Attached files
file | filename |
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EX-10.1 - EXHIBIT 10.1 - BRAINTECH INC | ex101.htm |
EX-10.6 - EXHIBIT 10.6 - BRAINTECH INC | ex106.htm |
EX-10.3 - EXHIBIT 10.3 - BRAINTECH INC | ex103.htm |
EX-10.7 - EXHIBIT 10.7 - BRAINTECH INC | ex107.htm |
EX-10.2 - EXHIBIT 10.2 - BRAINTECH INC | ex102.htm |
EX-10.8 - EXHIBIT 10.8 - BRAINTECH INC | ex108.htm |
EX-10.9 - EXHIBIT 10.9 - BRAINTECH INC | ex109.htm |
EX-10.5 - EXHIBIT 10.5 - BRAINTECH INC | ex105.htm |
EX-10.4 - EXHIBIT 10.4 - BRAINTECH INC | ex104.htm |
EX-10.11 - EXHIBIT 10.11 - BRAINTECH INC | ex1011.htm |
EX-10.10 - EXHIBIT 10.10 - BRAINTECH INC | ex1010.htm |
EX-32.2 - EXHIBIT 32.2 - BRAINTECH INC | ex322111309.htm |
EX-31.2 - EXHIBIT 31.2 - BRAINTECH INC | ex312111309.htm |
EX-32.1 - EXHIBIT 32.1 - BRAINTECH INC | ex321111309.htm |
EX-31.1 - EXHIBIT 31.1 - BRAINTECH INC | ex311111309.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.
10
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.
|
11
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.
12
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.
13
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.
14
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.
15
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 (*)
16
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)
|
17