaudited – Prepared by Management)
(Expressed in United States dollars)

Nine months ended September 30, 2009 and 2008


2.  Basis of presentation (continued):

Fair Value Measurements

Effective January 1, 2008, the Company adopted ASC 825, which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The adoption of ASC 825 did not have a material impact on the consolidated financial statements.

In April 2009, the FASB issued ASC 825-10.  ASC 825-10 extends disclosure requirements to interim period financial statements, in addition to the existing requirements for annual periods and disclosure of the methods and significant assumptions used to estimate fair value.  ASC 825-10 is effective for interim and annual periods ending after June 15, 2009. The adoption of ASC 825-10 did not have a material impact on the consolidated financial statements.

Subsequent Events

In May 2009, the FASB issued ASC 855.  ASC 855 is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date—that is, whether that date represents the date the financial statements were issued or were available to be issued.  ASC 855 is effective for interim and annual periods ending after June 15, 2009 and shall be applied prospectively.  The adoption of ASC 855 did not have a material impact on our consolidated financial statements.

Revenue Recognition

In September 2009, the Emerging Issues Task Force (“EITF”) reached a consensus on ASC 605-25.  ASC 605-25 eliminates the criterion for objective and reliable evidence of fair value for the undelivered products or services. Instead, revenue arrangements with multiple deliverables should be divided into separate units of accounting if the deliverables meet both of the following criteria:
 
§ 
The delivered items have value to the customer on a standalone basis; and

§ 
If the arrangement includes a general right of return relative to the delivered items, delivery or performance of the undelivered items is considered probable and substantially in the control of the vendor.

ASC 605-25 eliminates the use of the residual method of allocation and requires, instead, that arrangement consideration be allocated, at the inception of the arrangement, to all deliverables based on their relative selling price (i.e., the relative selling price method). When applying the relative selling price method, a hierarchy is used for estimating the selling price for each of the deliverables, as follows:

·    
VSOE (Vendor-Specific Objective Evidence) of the selling price;

·    
Third-party evidence (TPE) of the selling price – prices of the vendor’s or any competitor’s largely interchangeable products or services, in standalone sales to similarly situated customers; and

·    
Best estimate of the selling price.

 
F-9

 

BRAINTECH, INC.

Notes to Condensed Consolidated Financial Statements
(Unaudited – Prepared by Management)
(Expressed in United States dollars)

Nine months ended September 30, 2009 and 2008

 
2.  Basis of presentation (continued):

In September 2009, the EITF reached a consensus on ASC 985-605.  Entities that sell joint hardware and software products that meet the scope exception (i.e., essential functionality) will be required to follow the guidance in ASC 985-605.  ASC 985-605 provides a list of items to consider when determining whether the software and non-software components function together to deliver a product’s essential functionality.

ASC 985-605 must be adopted for arrangements entered into beginning January 1, 2011, and may be early-adopted.  The Company is currently evaluating the impact of adopting ASC 985-605 and ASC 605-25 on its consolidated financial statements.


3.  Shafi acquisition:

On August 12, 2008, in a stock for stock transaction, the Company acquired 100% of the outstanding shares of Shafi, Inc. and 80% of the shares of Shafi Innovation, Inc. (together “SI”) from Adil Shafi.  Consideration for the purchase was 3,000,000 shares of the common stock of Braintech, Inc. at a fair value of $0.33 per share (the “Closing Purchase Shares”) issued at the closing of the acquisition and 1,000,000 shares of Braintech, Inc. common stock to be issued quarterly over the next 12 months upon the achievement of specific performance criteria.

Prior to the completion of the purchase transaction, on June 5, 2008, the Company advanced $100,000 to SI to meet its working capital needs.  This advance was secured by all of the assets of SI, and was documented and secured at the SI closing by a demand promissory note bearing an annual interest rate of 2.54%.

In order to finance the $100,000 advance, the Company’s Chief Executive Officer and former Chief Executive Officer each advanced to the Company $50,000 against delivery by the Company of promissory notes.  The promissory notes provide for interest at 6% per annum.  The promissory notes also provide that, each of the promissory note holders will be issued 50,000 common share purchase warrants as additional compensation.  On September 26, 2008, the promissory notes plus accrued interest were repaid in full and the Company issued a total of 100,000 common share purchase warrants to the Chief Executive Officer and former Chief Executive officer.  Each common share purchase warrant entitles the holder to purchase one share for three years at a price of $0.36 per share.  The fair value of the warrants ($17,082) was recorded as stock-based compensation in financing expenses.  The fair value was calculated using the Black-Scholes valuation model and the following assumptions: dividend yield 0%, expected volatility 190%, risk-free interest rate 2.11%, and an expected term of two years.

The acquisition was accounted for under the purchase method.  The following table summarizes the preliminary estimated fair values of the assets and liabilities acquired net of the debt Adil Shafi personally assumed as of August 12, 2008.

 
F-10

 

BRAINTECH, INC.

Notes to Condensed Consolidated Financial Statements
(Unaudited – Prepared by Management)
(Expressed in United States dollars)

Nine months ended September 30, 2009 and 2008


3.  Shafi acquisition (continued):

Intangible assets of Shafi Inc.
$
1,090,000 
Goodwill of Shafi Inc.
 
900,000 
Due to Braintech, Inc.
 
(100,000)
Current liabilities of Shafi Inc.
 
(900,000)
     
Net assets acquired of Shafi Inc.
$
990,000 
Consideration: 3,000,000 shares of common stock issued
$
990,000 

Of the $1,090,000 of acquired intangible assets, $500,000 was assigned to branding and the SI customer base and contacts and $590,000 was assigned to the purchased technology.  The $900,000 of goodwill was assigned to the estimated value of future net revenues.  At December 31, 2008, management believed that significant uncertainty existed as to the value of the SI intangible assets and goodwill, and accordingly, an impairment charge of $1,990,000 was recorded.

As part of the SI acquisition, the parties agreed that any current liabilities of SI in excess of $900,000 would be fully and finally satisfied in a timely manner by Adil Shafi without liability to the Company or SI.  As of the date of closing the excess debt assumed by Adil Shafi was approximately $172,000.  Through September 30, 2009, Braintech, Inc. had advanced additional funds to Shafi thereby allowing SI to repay $103,882 of the $900,000 in current liabilities.

Included in accounts payable is the amount of $796,118 of SI current liabilities, which is non-recourse to the Company.

On February 6, 2009, the Company filed a lawsuit in the U.S. District Court for the Eastern District of Michigan, Southern Division, against Adil Shafi for rescission of the acquisition of SI and for damages. On April 22, 2009, Adil Shafi filed a First Amended Counterclaim asserting eight causes of action against the Company and its CEO, Frederick Weidinger.  The Company believes that Adil Shafi’s claims are groundless both as to the Company and to Mr. Weidinger.  In a letter dated May 7, 2009, the law firm representing the Company and Mr. Weidinger advised Adil Shafi and his counsel that Adil Shafi added Mr. Weidinger as a third-party defendant solely for improper purposes, and demanded that Adil Shafi dismiss the Weidinger claims within 21 days.  Mr. Weidinger has not benefited in any way from the SI transaction, nor acted improperly in any way with respect to the SI transaction.  On July 22, 2009, Adil Shafi filed a Second Amended Counterclaim asserting fewer causes of action against the Company and its CEO.  While the Company has initiated this action and is vigorously pursuing it, the final outcome, which the Company believes will be favorable, cannot now be determined.  This matter is subject to inherent uncertainties and management’s view may change in the future.

 
F-11

 

BRAINTECH, INC.

Notes to Condensed Consolidated Financial Statements
(Expressed in United States dollars)

Nine months ended September 30, 2009 and 2008

 
4.  Deferred revenue:

 
Nine Months Ended September 30,
   
2009
 
2008
Balance, beginning of period
$
1,260,510 
$
622,971 
Revenue invoiced and deferred for future recognition
 
8,051 
 
572,092 
Previously deferred revenue recognized in current period
 
(56,451)
 
(82,020)
Balance, end of period
$
1,212,110 
$
1,103,043 



5.  Due to related party:

This amount is due to the Company’s CEO and is represented by $90,300 in 2007 and 2008 accrued bonuses plus interest at 5%, $12,900 in deferred salary from July 1, 2009 plus interest at 5% and $30,000 in shares of common stock repurchased from the CEO by the Company plus interest at 8%.  Each of the principal amounts including the related interest is secured by a promissory note.  Also included in this amount is the September 2009 salary increase of $5,000 which was paid by the issuance of shares in October 2009.


6.  Bank loan and loan guarantee:

In October 2006 the Company obtained a $2,473,000 bank loan (“2006 RBC Loan Agreement”) from Royal Bank of Canada (“RBC”) and used the proceeds to redeem all of its previously outstanding secured convertible debentures.  RBC was granted a security interest in all of the Company’s personal and intangible property, including intellectual property.  As additional security, RBC required standby letters of credit (“LCs”) securing the full amount of the loan. Certain accredited investors (the “LC Providers”) provided the LCs as financing to the bank in order to enable the loan.

 
F-12

 

BRAINTECH, INC.

Notes to Condensed Consolidated Financial Statements
(Expressed in United States dollars)

Nine months ended September 30, 2009 and 2008

 
6.  Bank loan and loan guarantee (continued):

On September 17, 2008, the Company entered into a letter agreement with RBC dated July 29, 2008 (the “2008 RBC Loan Agreement”).  The 2008 RBC Loan Agreement provided for a $250,000 revolving demand facility and a $2,405,000 non-revolving term loan and superseded and canceled the 2006 RBC Loan Agreement.  The term loan was repayable in equal monthly installments of $108,208 principal plus monthly accrued interest.  The maturity date of the term loan was July 11, 2009.  Interest was calculated at the floating 30 day LIBOR rate plus 1.50%.

On July 29, 2009, the Company entered into a letter agreement with RBC dated July 11, 2009 (the “2009 RBC Loan Agreement”).  The 2009 RBC Loan Agreement provided for a $1,506,000 non-revolving term loan and superseded and canceled the 2008 RBC Loan Agreement.  The term loan was repayable in equal monthly installments of $50,000 principal plus monthly accrued interest.  The maturity date for the term loan was September 9, 2009.  The respective security interests of RBC and the LC Providers remained in place as described above.

As at September 30, 2009, RBC had collected $1,391,253 from LC Providers and $1,392,577 had been transferred into trust pending repayment of the RBC Loan.

The 2009 RBC Loan Agreement was paid in full on October 6, 2009, using $1,464,267 drawn from the LCs.  The LC Providers had instructed RBC to use these LC funds to pay off the RBC loan.  The RBC loan is now fully paid.

As a result, the Company owes the LC Providers $1,464,267 plus interest at a rate of 10% per annum until paid in full.  The LC Providers have a first priority lien on all of the Company’s assets, including its intellectual property.  If the Company fails to pay the amounts due to the LC Providers, the LC Providers could enforce their rights in default.

On October 29, 2009, LC debt of $289,842 was converted into 7,246,040 shares of common stock.  As part of the conversion, the LC Provider agreed to purchase 2,831,008 additional shares of common stock for a price of $113,240 by December 31, 2009.  The shares will be held in escrow until the payment is made, and will be forfeited if no payment is made.

On October 30, 2009, the Company executed definitive loan documents for a new $3,000,000 credit facility with Silicon Valley Bank (“SVB”), consisting of a $2,200,000 term loan facility (“SVB Term Loan”) and an $800,000 credit line to be secured by the Company’s accounts receivable (“SVB A/R Line”).  The SVB A/R Line will mature 18 months from closing.  The SVB Term Loan will require interest payments only for 18 months from closing, and will then convert to an 18 month term loan, with final maturity 36 months from closing.  The SVB Term Loan will be secured by cash deposits or letters of credit (“Backstop Security”) supplied by certain shareholders (“Pledgors”), initially in the amount of $1,550,000, with the largest amount being provided by the Company’s CEO.  The Pledgors have a lien on all of the Company’s assets, including its intellectual property, second only to SVB’s lien.

As compensation to the Pledgors for providing the Backstop Security, the Company will issue to the Pledgors 20 shares of common stock for each $1 of Backstop Security they provide for the SVB loan, for a total of 31,000,000 shares.  The Pledgors will also receive a secured note which is activated only in the event of default.  The face value of each note is equal to the amount of Backstop Security provided plus a 50% return.  An 8% coupon is initiated in the event of default.  The notes will rank second in security behind SVB.  In the event of default, Pledgors who are not already on the Board of the Company will be appointed to the Board.  The Pledgors have the right to approve or deny any debt financing proposed by the Company, but such approval must not be unreasonably withheld, conditioned or delayed.  The Pledgors’ expenses will be paid by the Company.
 
F-13


Through December 31, 2009, the Pledgors have the right to place additional Backstop Security up to an aggregate amount of $2,200,000.  Subject to the same aggregate limit and subject to the approval of SVB and the Company, additional parties, including shareholders of the Company, may become Pledgors.  In addition, through December 31, 2009, each Pledgor, subject to SVB’s approval, may elect to convert his “pledge” into equity on the same terms as the conversion described above, i.e., at a ratio of 25 total shares (including the 20 already received) for each $1 of Backstop Security converted.  If any Pledgor so elects, SVB would use such Pledgor’s pledged Backstop Security to pay down the SVB Term Loan.  In such event, the applicable Pledgor, having already received 20 shares of our common stock for each $1 of Backstop Security pledged, would then receive 5 additional shares and forfeit his Pledgor’s rights under the SVB arrangement.

7.  Common Stock:
 
        (a) During the nine month period ended September 30, 2009, common stock transactions were as follows:

On January 26, 2009, as final compensation for advancing $255,000 in emergency financing in 2006, the Company issued 410,000 shares of common stock at a fair value of $0.10 per share to a single party in addition to 100,000 shares and 100,000 share purchase warrants previously issued to such party.  In conjunction with this final compensation arrangement, such party returned to the Company for cancellation the 100,000 share purchase warrants, each entitling the holder to purchase one additional share of common stock exercisable at $0.30 per share.  Although this compensation arrangement was settled in January 2009, the arrangement was made in December 2008.  Accordingly, the Company had accrued the fair value of the financing expense ($39,752) as of December 31, 2008.

On March 12, 2009, the Company issued 1,750,000 shares of Bonus Stock (note 7(b)) at a purchase price of $0.01 per share in accordance with the terms of an employment agreement with an officer of the Company. These shares are being held in escrow pending completion of five individual performance milestones. When management determines that it is likely that the milestones will be met, the corresponding shares will be released from escrow and the Company will record an expense equal to $0.09 per share being the excess of the fair value of the common stock over the purchase price. If the milestones are not completed, the Company will repurchase the shares for the purchase price of $0.01 per share.

 
F-14

 

BRAINTECH, INC.

Notes to Condensed Consolidated Financial Statements
(Expressed in United States dollars)

Nine months ended September 30, 2009 and 2008


7.  Common Stock (continued):

On April 27, 2009, the Company issued 1,500,000 shares of Bonus Stock and placed those shares in escrow with the Company’s transfer agent.  The shares were issued as security for monthly payments of $5,000 each totaling $150,000 over a 30 month period due under the terms of a Consultancy Agreement.  The shares will be returned to the Company in 50,000 share increments as the monthly payments are made.  If the Company fails to make a monthly payment, 100,000 shares will be released from escrow to the Consultant.  On September 21, 2009, 100,000 shares were released from escrow in lieu of the August 2009 $5,000 payment.  On October 12, 2009, an additional 100,000 shares were released from escrow in lieu of the September 2009 payment.

On May 4, 2009, 250,000 shares of Bonus Stock were returned to the Company and cancelled in accordance with the terms of a retainer agreement for legal services dated May 4, 2009.

On June 12, 2009, the Company issued 500,000 shares of Bonus Stock as compensation pursuant to the terms of a retainer agreement for legal services dated May 4, 2009.  The Company recorded the fair value of the shares ($45,000) as consulting fees.

On June 16, 2009, effective as of January 1, 2009, the Company entered into a new Employment and Retention Agreement (the “Agreement”) with the Company’s CEO.  The Agreement provides for the issuance of up to 13,000,000 shares of common stock upon the achievement of certain identifiable milestones.  On September 16, 2009, these shares were issued at $0.01 per share to the CEO in accordance with the Agreement.  These shares are being held in escrow pending the achievement of certain milestones.  A compensation expense of $130,000 was recorded to offset payment of the purchase price of $130,000 for the 13,000,000 escrowed shares pursuant to the Agreement.

The CEO’s new Agreement also provided for an increase in salary of $5,000 per month effective on January 1, 2009.  In order to preserve cash flow, the CEO agreed to accept shares of common stock in lieu of cash for the salary increase.  Accordingly, on September 16, 2009, 368,439 shares of Bonus Stock were issued at a deemed price of $0.11 per share representing the amount due for the months of January to August 2009.  On October 5, 2009, 54,688 shares of Bonus Stock were issued at a deemed price of $0.09 per share representing the amount due for the month of September 2009.

On August 10, 2009, 3,000,000 shares of Bonus Stock were returned to the Company by the CEO and cancelled when it was determined that the milestones relating to the shares were not achieved.

Effective July 1, 2009, an employee of the Company agreed to accept shares in the capital stock of the Company in lieu of his monthly cash salary and car allowance of $15,183.  Accordingly, on August 7, 2009, 185,574 shares were issued to the employee at a deemed price of $0.08 per share representing the amount due for the month of July 2009, on August 10, 2009, 139,846 shares were issued at a deemed price of $0.11 per share for August 2009, and on October 5, 2009 166,068 shares were issued at a deemed price of $0.09 for September 2009.

On September 16, 2009, 1,500,000 shares of Bonus Stock were returned to the Company and cancelled when it was determined that the milestones relating to the shares were not achieved.

 
F-15

 

BRAINTECH, INC.

Notes to Condensed Consolidated Financial Statements
(Expressed in United States dollars)

Nine months ended September 30, 2009 and 2008


7.  Common Stock (continued):

(b)  
Bonus stock and bonus stock option incentive plan:

At a meeting of the Board of Directors held October 22, 2007, the Company approved the Bonus Stock and Bonus Stock Option Plan (the “Bonus Plan”). The Bonus Plan provides for the issuance of common stock of the Company (“Bonus Stock”) and options to acquire common stock of the Company (“Bonus Stock Options”) to the participants upon the Company reaching certain identifiable milestones in its business plan. The aggregate amount of shares that may be issued under the Bonus Plan shall not exceed 30 million shares. The aggregate amount of shares to be issued as Bonus Stock shall not exceed 20 million shares and the aggregate amount of shares to be issued pursuant to the exercise of Bonus Stock Options shall not exceed 10 million shares.

As of September 30, 2009, 19,118,439 shares of Bonus Stock (December 31, 2008 – 11,750,000 shares) have been issued, of which 6,218,439 shares (December 31, 2008 – 5,250,000 shares) are no longer subject to escrow restrictions and 12,900,000 shares (December 31, 2008 – 6,500,000 shares) are held in escrow pending the achievement of performance milestones.


8. Stock options:

The Company reserved 1,500,000 common shares pursuant to the 2000 Stock Option Plan (“2000 Plan”), 2,500,000 common shares pursuant to the 2003 Stock Option Plan (“2003 Plan”), and 10,000,000 common shares pursuant to the 2007 Stock Option Plan (“2007 Plan”).  As of September 30, 2009, 774,000 stock options are unallocated and remain available pursuant to the 2000 Plan, 1,523,000 stock options are unallocated and remain available pursuant to the 2003 Plan, and 5,415,000 stock options are unallocated and remain available pursuant to the 2007 Plan.  The Company’s board of directors has discretion to set the price, term, vesting schedules, and other terms and conditions for options granted under the 2000 Plan and the Company’s Compensation Committee has discretion to set the price, terms, vesting schedules, and other terms and conditions for options granted under the 2003 and 2007 Plans.  The Company’s board of directors has granted the CEO authority to grant awards pursuant to the 2000, 2003 and 2007 Plans.

The Company also reserved 10,000,000 common shares pursuant to the Bonus Plan (note 7(b)).  As of September 30, 2009 4,185,000 stock options are unallocated and remain available pursuant to the Bonus Plan.  The Company’s Board of Directors and CEO have discretion to set the price, term, vesting schedules, and other terms and conditions for options granted under the Bonus Plan.

 
F-16

 


BRAINTECH, INC.

Notes to Condensed Consolidated Financial Statements
(Expressed in United States dollars)

Nine months ended September 30, 2009 and 2008

 
8. Stock options (continued):

The weighted average fair value of stock options granted during the nine months ended September 30, 2009 was $0.10 per option (2008 - $0.20 per option).  The fair value of each option grant is estimated on the date of grant using the Black-Sholes valuation model and the straight-line amortization approach with the following weighted average assumptions:

 
Nine Months Ended
 
September 30, 2009
September 30, 2008
Expected life (years)
2.33
2.00
Risk free interest rate
1.02%
2.06%
Expected volatility
247%
188%
Dividend yield
0%
0%
Expected forfeitures
0%
0%

The Company recorded stock-based compensation related to stock options of $241,791 for the nine months ended September 30, 2009 (September 2008 - $282,267).  As of September 30, 2009, the unrecorded deferred stock-based compensation balance related to stock options was $92,753 (September 2008 - $736,930) and will be recognized over an estimated weighted average amortization period of 1.25 years (2008 – 1.18 years).

A summary of the Company’s stock option activity is as follows:

   
Weighted
 
Number
average
 
of options
exercise price
     
Balance, December 31, 2008
14,267,000 
$0.40 
Options granted
1,140,000 
0.11 
Options exercised
Vested options expired
(3,160,000)
0.46 
Unvested options forfeited
(250,000)
0.13 
     
Balance, September 30, 2009
11,997,000 
$0.36 

Of those outstanding at September 30, 2009, 10,147,000 are exercisable (December 31, 2008 – 12,092,000), having a weighted average exercise price of $0.40 per share (December 31, 2008 - $0.43 per share).

The outstanding options as of September 30, 2009 have a weighted average remaining contractual life of 3.06 years (December 31, 2008 – 3.55 years).


 
F-17

 


BRAINTECH, INC.

Notes to Condensed Consolidated Financial Statements
(Expressed in United States dollars)

Nine months ended September 30, 2009 and 2008


9.  Share purchase warrants:

On January 26, 2009, as final compensation for advancing $255,000 in emergency financing in 2006, the Company issued 410,000 shares of common stock at a fair value of $0.10 per share to a single party in addition to 100,000 shares and 100,000 share purchase warrants previously issued to such party.  In conjunction with this final compensation arrangement, such party returned to the Company for cancellation the 100,000 share purchase warrants, each entitling the holder to purchase one additional share of common stock exercisable at $0.30 per share.  Although this compensation arrangement was settled in January 2009, the arrangement was made in December 2008.  Accordingly, the Company accrued the fair value of the financing expense ($39,752) as of December 31, 2008.

A summary of the Company’s share purchase warrant activity is as follows:
 
 
 
 
Number
of warrants
 
Weighted
average
exercise price
Weighted
average remaining
contractual life
(years)
         
Balance, December 31, 2008
35,521,179 
$   0.33
3.56
 
Warrants granted
 
Warrants expired
(2,281,227)
0.43
 
Warrants exercised
 
Warrants cancelled (note 7)
(100,000)
0.30
         
Balance, September 30, 2009
33,139,952 
$   0.32
2.51

Of the warrants outstanding as of September 30, 2009, 8,011,324 are held by the Company’s former CEO and 7,411,250 are held by the Company’s current CEO.


10.  Commitments:

The Company has obligations under operating lease arrangements that require the following minimum annual payments:

Year ending December 31:
 
2009
44,508
2010
142,539
2011
83,495
2012
62,903
2013
54,925
2014
33,687
 
$
422,057


 
F-18

 

BRAINTECH, INC.

Notes to Condensed Consolidated Financial Statements
(Expressed in United States dollars)

Nine months ended September 30, 2009 and 2008


10.  Commitments (continued):

Effective April 1, 2009, the Company vacated its North Vancouver leased office premises and ceased making the monthly rent payments.  The Company has been in communications with the landlord and the landlord has informed the Company that it reserves the right to seek remedies that are available under the lease.  The lease expires in November 2012, with the remaining amounts payable under the terms of the lease agreement aggregating approximately $570,000 (Canadian).  The lease penalty for early termination is the discounted present value of the remaining lease payments which was recorded as an expense during the quarter ended June 30, 2009 with a corresponding liability of $448,000 which remains accrued as at September 30, 2009 and is included in accrued liabilities on the balance sheet.


11.  Contingencies:

Three former employees, released as part of a reduction in work force by Braintech Canada, Inc., have instituted claims in the Provincial Court of British Columbia (small claims court) for common law entitlement.  Each claim is for $25,000 (Canadian).  The Company disputes the plaintiffs’ claims and believes that it has meritorious defenses and intends to vigorously defend these actions.  Management believes that any potential loss associated with this matter is neither probable nor reasonably estimable at this time and accordingly has not accrued any amounts for any potential loss.


12.  Financial instruments:

Fair value of financial instruments

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, due to related party, due to letter of credit providers and bank loan. The carrying amounts of cash and cash equivalents, accounts receivable, due to related party, accounts payable and accrued liabilities approximate their respective fair values because of the short maturities of those instruments. The Company’s bank loan consists of its revolving credit facility. The carrying value of the amount due to letter of credit providers and revolving credit facility approximates fair value as the interest rate fluctuates with market conditions.


13.  Subsequent events:

Effective October 22, 2009, the Company entered into an Employment Agreement with an officer of the Company which provides for monthly compensation of $10,000 through December 31, 2009.  Under the agreement, the officer was granted options to purchase 250,000 shares of common stock exercisable immediately at an exercise price of $0.08 per share through October 21, 2012 and the Company also agreed to issue 200,000 shares of common stock.

Pursuant to an Employment Agreement dated as of January 28, 2009 as amended July 1, 2009 with an officer of the Company, the officer’s salary and car allowance was paid in shares of common stock beginning July 1, 2009.  Effective October 31, 2009 the officer and the Company elected to terminate the officer’s employment and as a result the officer will receive severance pay of 3,500,000 shares of common stock, which will be issued in November 2009.  In addition, as provided by the agreement, the officer’s 1,750,000 shares of Bonus Stock will become fully vested and released from escrow and his 500,000 Bonus Stock Options will become fully vested and exercisable for three years from the date of termination.

Other subsequent events or transactions have been evaluated subsequent to the balance sheet date but prior to November 12, 2009, the issuance date of these financial statements, for recognition or disclosure. The events requiring disclosure have been described in notes 1, 5, 6 and 7.
 
 
F-19

 

Item 2.  Management’s Discussion and Analysis of Financial Conditions and Results of Operations
 
CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS
 
This Quarterly Report of Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act.  We intend that certain matters discussed in this report are “Forward-Looking Statements” intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995.  Forward-looking statements deal with our current plans, intentions, beliefs and expectations and relate to future events or our future financial performance.  In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “intends”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continues” or the negative of these terms or other comparable terminology.
 
Forward-looking statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our actual results in future periods to differ materially from what is currently anticipated.  We make cautionary statements throughout this report and the documents we have incorporated by reference.  You should read these cautionary statements as being applicable to all related forward-looking statements wherever they appear in this report, the materials referred to in this report, and the materials incorporated by reference into this report.  Our independent registered public accounting firm has issued an opinion on our consolidated financial statements for the years ended December 31, 2008 and 2007 that states that the consolidated financial statements were prepared assuming we will continue as a going concern and further states that our recurring losses from operations raise substantial doubt about our ability to continue as a going concern.  You are also urged to carefully review and consider the various disclosures made by us which attempt to advise interested parties of the factors which affect our business, and other disclosures including without limitation the disclosures made under the caption “Management Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements and related notes included in our annual report filed on Form 10-K for the year ended December 31, 2008 and the disclosures under the heading “Risk Factors” in this Quarterly Report and in the Form 10-K as well as other reports and filings we make with the Securities and Exchange Commission.
 
We cannot guarantee our future results, levels of activity, performance or achievements.  We are under no duty to update any of the forward-looking statements after the date of this report.
 
When used in this Quarterly Report on Form 10-Q, except as specifically noted otherwise, the term “Braintech” refers to Braintech, Inc. only, and the terms “Company,” “we,” “our,” “ours” and “us” refer to Braintech, Inc. and its wholly-owned subsidiaries.
 
Overview
 
The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and related notes and other financial information appearing elsewhere in this report and in our Form 10-K filed with the SEC on March 31, 2009.  Except for historical information, the following discussion contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions and our current beliefs regarding revenues we might earn if we are successful in implementing our business strategies.
 
Our business consists of the research and development, supply, commercialization, training, maintenance and support of machine vision and vision guidance technologies, products and services for industrial robots and other types of machines and material handling in the industrial, and government markets. The field of machine vision and vision guided robotics requires our vision software systems to incorporate advanced robotic engineering and programming technology for optimal integration with manufacturing automation systems.  Our products and services require a sophisticated sale resulting in a long sales cycle.
 
During the first three quarters of 2009 approximately 85% of our revenue was generated from new customers and approximately 15% from the recognition of deferred revenue associated with honoring warranty obligations pursuant to our contract with ABB.  Our long-term exclusive contract with ABB expired on December 31, 2008.  In order to develop and diversify its customer base, the Company has focused on different markets with the new mission of “touching the customer” and developing and building the U.S. Government & Defense business.  To that end, the Company recently opened new offices in McLean, Virginia to focus on developing new business in the government and defense market.  The Company is also considering the transition to a recurring revenue license model to improve sales in the industrial market resulting from a lack of capital budgets.
 
Throughout 2008 and 2009 we have been focused on finding new customers for our products and technology.  The progressively worsening economic environment during this time period, particularly in the auto industry, has created an extremely difficult environment.  Potential customers’ lack of capital budgets and the extended sales cycle in both the industrial and government markets have negatively impacted the Company’s sales and associated cash flow.  In addition, new markets have been difficult to penetrate, particularly for a company with resources as limited as ours.
 
The Company has been busy with efforts to refinance its debt on better terms and with a United States bank.
 
Effective July 17, 2009, we executed an extension of our loan with the Royal Bank of Canada (“RBC”).  The loan became payable in full on September 9, 2009.  On September 22, 2009, RBC began the process of drawing on the letters of credit (“LCs”) provided as security for the RBC loan by certain shareholders of the Company (“LC Providers”).  The LC Providers instructed RBC to pay off the RBC loan using the $1,464,267 drawn from the LCs, and on October 6, 2009, the RBC loan was paid in full.  As a result, the Company became indebted to the LC Providers in the amount of $1,464,267 plus interest at a rate of 10% per annum and expenses.  The LC Providers have a first priority lien on all of the Company’s assets, including its intellectual property.
 
Effective October 29, 2009, as part of our refinancing, LC Provider Owen Jones, a director, converted his LC debt of $289,842 into 7,246,040 shares of our common stock.  This reduced the LC Provider debt by $289,842.  In addition, Mr. Jones agreed to purchase 2,831,008 additional shares of our common stock for a price of $113,240 by December 31, 2009, further reducing the Company’s need for debt.
 
Effective October 30, 2009, we executed definitive loan documents for our new $3,000,000 credit facility with Silicon Valley Bank (“SVB”), consisting of a $2,200,000 term loan facility (“SVB Term Loan”) and an $800,000 credit line to be secured by our accounts receivable (“SVB A/R Line”).  The SVB A/R Line will mature 18 months from closing.  The SVB Term Loan will be interest only for 18 months from closing, and will then convert to an 18 month term loan, with final maturity 36 months from closing.  The SVB Term Loan will be secured by cash deposits or letters of credit supplied by certain shareholders (“Pledgors”), with the largest amount being provided by our CEO.  The Pledgors have a lien on all of the Company’s assets, including its intellectual property, second only to SVB’s lien.
 
During November 2009, the Company anticipates borrowing a total of $1,550,000 under the SVB Term Loan, in order to pay off the remaining LC Providers in full, reduce the Company’s borrowing cost, and provide the Company with additional working capital.
 
Critical Accounting Policies and Estimates
 
There have been no material changes in our critical accounting policies and estimates for the nine month period ended September 30, 2009 from our disclosure in our Annual Report on Form 10-K for the year ended December 31, 2008.  For a discussion of our critical accounting policies, please see our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.
 
Results of Operations
 
 
Three Months Ended September 30, 2009 Compared to the Three Months Ended September 30, 2008
 

Sales
Three Months Ended
   
 
September 30
 
September 30
 
%
 
2009
 
2008
 
Change
           
 
$281,680
 
$1,375,309
 
(79.5%)


Our decrease in sales year over year is attributable to the expiration of the ABB Exclusive Global Channel Partner Agreement.  During the three month period ended September 30, 2008, we invoiced $1,504,187 for software licenses delivered for installation in manufacturing plants.  Of this amount, we deferred $210,837 for future recognition in accordance with SOP 97-2.  We also recorded $52,536 for engineering and other services and $29,423 of previously deferred revenue.  During the three month period ended September 30, 2009, we invoiced $669 for software licenses.  We also recorded $267,790 for solution development and other services and $13,221 of previously deferred revenue.
 
2


Research and Development Expenses
Three Months Ended
   
 
September 30
 
September 30
 
%
 
2009
 
2008
 
Change
           
 
$145,361
 
$89,640
 
62.2%

Effective April 1, 2009, we vacated our North Vancouver research and development facility and transferred all of our research and development activities to our offices in McLean, Virginia and Pontiac, Michigan.  Research and development expenditures increased $55,721, or 62.2%, from $89,640 for the three month period ended September 30, 2008, to $145,361 for the three month period ended September 30, 2009.  We accrued a Precarn funding grant of $76,081 during the three month period ended September 30, 2008 compared to nil for the three month period ended September 30, 2009.  Adding back this amount indicates that actual expenditures on research and development decreased $20,360.  The decrease was mainly due to a reduction of research and development personnel on the closing of the North Vancouver office and the opening of the Pontiac, Michigan and McLean, Virginia offices.


Selling, General and Administrative Expenses
Three Months Ended
   
 
September 30
 
September 30
 
%
 
2009
 
2008
 
Change
           
 
$822,583
 
$829,670
 
(0.8)%

Selling, general and administrative (SG&A) expenses decreased $7,087, or 0.8%, from $829,670 for the three month period ended September 30, 2008, to $822,583 for the three month period ended September 30, 2009.  Stock option expense decreased $25,260 from $84,155 for the three month period ended September 30, 2008 to $58,895 for the three month period ended September 30, 2009.  Wages and benefits increased $79,935 from $377,476 to $457,411.  (Wages and benefits decreased $206,636 from the quarter ended June 30, 2009 to the quarter ended September 30, 2009, as shown in the table below under the heading “Cost Reduction Strategy”.)  A decrease in our administration and sales staff was offset by (i) the accrual of a $130,000 non-cash compensation expense in lieu of receipt of the purchase price of $130,000 ($0.01 per share) for 13,000,000 escrowed shares of our common stock to be awarded upon achievement of specified milestones pursuant to our CEO’s Employment and Retention Agreement, and (ii) a wage increase to our CEO of $5,000 per month which our CEO has voluntary been receiving in the form of stock.  In addition, our CEO has voluntarily deferred 20% of his salary since July 2009.  Professional fees decreased $36,123 from $166,415 for the three month period ended September 30, 2008 to $130,292 for the three month period ended September 30, 2009.  The decrease in professional fees resulted from an increase in litigation and legal fees of $11,622, a decrease in accounting fees of $10,447 and a decrease in patent fees of $37,298.  Trade show and marketing expenses decreased $50,176 from $64,801 to $14,625 as a result of decreased activity, and office and miscellaneous expenses increased $24,537 from $136,822 to $161,359.


Interest and Financing Expenses
Three Months Ended
   
 
September 30
 
September 30
 
%
 
2009
 
2008
 
Change
           
 
$50,263
 
$2,493,361
 
(98.0)%

Interest and financing expenses decreased $2,443,433, or 98.0% from $2,493,361 for the three month period ended September 30, 2008, to $50,263 for the three month period ended September 30, 2009.  The interest on the bank loan increased $17,450 from $18,862 for the three month period ended September 30, 2008, to $36,312 for the three month period ended September 30, 2009.  The increase was mainly due to the increase in the principal amount of the bank loan as a result of an advance of $1,207,163 received on July 29, 2008 and due to an increase in the interest rate in connection with our temporary extension of the Royal Bank of Canada loan.

During the three month period ended September 30, 2008 we recorded an expense of $2,440,705 for the fair value of equity issued as compensation to the LC Providers.  There was no such expense during the three month period ended September 30, 2009.  Other financing expenses decreased $18,028 from $32,004 to $13,976.
 
3


Nine Months Ended September 30, 2009 Compared to the Nine Months Ended September 30, 2008
 

Sales
Nine Months Ended
   
 
September 30
 
September 30
 
%
 
2009
 
2008
 
Change
           
 
$375,769
 
$3,581,679
 
(89.5%)

Our decrease in sales year over year is attributable to the expiration of the ABB Exclusive Global Channel Partner Agreement.  During the nine month period ended September 30, 2008, we invoiced $4,002,430 for software licenses delivered for installation in manufacturing plants.  Of this amount, we deferred $572,092 for future recognition in accordance with SOP 97-2.  We also recorded $59,321 for engineering and other services and $92,020 of previously deferred revenue.  During the nine month period ended September 30, 2009, we invoiced $59,579 for software licenses delivered for installation in manufacturing plants.  Of this amount, we deferred $8,051 for future recognition.  We also recorded $267,790 for solution development and other services and $56,451 of previously deferred revenue.


Research and Development Expenses
Nine Months Ended
   
 
September 30
 
September 30
 
%
 
2009
 
2008
 
Change
           
 
$476,677
 
$402,739
 
18.4%

Effective April 1, 2009, we vacated our North Vancouver research and development facility and transferred all of our research and development activities to our offices in McLean, Virginia and Pontiac, Michigan.  Research and development expenditures increased $73,938, or 18.4%, from $402,739 for the nine month period ended September 30, 2008, to $476,677 for the nine month period ended September 30, 2009.  We accrued a Precarn funding grant of $186,234 during the nine month period ended September 30, 2008 compared to a grant of $17,471 accrued during the nine month period ended September 30, 2009.  Adding back these amounts indicates that actual expenditures on research and development decreased $94,825 from $588,973 for the nine month period ended September 30, 2008 to $494,148 for the nine month period ended September 30, 2009.  The decrease was mainly due to a reduction of research and development personnel on the closing of the North Vancouver office and the opening of the Pontiac, Michigan and McLean, Virginia offices.  A reduction in stock option expense also contributed to the decrease in research and development expenditures.  During the nine month period ended September 30, 2008 we incurred $29,375 in stock option expense compared to nil for the nine month period ended September 30, 2009.


Selling, General and Administrative Expenses
Nine Months Ended
   
 
September 30
 
September 30
 
%
 
2009
 
2008
 
Change
           
 
$3,621,411
 
$3,797,523
 
(4.6%)

Selling, general and administrative (SG&A) expenses decreased $176,122, or 4.6%, from $3,797,523 for the nine month period ended September 30, 2008, to $3,621,411 for the nine month period ended September 30, 2009.  A stock based compensation expense of $1,290,000 arising from the issuance of shares of our common stock upon the achievement of certain milestones was recorded in the nine month period ended September 30, 2008.  No similar expense was recorded in the nine month period ended September 30, 2009.  Stock option expense decreased $11,100 from $252,892 for the nine month period ended September 30, 2008 to $241,792 for the nine month period ended September 30, 2009.  Wages and benefits increased $770,443 from $1,109,603 to $1,880,046 resulting from an increase in our administration and sales staff from the opening of our offices in McLean, Virginia and Pontiac, Michigan and from (i) the accrual of a $130,000 non-cash compensation expense in lieu of receipt of the purchase price of $130,000 ($0.01 per share) for 13,000,000 escrowed shares of our common stock to be awarded upon achievement of specified milestones pursuant to our CEO’s Employment and Retention Agreement, and (ii) a wage increase to our CEO of $5,000 per month which our CEO has voluntary been receiving in the form of stock.  In addition, our CEO has voluntarily deferred payment of his $90,300 bonus for 2007 and 2008 and he has also voluntarily deferred 20% of his salary since July 2009.
 
4


Professional fees increased $15,882 from $437,928 for the nine month period ended September 30, 2008 to $453,810 for the nine month period ended September 30, 2009.  The increase in professional fees resulted from an increase in litigation and legal fees of $96,111, a decrease in accounting fees of $4,991 and a decrease in Patent fees of $75,238.

Trade show and marketing expenses decreased $128,747 from $263,224 to $134,477 as a result of decreased activity, and office and miscellaneous expenses increased $73,161 from $418,126 to $491,287.  During the nine month period ended September 30, 2009, we recorded a lease termination expense of $420,000; calculated as the discounted present value of the remaining lease payments due under the North Vancouver office lease.


Interest and Financing Expenses
Nine Months Ended
   
 
September 30
 
September 30
 
%
 
2009
 
2008
 
Change
           
 
$97,489
 
$2,520,653
 
(96.1%)

Interest and financing expenses decreased $2,423,164, or 96.1% from $2,520,653 for the nine month period ended September 30, 2008, to $97,489 for the nine month period ended September 30, 2009.  The interest on the bank loan increased $16,089 from $60,828 for the nine month period ended September 30, 2008, to $76,917 for the nine month period ended September 30, 2009.  The decrease was mainly due to the increase in the principal amount of the bank loan as a result of an advance of $1,207,163 received on July 29, 2008 and due to an increase in the interest rate.  During the nine month period ended September 30, 2008 we recorded an expense of $2,440,705 for the fair value of equity issued as compensation to the LC Providers.  There was no such expense during the nine month period ended September 30, 2009.  Other financing expenses decreased $24,025 from $43,544 to $19,519.



Liquidity and Capital Resources
 
Cash Flows
 
During the nine month period ended September 30, 2009 we financed our research and development activities, our selling, general and administrative activities, our investment in fixed assets, and the repayment of our bank loan using cash provided from cash reserves.  At September 30, 2009 we had cash and cash equivalents of $169,756, a decrease of $2,276,782 from cash and cash equivalents of $2,446,538 at December 31, 2008. We also had restricted cash in the amount of $1,392,577.  This amount, together with an additional amount was used to repay the loan from the Royal Bank of Canada.
 
Operating activities used cash of $1,664,445 for the nine month period ended September 30, 2009 and provided cash of $857,337 for the nine month period ended September 30, 2008.  Cash used by operating activities during the nine month period ended September 30, 2009 resulted from a net loss of $3,824,569, a decrease in deferred revenue of $48,400, offset by non-cash amortization expenses of $26,212, non-cash loss on disposition of fixed assets of $2,316, non-cash stock option expenses of $241,791, non-cash compensation for services rendered of $248,866, a decrease in current assets of $1,033,419, and an increase in current liabilities of $655,920.
 
Investing activities used cash of $29,830 during the nine month period ended September 30, 2009 and $17,601 during the nine month period ended September 30, 2008 for the purchase of fixed assets.
 
During the nine month period ended September 30, 2009, financing activities provided cash of $147,500 as a result of capital stock transactions and used cash of $698,683 for repayment of the bank loan.  The draw on the letters of credit contributed $1,391,253 to restricted cash.  During the nine month period ended September 30, 2008 financing activities provided cash of $1,207,163 as a result of an advance on our bank loan and used cash of $855,000 for repayment of the bank loan.
 
5

 
Cost Reduction Strategy

The following table highlights the effect of our ongoing cost reduction strategy by comparing the total expenses incurred during the three month period ended September 30, 2009 to the three month period ended June 30, 2009.

 
Three Month Period ended
 
Expense Category
June 30, 2009
September 30, 2009
Cost Reduction
       
Wages & Benefits
$562,418
$355,782
$206,636 
Consulting & Contract Labor
450,096
232,720
217,376 
Stock Option Expense
78,048
58,895
19,153 
Professional Services
223,451
130,292
93,159 
Trade Show & Marketing
61,903
25,225
36,678 
Office & Miscellaneous
149,349
165,029
(15,680)
Lease Termination Expense
420,000
420,000 
       
Total
1,945,265
967,943
977,322 

 
Bank Loans and Other Transactions
 
On July 29, 2009 we negotiated an extension of our loan with the Royal Bank of Canada (“RBC”).  The loan became payable in full on September 9, 2009.  On September 22, 2009, RBC began the process of drawing on the letters of credit (“LCs”) provided as security for the RBC loan by certain shareholders of the Company (“LC Providers”).  As of September 30, 2009, RBC had collected $1,391,253 from the LC Providers and $1,392,577 had been transferred into trust pending repayment of the RBC loan.  The LC Providers instructed RBC to pay off the RBC loan using the $1,464,267 drawn from the LCs, and on October 6, 2009, the RBC loan was paid in full.  As a result, the Company became indebted to the LC Providers in the amount of $1,464,267 plus interest at a rate of 10% per annum and expenses.  The LC Providers have a first priority lien on all of the Company’s assets, including its intellectual property.
 
On October 29, 2009, as part of our refinancing, LC Provider Owen Jones, a director, converted his LC debt of $289,842 into 7,246,040 shares of our common stock.  This reduced the LC Provider debt by $289,842.  In addition, Mr. Jones agreed to purchase 2,831,008 additional shares of our common stock for a price of $113,240 by December 31, 2009, further reducing the Company’s need for debt.
 
On October 30, 2009, we executed definitive loan documents for our new $3,000,000 credit facility with Silicon Valley Bank (“SVB”), consisting of a $2,200,000 term loan facility (“SVB Term Loan”) and an $800,000 credit line to be secured by our accounts receivable (“SVB A/R Line”).  The SVB A/R Line will mature 18 months from closing.  The SVB Term Loan will be interest only for 18 months from closing, and will then convert to an 18 month term loan, with final maturity 36 months from closing.  The SVB Term Loan will be secured by cash deposits or letters of credit supplied by certain shareholders (“SVB Pledgors”), with the largest amount being provided by our CEO.  The SVB Pledgors have a lien on all of the Company’s assets, including its intellectual property, second only to SVB’s lien.
 
During November 2009, the Company anticipates borrowing a total of $1,550,000 under the SVB Term Loan, in order to pay off the remaining LC Providers in full, reduce the Company’s borrowing cost, and provide the Company with additional working capital.
 
 
Recent Accounting Pronouncements
 
Codification

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of SFAS No. 162” (the Codification).  The Codification will be the single source of authoritative nongovernmental U.S. accounting and reporting standards, superseding existing FASB, AICPA, EITF and related literature. The Codification eliminates the hierarchy of generally accepted accounting standards (“GAAP”) contained in SFAS No. 162 and establishes one level of authoritative GAAP. All other literature is considered non-authoritative. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009, which for the Company would be September 30, 2009.  There was no change to our consolidated financial statements upon adoption.  All accounting references have been updated. SFAS references have been replaced with Accounting Standard Codification (“ASC”) references.
 
6

 
Revenue Recognition

In September 2009, the Emerging Issues Task Force (“EITF”) reached a consensus on ASC 605-25.  ASC 605-25 eliminates the criterion for objective and reliable evidence of fair value for the undelivered products or services. Instead, revenue arrangements with multiple deliverables should be divided into separate units of accounting if the deliverables meet both of the following criteria:
 
§  
The delivered items have value to the customer on a standalone basis; and

§  
If the arrangement includes a general right of return relative to the delivered items, delivery or performance of the undelivered items is considered probable and substantially in the control of the vendor.

ASC 605-25 eliminates the use of the residual method of allocation and requires, instead, that arrangement consideration be allocated, at the inception of the arrangement, to all deliverables based on their relative selling price (i.e., the relative selling price method). When applying the relative selling price method, a hierarchy is used for estimating the selling price for each of the deliverables, as follows:
 
·  
VSOE (Vendor-Specific Objective Evidence) of the selling price;

·  
Third-party evidence (TPE) of the selling price – prices of the vendor’s or any competitor’s largely interchangeable products or services, in standalone sales to similarly situated customers; and
 
·  
Best estimate of the selling price.

In September 2009, the EITF reached a consensus on ASC 985-605.  Entities that sell joint hardware and software products that meet the scope exception (i.e., essential functionality) will be required to follow the guidance in ASC 985-605.  ASC 985-605 provides a list of items to consider when determining whether the software and non-software components function together to deliver a product’s essential functionality.

ASC 985-605 must be adopted for arrangements entered into beginning January 1, 2011, and may be early-adopted.  We are currently evaluating the impact of adopting ASC 985-605 and ASC 605-25 on our consolidated financial statements.
 
 
During the first three quarters of fiscal 2009, we adopted the following accounting standards:
 
Fair Value Measurements

Effective January 1, 2008, we adopted ASC 825, which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The adoption of ASC 825 did not have a material impact on the consolidated financial statements.

In April 2009, the FASB issued ASC 825-10.  ASC 825-10 extends disclosure requirements to interim period financial statements, in addition to the existing requirements for annual periods and disclosure of the methods and significant assumptions used to estimate fair value.  ASC 825-10 is effective for interim and annual periods ending after June 15, 2009. The adoption of ASC 825-10 did not have a material impact on the consolidated financial statements.

Subsequent Events

In May 2009, the FASB issued ASC 855.  ASC 855 is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date—that is, whether that date represents the date the financial statements were issued or were available to be issued.  ASC 855 is effective for interim and annual periods ending after June 15, 2009 and shall be applied prospectively.  The adoption of ASC 855 did not have a material impact on our consolidated financial statements.
 
7

 
Item 3.    Quantitative and Qualitative Disclosures about Market Risk
 
Not applicable.  The Company is a smaller reporting company, and smaller reporting companies are not required to file the quantitative and qualitative disclosures about market risk.
 

 
Item 4T.   Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the end of the period covered by this Quarterly Report on Form 10-Q, September 30, 2009, we have carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures.  This evaluation was carried out under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial and accounting officer. Based upon that evaluation, the Company’s principal executive officer and the Company’s principal financial and accounting officer concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this report.
 
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time period specified in the Securities and Exchange Commission’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to management, including our president and chief executive officer as appropriate, to allow timely decisions regarding required disclosure.
 
Changes in Internal Control over Financial Reporting
 
Management is responsible for establishing and maintaining adequate control over financial reporting for the Company.  Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  Internal controls over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Our management identified no changes in our internal controls over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
 
PART II – OTHER INFORMATION
 
Item 1.    Legal Proceedings
 
 
We may, from time to time, be subject to claims and legal proceedings brought against it in the normal course of business. Such matters are subject to many uncertainties. Management believes that adequate provisions have been made in the accounts where required and the ultimate resolution of such contingencies will not have a material adverse effect on our financial position. However, we are not able to predict the outcome of the pending legal proceedings listed below, or other legal proceedings, to which we may become subject in the normal course of business or estimate the amount or range of any possible loss we might incur if we do not prevail in the final, non-appealable determinations of such matters. Therefore, we have no current accruals for these potential contingencies. We cannot provide assurance that the legal proceedings listed here, or other legal proceedings not listed here, will not have a material adverse impact on our financial condition or results of operations.
 
8

 
On February 6, 2009, we filed a lawsuit in the U.S. District Court for the Eastern District of Michigan, Southern Division, against Adil Shafi for rescission of the acquisition of Shafi, Inc. and Shafi Innovation, Inc. (collectively, “SI”) and for damages. On April 22, 2009, Adil Shafi filed a First Amended Counterclaim asserting eight causes of action against us and our CEO, Frederick Weidinger.  We believe that Adil Shafi’s claims are groundless both as to us and to Mr. Weidinger.  In a letter dated May 7, 2009, the law firm representing us and Mr. Weidinger advised Adil Shafi and his counsel that Adil Shafi added Mr. Weidinger as a third-party defendant solely for improper purposes, and demanded that Adil Shafi dismiss the Weidinger claims within 21 days.  Mr. Weidinger has not benefited in any way from the SI transaction, nor acted improperly in any way with respect to the SI transaction.  On July 22, 2009, Adil Shafi filed a Second Amended Counterclaim asserting fewer causes of action against us and our CEO.  While we have initiated this action and is vigorously pursuing it, the final outcome, which we believe will be favorable, cannot now be determined.  This matter is subject to inherent uncertainties and management’s view may change in the future.

Three former employees, released as part of a reduction in work force by Braintech Canada, Inc., have instituted small claims in the Provincial Court of British Columbia (small claims court) for common law entitlement.  Each claim is for $25,000 (Canadian).  The Company disputes the plaintiffs’ claims and believes that it has meritorious defenses and intends to vigorously defend these actions.  Management believes that any potential loss associated with this matter is neither probable nor reasonably estimable at this time and accordingly has not accrued any amounts for any potential loss.

No amounts have been accrued with respect to the above outstanding legal proceedings.


Item 1A.    Risk Factors
 
We operate in a rapidly changing environment that involves a number of risks and uncertainties, some of which are beyond our control. Before deciding to purchase, hold or sell our common stock, you should carefully consider the risks described below in addition to the other cautionary statements and risks described elsewhere and the other information contained in this Quarterly Report on Form 10-Q and our other filings with the SEC, including our subsequent reports on Forms 10-Q and 8-K. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial or which are similar to those faced by other companies in our industry or business in general may also affect our business operations.  If any of these known or unknown risks or uncertainties actually occurs with material adverse effects on us, our business, financial condition, results of operations and/or liquidity could be seriously harmed. In that event, the market price for our common stock will likely decline and you may lose all or part of your investment.
 
There is substantial doubt about our ability to continue as a going concern.
 
Our independent registered public accounting firm has issued an opinion on our consolidated financial statements for the years ended December 31, 2008 and 2007 that states that the consolidated financial statements were prepared assuming we will continue as a going concern and further states that our recurring losses from operations raise substantial doubt about our ability to continue as a going concern.  Our plans concerning these matters are addressed in this Form 10-Q and in Note 1 to the accompanying unaudited condensed consolidated financial statements.  Our future is dependent on our ability to address these matters.  If we fail to do so for any reason, we may not be able to continue as a going concern, our business may fail and investors may lose their entire investment.
 
As a result of paying off our loan with Royal Bank of Canada (“RBC”), we became indebted to the LC Providers.  If we are not able to pay the remaining amounts due to the LC Providers, the LC Providers could enforce their rights in default and investors could lose their entire investment.
 
All of our assets, including intellectual property, are pledged as security to the individuals providing letters of credit (“LCs”) as back-stop security for the RBC loan (“LC Providers”).  The RBC loan was paid with funds drawn from LCs provided by the LC Providers.  If we are not able to pay the remaining amounts due to the LC Providers, the LC Providers could enforce their rights in default and investors could lose their entire investment.
 
We could default under our new loan with Silicon Valley Bank (“SVB”), and investors could lose their entire investment.
 
Our new loan with SVB is secured by a first lien on all assets of the Company, including intellectual property.  We could default under the SVB loan, and investors could lose their entire investment.
 
9

 
If we default under the SVB loan, SVB may pay the SVB loan using cash and a letter of credit provided by certain individuals (“Pledgors”), triggering a default under the Pledgors’ security agreement with the Company which could result in investors losing their entire investment.
 
The Pledgors have a lien on all of the Company’s assets, including intellectual property, second only to SVB’s lien.  In the event the Company defaults on the SVB loan and SVB uses the Pledgors’ back-stop security to pay the SVB loan, investors could lose their entire investment.  Our CEO, who is our largest shareholder, is also the Pledgor of the largest amount of back-stop security to SVB.  His interests and the interests of the other Pledgors may conflict with the interests of the other holders of Braintech’s common stock.  As part of the Pledgors’ back-stop security transaction, a Pledgors Committee will be created consisting of two non-employee Pledgors to manage the affairs of the Pledgors as they relate to the Company.
 
We have almost exclusively relied on a single channel partner, ABB, to distribute and generate sales of our products.  Our agreement with ABB expired on December 31, 2008. If we are unable to promptly enter into relationships with new customers or new channel partners, our business may fail and investors may lose their entire investment.
 
We historically relied almost exclusively on the Robotics Division of ABB Inc. to purchase our products and to sell and distribute them to end users pursuant to an Exclusive Global Channel Partner Agreement entered into in May 2006.  This Channel Partner Agreement expired in accordance with its terms on December 31, 2008.  Under this agreement, ABB accumulated approximately $8 million of unsold inventory of vision licenses which we have agreed they may continue selling notwithstanding the agreement’s expiration on December 31, 2008.  We will receive no further revenue under this agreement.  If we are unable to promptly enter into relationships with new customer or new channel partners, our business may fail and investors may lose their entire investment.
 
We may be unable to generate new sales sufficient to cover our expenses, our business may fail, and investors could lose their entire investment.
 
We may not be successful in generating new revenues sufficient to cover our expenses, our business may fail, and investors could lose their entire investment. In addition, because our products and services require a long sales cycle, even if we do generate substantial sales, we may be unable to generate such sales quickly enough to cover our expenses, our business may fail, and investors could lose their entire investment.
 
We may require additional funds to survive as a company. Our inability to obtain such financing could result in foreclosure.
 
We may need to raise additional funds through public or private debt or sale of equity. The financing we need may not be available when needed. Even if this financing is available, it may be on terms that are materially adverse to your interests with respect to dilution of book value, dividend preferences, liquidation preferences, or other terms. Our inability to obtain financing could require us to cease our operations, which could result in investors losing their entire investment.
 
We have a history of losses and have a significant deficit, which raises substantial doubt about our ability to continue as a going concern.
 
We have generated only approximately $12.9 million in revenues since the inception of our current operations January 3, 1994 and we expect to incur operating losses in the future. Our net loss from inception of our current operations in 1994 to September 30, 2009 was approximately $41.3 million. We had unrestricted cash in the amount of $169,756 as of September 30, 2009. We estimate that without further funding or new revenue, our cash resources will be insufficient to repay the LC Providers the amounts due as described above. These circumstances raise substantial doubt about our ability to continue as a going concern as described in an explanatory paragraph to our independent auditors’ report dated March 26, 2009 on our audited financial statements for the years ended December 31, 2008 and 2007.  If we are unable to continue as a going concern, investors will lose their entire investment.
 
Because we can issue additional common shares, purchasers of our common stock may incur immediate dilution and may experience further dilution.
 
The Board of Directors is authorized to issue up to 200,000,000 common shares, of which 69,826,860 are issued and outstanding as of November 12, 2009. Our board of directors has the authority to cause us to issue additional shares of common stock without the consent of any of our shareholders. Consequently, our shareholders may experience significant dilution in their ownership in the future.
 
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We may lose our competitiveness if we are not able to protect our proprietary technology and intellectual property rights against infringement, and any related litigation may be time-consuming and costly.
 
Our success and ability to compete depends to a significant degree on our proprietary technology. If any of our competitors copy or otherwise gain access to our proprietary technology or develop similar products independently, we may not be able to compete as effectively. The measures we have implemented to protect our proprietary technology and other intellectual property rights are currently based upon a combination of provisional patent applications, patents, trademarks and trade secrets. These measures, however, may not be adequate to prevent the unauthorized use of our proprietary technology and our other intellectual property rights. Further, the laws of foreign countries may provide inadequate protection of such intellectual property rights. We may need to bring legal claims to enforce or protect such intellectual property rights. Any litigation, whether successful or unsuccessful, may result in substantial costs and a diversion of our resources. In addition, notwithstanding our rights to our intellectual property, other persons may bring claims against us alleging that we have infringed on their intellectual property rights or claims that our intellectual property rights are not valid. Any claims against us, with or without merit, could be time consuming and costly to defend or litigate, divert our attention and resources, result in the loss of goodwill associated with our business or require us to make changes to our products.
 
We have revised our business strategy to include new employees, new markets, new technologies, and new products. If we are unsuccessful in penetrating new markets, generating new customers, developing new technologies and products, our business may fail and investors may lose their entire investment.
 
We have no operating history in these new markets and our new technologies and products are novel to these markets. As a result, it is extremely difficult for us to accurately forecast our future operating performance and the performance of our new technologies and products and the revenues it will generate. Our prospects must be considered in light of the risks, delays, expenses and difficulties frequently encountered by companies embarking into new markets with new technologies and products. Currently we are finding that it is very difficult to introduce our products into these new sales markets and that we have a significantly longer than normal sales cycle.  Many of these factors are beyond our control, including unanticipated operational, research and business development expenses, employment costs, administrative expenses, legal expenses and technology costs. In addition, as a result of the current economic situation, we are finding that our potential industrial assembly customers do not have available capital budgets.  We cannot assure our investors that our revised business strategy will materialize or prove successful. Furthermore, we may need to raise additional funds through public or private debt or sale of equity to execute our revised business strategy. There can be no assurance that any additional financing will be available to us or that adequate funds will be available when needed or on terms that are acceptable to us. The inability to secure additional financing would prevent us from succeeding with our new business strategy which would result in the loss of your investment.

Acquisitions could prove difficult to integrate, disrupt our business, dilute stockholder value and consume resources that are necessary to sustain our business.

We may acquire companies in the future. An acquisition may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the technologies, products, personnel or operations of the acquired organizations, particularly if the key personnel of the acquired company choose not to work for us, and we may have difficulty retaining the customers of any acquired business due to changes in management and ownership. Acquisitions may also disrupt our ongoing business, divert our resources and require significant management attention that would otherwise be available for ongoing development of our business. We cannot provide assurance that the anticipated benefits of any acquisition, investment or business relationship would be realized or that we would not be exposed to unknown liabilities. Moreover, we may become involved in legal disputes relating to acquisitions.  In connection with one or more of these transactions, we may:

·  
issue additional equity securities that would dilute the ownership of our stockholders;
 
·  
use cash that we may need in the future to operate our business;
 
·  
incur or assume debt on terms unfavorable to us or that we are unable to repay;
 
·  
incur large charges or substantial liabilities;
 
·  
encounter difficulties retaining key employees of an acquired company or integrating diverse business cultures;
 
·  
become involved in legal disputes; and
 
·  
become subject to adverse tax consequences, substantial depreciation or deferred compensation charges.
 
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For example, in our acquisition of Shafi, the consideration we paid consisted primarily of shares of our common stock, which diluted the ownership of our existing stockholders.  Moreover, we are currently in litigation to rescind the Shafi acquisition. See Item 1 of Part II of this Form 10-Q (“Legal Proceedings”) and note 3 to our financial statements.
 
A decline in the price of our common stock could affect our ability to raise further working capital and adversely impact our ability to continue operations.
 
A prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise capital. Because a portion of our continued operations will be financed through the sale of equity securities, a decline in the price of our common stock could be especially detrimental to our liquidity and our operations. Such reductions may force us to reallocate funds from other planned uses and may have a significant negative effect on our business plan and operations, including our ability to develop new products and continue our current operations. If our stock price declines, we can offer no assurance that we will be able to raise additional capital or generate funds from operations sufficient to meet our obligations. If we are unable to raise sufficient capital in the future, we may not be able to have the resources to continue our normal operations.
 
The market price for our common stock may also be affected by our ability to meet or exceed expectations of analysts or investors. Any failure to meet these expectations, even if minor, may have a material adverse effect on the market price of our common stock.
 
Our common stock is illiquid and the price of our common stock may be negatively impacted by factors which are unrelated to our operations.
 
Our common stock currently trades on a limited basis on the OTC Bulletin Board. Trading of our stock through the OTC Bulletin Board is frequently thin and highly volatile. There is no assurance that a sufficient market will develop in our stock, in which case it could be difficult for shareholders to sell their stock. The market price of our common stock could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve our planned growth, quarterly operating results of our competitors, trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting our competitors or us. In addition, the stock market is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance and could have the same effect on our common stock.
 
We operate in a highly competitive industry. Many of our competitors have greater financial, technical, sales and marketing resources, better name recognition and a larger customer base than ours. Our failure to compete effectively in the areas of hiring qualified personnel, product line and price may adversely affect our ability to generate revenue.
 
The market for vision guided robotics and vision guidance is subject to frequent product introductions with improved price and/or performance characteristics. Even if we are able to introduce products which meet customer requirements in a timely manner, there can be no assurance that our existing and new products will gain enough market acceptance to allow us to execute a timely sales contract with one or more new customers. Many of our competitors have greater financial, technical, sales and marketing resources, better name recognition and a larger customer base than ours. They may be better able to attract qualified personnel than we will. In addition, many of our large competitors may offer customers a broader product line, which may provide a more comprehensive solution than our current solutions. Competitors’ products may add features, increase performance or sell at lower prices. We cannot predict whether our products will compete successfully with such new or existing competing products. Increased competition in the industry could result in significant price competition, reduced profit margins or loss of market share, any of which could have a material adverse effect on our ability to generate revenues and successfully operate our business. If we go out of business, investors will lose their entire investment.
 
The sale of a substantial number of shares of our common stock into the public market may result in significant downward pressure on the price of our common stock and could affect the ability of our stockholders to realize the current trading price of our common stock.
 
The sale of a substantial number of shares of our common stock in the public market could cause a reduction in the market price of our common stock. We had 69,826,860 shares of common stock issued and outstanding as of November 12, 2009.  On April 20, 2007 we filed a registration statement under the Securities Act of 1933. This registration statement, declared effective on May 11, 2007, relates to the resale by certain selling stockholders of up to 13,977,494 shares of common stock and 23,694,259 shares of common stock issuable to security holders upon exercise of share purchase warrants. The 13,977,494 shares registered by this registration statement are included in the number of our issued and outstanding common shares as of November 12, 2009, shown above. Upon the exercise of the outstanding warrants an additional 23,694,259 shares will also be outstanding and further dilute your interest as a shareholder. Furthermore, in connection with the acquisition of Shafi, we issued shares of our common stock.  Any significant downward pressure on the price of our common stock as the selling stockholders under one or more registration statements sell the shares of our common stock could encourage short sales by the selling stockholders or others. Any such short sales could place further downward pressure on the price of our common stock. If the price of our common stock goes down, investors could lose most of the value of their investments.
 
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Rapid technological changes in the machine vision and vision guided robotics industry could render our products non-competitive or obsolete and consequently affect our ability to generate revenues, causing us to go out of business and investors to lose their entire investment.
 
The machine vision and vision guided robotics industry is characterized by rapidly changing technology and evolving industry standards. We believe that our success will depend in part on our ability to develop our products or enhance our current products and to introduce improved products promptly into the market. We can make no assurance that our technology will not become obsolete due to the introduction of alternative technologies by competitors. If we are unable to continue to develop and introduce new products to meet technological changes and changes in market demands, our business and operating results, including our ability to generate revenues, could be adversely affected. If we go out of business, investors will lose their entire investment.
 
We do not intend to pay dividends and there will be less ways in which you can make a gain on any investment in Braintech Inc.
 
We have never paid any cash dividends and currently do not intend to pay any dividends for the foreseeable future. Because we do not intend to declare dividends, any gain on an investment in our Company will need to come through appreciation of the price of our common stock. There can be no assurance that the price of our common stock will increase.
 
Trading of our stock may be restricted by the SEC’s penny stock regulations, which may limit a stockholder’s ability to buy and sell our stock.
 
The Securities and Exchange Commission has adopted regulations which generally define “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.
 
NASD sales practice requirements may also limit a stockholder’s ability to buy and sell our stock.
 
In addition to the “penny stock” rules described above, the National Association of Securities Dealers (NASD) has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, the NASD believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The NASD requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
 
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Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
 
As previously disclosed, under our new Employment and Retention Agreement effective as of January 1, 2009 (“Agreement”) with our Chairman, President and CEO, Rick Weidinger (“Weidinger”), Weidinger is eligible to earn 13,000,000 shares of our common stock (“Bonus Stock”) under the 2007 Bonus Stock and Bonus Stock Option Plan (“Bonus Plan”) on the achievement of certain specified milestones.  The pool of registered shares under the Bonus Plan is insufficient to issue all 13,000,000 shares of Bonus Stock as registered shares.  Accordingly, we issued 8,000,000 registered shares and 5,000,000 unregistered shares.  Pursuant to the Agreement, all of these shares are held in escrow pending the achievement of the specified milestones.  The 5,000,000 unregistered shares were not registered in reliance on Section 4(2) of the Securities Act.

The information contained in Item 5 below relating to unregistered shares issued to Edward A. White, Jerry Osborn, Owen Jones and certain Pledgors is incorporated herein by reference.  The shares were not registered in reliance on Section 4(2) of the Securities Act.

Item 3.    Defaults upon Senior Securities
 
Not applicable
 
Item 4.    Submission of Matters to a Vote of Security Holders
 
Not applicable
 
Item 5.    Other Information
 
On October 27, 2009, effective October 22, 2009, the Company entered into an Employment Agreement (“White Agreement”) with Edward A. White, the Company’s Senior Vice President – Administration, principal accounting officer and principal financial officer.  The White Agreement provides for monthly compensation of $10,000 through December 31, 2009.  Under the White Agreement, Mr. White was granted options to purchase 250,000 shares of our common stock through October 21, 2012 and the Company agreed to issue 200,000 unregistered shares of common stock.  The 200,000 unregistered shares will not be registered in reliance on Section 4(2) of the Securities Act. The description of the terms of the White Agreement set forth herein is qualified in its entirety by reference to the full text of the White Amendment, which is filed as an exhibit hereto.
 
Under the Employment Agreement dated as of January 28, 2009 as amended July 1, 2009 (“Agreement”) between the Company and Jerry L. Osborn (“Osborn”), Executive Vice President, Braintech, Inc. and President, Braintech Industrial, Inc., Osborn’s salary and car allowance was paid in unregistered shares of our stock beginning July 1, 2009.  Pursuant to the Agreement, the Company issued Osborn the following unregistered shares of our common stock:  185,574 shares for July 2009 on August 7, 2009, 139,846 shares for August 2009 on September 10, 2009, 166,068 shares for September 2009 on October 5, 2009, and 370,069 shares for October 2009 will be issued in November 2009.  As permitted under the Agreement, effective October 31, 2009 Osborn and the Company elected to terminate his employment and as a result he will receive severance pay of 3,500,000 unregistered shares of our common stock, which will be issued in November 2009.  The shares were not registered in reliance on Section 4(2) of the Securities Act.  In addition, as provided by the Agreement, Osborn’s 1,750,000 shares of Bonus Stock will become fully vested and his 500,000 Bonus Stock Options will become fully vested and exercisable for three years from the date of termination.
 
Pursuant to a Stock Purchase Agreement with the Company dated as of October 29, 2009 (“Stock Purchase Agreement”), as part of our refinancing, LC Provider Owen Jones, a director, converted his LC debt of $289,842 into 7,246,040 unregistered shares of our common stock, i.e., a ratio of 25 shares for each $1 of debt converted.  This reduced the LC Provider debt by $289,842.  In addition, Mr. Jones agreed to purchase 2,831,008 additional unregistered shares of our common stock for a price of $113,240 ($.04 per share) by December 31, 2009, further reducing the Company’s need for debt. The shares will not be registered in reliance on Section 4(2) of the Securities Act. The description of the terms of the Stock Purchase Agreement set forth herein is qualified in its entirety by reference to the full text of the Stock Purchase Amendment, which is filed as an exhibit hereto.
 
Effective October 30, 2009, we executed definitive loan documents for our new $3,000,000 credit facility with Silicon Valley Bank (“SVB”), consisting of a $2,200,000 term loan facility (“SVB Term Loan”) and an $800,000 credit line to be secured by our accounts receivable (“SVB A/R Line”).  The SVB A/R Line will mature 18 months from closing.  The SVB Term Loan will be interest only for 18 months from closing, and will then convert to an 18 month term loan, with final maturity 36 months from closing.  The SVB Term Loan will be secured by cash deposits or letters of credit supplied by certain shareholders (“Pledgors”), with the largest amount being provided by our CEO.  The Pledgors have a lien on all of the Company’s assets, including its intellectual property, second only to SVB’s lien.  During November 2009, the Company anticipates borrowing a total of $1,550,000 under the SVB Term Loan, in order to pay off the remaining LC Providers in full, reduce the Company’s borrowing cost, and provide the Company with additional working capital.
 
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As a pre-condition for the new credit facility, SVB required back-stop security, which was provided by five shareholders of the Company.  In consideration of the Pledgors providing $1,550,000 of back-stop security to make the new SVB credit facility possible, the Company, with the unanimous approval of the LC Providers Committee, the Independent Directors Committee and the full Board of Directors, agreed with the Pledgors as follows.  The Pledgors will receive 20 shares of common stock for each $1 of back-stop security they provide for the SVB loan.  The shares will not be registered in reliance on Section 4(2) of the Securities Act. The Pledgors will receive a secured note which is activated only in the event of default.  The face value of each note is equal to the amount of back-stop security provided plus a 50% return.  An 8% coupon is initiated in the event of default.  The notes are secured in second position behind SVB.  In the event of default, Pledgors who are not already on the Board of the Company will be appointed to the Board.  The Pledgors have the right to approve or deny any debt financing proposed by the Company, but such approval must not be unreasonably withheld, conditioned or delayed.  The Pledgors’ expenses will be paid by the Company.  The following table shows the amounts of back-stop security placed or to be placed and the amount of consideration to be received by each Pledgor to date:
 
PLEDGOR
DESCRIPTION
BACK-STOP SECURITY AMOUNT
SHARES TO BE RECEIVED
AMOUNT OF NOTE
Rick Weidinger
CEO, Director,
Largest Shareholder
$750,000
15,000,000
$1,125,000
Kenneth Brooks
Shareholder
$350,000
7,000,000
$525,000
David Baird
Shareholder
$250,000
5,000,000
$375,000
Fred Bohlander
Shareholder
$100,000
2,000,000
$150,000
Colin Eagen
Shareholder
$100,000
2,000,000
$150,000

Through December 31, 2009, the Pledgors have the right to place additional back-stop security up to an aggregate amount of $2,200,000, which is the limit of the SVB Term Loan.  Additional parties, including shareholders of the Company, may become Pledgors through December 31, 2009, subject to the $2,200,000 aggregate limit and subject to the approval of SVB and the Company,.  In addition, through December 31, 2009, each Pledgor, subject to SVB’s approval, may elect to convert his “pledge” into equity on the same terms as Mr. Jones’ conversion described above, i.e., at a ratio of 25 total shares (including the 20 already received) for each $1 of back-stop security converted.  If any Pledgor so elects, SVB would use such Pledgor’s pledged back-stop security to pay down the SVB Term Loan.  In such event, the applicable Pledgor, having already received 20 unregistered shares of our common stock for each $1 of back-stop security pledged, the Pledgor would then receive five (5) additional unregistered shares and forfeit his Pledgor’s rights under the SVB arrangement. The shares will not be registered in reliance on Section 4(2) of the Securities Act.
 
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Item 6.    Exhibits
 
The following is an index of the exhibits included in this report or incorporated herein by reference.
 
Number           Exhibit
   
10.1*
Loan and Security Agreement (Term Loan) dated as of October 30, 2009 between the Company and Silicon Valley Bank
   
10.2*
Loan and Security Agreement (Accounts Receivable Line of Credit) dated as of October 30, 2009 between the Company and Silicon Valley Bank
   
10.3*
Non-Recourse Letter of Credit Agreement dated as of October 30, 2009 by Rick Weidinger in favor of Silicon Valley Bank
   
10.4*
Non-Recourse Pledged Account Agreement dated as of October 30, 2009, by Kenneth Brooks, David Baird, Frederick Bohlander and Colin Eagen in favor of Silicon Valley Bank
   
10.5*
Subordination Agreement dated as of October 30, 2009 between Rick Weidinger, Kenneth Brooks, David Baird, Frederick Bohlander and Colin Eagen and Silicon Valley Bank
   
10.6*
Subordination Letter of James Speros dated as of October 30, 2009 in favor of Silicon Valley Bank
   
10.7*
Stock Purchase Agreement dated as of October 29, 2009 between the Company and Owen Jones
   
10.8*
Employment Agreement dated as of October 22, 2009 between the Company and Edward A. White
   
10.9*
Promissory Note ($90,300 Cash Bonus plus interest) issued September 21, 2009 by the Company to Rick Weidinger
   
10.10*
Promissory Note (Deferred Salary plus interest) issued September 21, 2009 by the Company to Rick Weidinger
   
10.11*
Promissory Note ($30,000 Stock Repurchase plus interest) issued September 25, 2009 by the Company to Rick Weidinger
   
31.1*
Certificate of the Principal Executive Officer pursuant to Sec 302 of the Sarbanes-Oxley Act of 2002
   
31.2*
Certificate of Principal Financial and Accounting Officer pursuant to Sec 302 of the Sarbanes-Oxley Act of 2002
   
32.1*
Certificate of Principal Executive Officer pursuant to Sec 906 of the Sarbanes-Oxley Act of 2002
   
32.2*
Certificate of Principal Financial and Accounting Officer pursuant to Sec 906 of the Sarbanes-Oxley Act of 2002

Exhibits filed herewith are designated with an asterisk (*)

 
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SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 BRAINTECH, INC. (the Registrant)
 
 
       
 By:
/s/ Frederick W. Weidinger
 
Date:  November 16, 2009
 
Frederick W. Weidinger
   
 
Chief Executive Officer
(Principal Executive Officer)
   
     
       
 By:
/s/ Edward A. White             
 
Date: November 16, 2009
 
Edward A. White
   
 
Treasurer,
(Principal Financial and
Accounting Officer)
   

 
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