<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period ended March 31, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________
BRAINTECH, INC.
---------------------------------------
(Exact name of Registrant as specified in its charter)
Nevada . . 98-0168932 .
- ----------------------- --------------------- --------------------
(State or jurisdiction (Commission File (IRS Employer
of incorporation) Number) Identification No.)
930 West 1st St. #102, North Vancouver, B.C., Canada, V7P 3N4
- ---------------------------------------------------------------------------
(Address of Principal Executive offices)
Issuer's Telephone Number: (604) 988-6440
--------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $0.001 par value
(Title of Class)
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities
<PAGE>
Exchange Act of 1934 during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes / X / No / /
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 34,771,333 Common shares, par value
$0.001, as at July 22, 1999.
Transitional Small Business Disclosure Format (check one):
Yes / / No / X /
Index to Exhibits on Page 7
ii
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BrainTech, Inc.
Form 10-QSB
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.......................................1
Item 2. Management's Discussion and
Analysis or Plan of Operation..............................1
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..........................................5
Item 2. Changes in Securities and Use of Proceeds..................7
Item 3. Defaults upon Senior Securities............................7
Item 4. Submission of Matters to a Vote of
Securities Holders.........................................7
Item 5. Other Matters..............................................7
Item 6. Exhibits and Reports on Form 8-K...........................7
</TABLE>
iii
<PAGE>
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
Each of the following items are contained in the Company's Consolidated
Financial Statements and are set forth herein.
(i) Consolidated Balance Sheets as of March 31, 1998 and 1999;
(iii) Consolidated Statements of Operations for the three month
periods ended March 31, 1998 and 1999;
(iv) Statements of Stockholders' Deficit for the period beginning
January 3, 1994 and ending ended March 31, 1999;
(v) Consolidated Statements of Cash Flows for the three month
periods ended March 31, 1998 and 1999; and
(vi) Notes to Financial Statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
OVERVIEW
The Company was incorporated in 1987. Since the first quarter of 1994,
the Company has been engaged in the development of products to be used in
creating visual recognition systems, and in designing visual recognition
systems.
As of March 31, 1999 the Company had incurred an aggregate deficit of
approximately $6,112,494 during the development stage. The Company expects to
continue to incur significant additional operating losses over the foreseeable
future as its product development, research and development, and marketing
efforts continue to expand. Operating losses may fluctuate from quarter to
quarter as a result of differences in the timing of expenses incurred and
revenue recognised.
1
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RESULTS OF OPERATIONS
The Company believes that its limited history of revenue generation and
recent business developments make the prediction of future results of operations
difficult, and, accordingly, that its operating results should not be relied
upon as an indication of future performance.
THREE MONTH PERIOD ENDED MARCH 31, 1999 COMPARED WITH THE THREE MONTH PERIOD
ENDED MARCH 31, 1998
During the three month period ended March 31, 1999, the Company did not
receive any operating revenue. During the three month period ending March 31,
1998, the Company recorded revenue from operations totalling $31,005. This
amount consisted of $30,000 invoiced during the quarter to Cordis, a Johnson &
Johnson company, for a feasibility study in respect of a shunt inspection
system, and $1,005 representing one half of the amount charged to NGI Technology
Inc. for the purchase of a BrainTron processor.
Cost of sales for the three month period ended March 31, 1998 were
$16,200. This figure is an estimate, based on a pro rata portion of the total
cost of sales of $30,005 recorded for the fiscal year ended December 31, 1998.
The Company recorded no cost of sales for the three month period ended March 31,
1999.
Research and development expenses for the three month period ended
December 31, 1999 were $123,492, compared with $5,052 for the three month period
ended December 31, 1998. Research and development expenses (which are reported
net of government grants) were reduced during the period ended March 31, 1998 by
grant funds totalling approximately $38,000 from the National Research Council
of Canada. Those funds were used for the development of the Odysee Development
Studio, the Company's principal project. Salaries allocated to research and
development increased from approximately $32,000 for the three month period
ended March 31, 1998 to approximately $97,000 (inclusive of bonus payments
totalling $24,000) for the three month period ended March 31, 1999. In addition,
research and development expenses for the three month period ended March 31,
1999 included approximately $20,000 in payments to North Shore Circuit Design of
Austin, Texas for work performed on the IMPAC Accelerator board. There was no
2
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similar payment during the three month period ended March 31, 1998.
Consulting and contractor expenses decreased to $4,045 for the three
month period ended December 31, 1999 from $10,231 for the three month period
ended December 31, 1998. The magnitude of the decrease is not material.
Salaries and benefits expenses increased to approximately $58,721 for
the three month period ended March 31, 1999 from approximately $43,870 for the
three month period ended March 31, 1998. The principal reason for the increase
was additional personnel employed by the Company.
General, selling, and administrative expenses increased to
approximately $170,667 for three month period ended March 31, 1999 from
approximately $114,778 for the three month period ended March 31, 1998. Several
factors contributed to the increase. The Company's recorded foreign exchange
expense increased from approximately $28,600 to approximately $46,600. The
Company's foreign exchange expense results principally from adjusting entries
made in respect of transactions recorded in United States dollars, but actually
carried out in Canadian dollars. Accounting costs increased from approximately
$2,700 to approximately $10,400, principally as a result of costs incurred in
resolving accounting issues relating to the Company's incentive stock options
and costs incurred in connection with the Company becoming a reporting issuer
pursuant to the Securities Exchange Act of 1934. Rent expenses increased from
approximately $11,300 to approximately $21,400, principally as a result of
increased lease space occupied by the Company beginning September, 1998. Travel
and Promotion expenses increased from approximately $28,500 to approximately
$35,100.
PLAN OF OPERATION
For the balance of its present fiscal year, the Company's efforts will
be directed towards the following projects:
1. Marketing and continued development of the Odysee Development Studio.
3
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2. Development of the Sorting Precision Quality Recycling ("SPQR") system.
3. Completing the IMPAC Accelerator Board and the BrainTron II processor.
4. Marketing of quality control systems.
Marketing and continued development of the Odysee Development Studio is
the Company's top priority. To the extent that the Company's resources are
limited, they will be directed to Odysee in preference to other projects.
The Company currently employs 6 full time and 11 part time officers or
employees. The Company's current monthly salary costs are approximately $45,000.
For the three month period ended March 31, 1999 the Company's average
monthly cash expenses, inclusive of salary costs, were approximately $130,000.
As at the end of July, 1999, the Company will have utilized
substantially all of its available cash. By Press Release dated July 6, 1999 the
Company announced a private placement of 5,000,000 shares at a price of $0.20
per share, which will be offered pursuant to Rule 506 of Regulation D to the
Securities Exchange Act of 1933. The Company is in the process of identifying
potential investors. Based on the Company's success in raising private placement
financing in the past, the Company expects that it will be able to complete the
proposed financing.
The financing described above, if completed, will provide the Company
with sufficient capital resources to pay ongoing operating expenses at their
present level for the balance of the current fiscal year, and part of the first
quarter of Company's next fiscal year. While the Company is in the process of
completing the financing, it expects that it will have to borrow funds on an
interim basis. If the Company is not able to complete the financing, it will be
forced to seek alternate sources of financing. If the Company is unable to
generate sufficient funds to pursue all of the projects identified above, the
Company's first priority will be the marketing and development of the Odysee
Development Studio. The Company does not presently plan to incur significant
capital
4
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expenses or to increase its salary or other operating costs significantly
during the balance of the current fiscal year. Any significant capital
expenses or increases in operating costs will be dependent on the Company
raising additional capital or generating revenue from the sales of its
products or services.
The Company has not at any time been able to generate sufficient
revenue from sales of its products or services to sustain ongoing operations,
and does not have an established record of sales or established distribution
channels for its products or services. In order for the Company to continue as a
going concern, the Company will have to begin generating significant sales
revenue.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to the following material legal proceedings.
1. JMF Management Inc. et al v. BrainTech, Inc. et al,
British Columbia Supreme Court Action No. C990550
-------------------------------------------------
On February 1, 1999 JMF Management Inc. and Manfred Kurschner commenced
legal proceedings against the Company and TechWest Management Inc. Mr. Kurschner
is the Company's former Manager of Investor Relations and JMF Management Inc. is
Mr. Kurschner's personal management Company. The Plaintiffs claim approximately
$100,000 in damages for alleged breach of a stock option agreement and
approximately $7,500 alleged to be owing pursuant to a consulting agreement. The
Company has filed a defence and counterclaim. The Company's counterclaim claims
damages for breach of fiduciary duty and negligence. No depositions have been
conducted in the action and trial date has been set. The outcome of the action
is uncertain.
2. Cactus Consultants Co. Ltd. v. BrainTech, Inc. et al,
British Columbia Supreme Court Action No. C991377
--------------------------------------------------
On March 16, 1999 Cactus Consultants Co. Ltd., Crystal Securities Inc.,
and Elmswell Investments Inc. commenced
5
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legal proceedings against the Company and certain of its present and former
directors. The Plaintiffs claim $606,000 as damages for breach of contract
and conversion of stock certificates. The Company's records show that during
the fiscal year ending December 31, 1995, a total of 3,000,000 shares of
Common Stock were subscribed at a price of $0.25 per share, and that the
Company received $606,000 of the subscription amount. Prior to December 31,
1998 the Company recorded $606,000 as "Subscriptions received" on its
financial statements. Subsequent to the commencement of court action, the
Company has recorded the same amount as "Amounts in dispute". The Company has
filed a defence and counterclaim alleging that the plaintiffs and Jan
Olivier, a former promoter of the Company, caused share certificates of the
Defendant to be issued to the plaintiffs improperly, and caused funds of the
Company to be used for unauthorized and improper purposes. The outcome of the
action is uncertain.
3. BrainTech, Inc. v. John Kostiuk, District Court of Harris County
Action 96-55978; British Columbia Supreme Court Action C972736;
British Columbia Court of Appeal Action CA024459
-----------------------------------------------------------------------
On May 7, 1997 the Company obtained judgment for damages in the amount
of $300,000 in legal proceedings commenced in the District Court of Harris
County in the State of Texas against John Kostiuk, a resident of British
Columbia, for defamatory and injurious statements which Mr. Kostiuk caused to be
published about the Company over the Internet. On April 2, 1998 the Company
obtained a judgement of the Supreme Court of British Columbia enforcing the
Texas judgment.
Effective October 31, 1998 Sideware Systems Inc. purchased a 50%
interest in the judgment for a purchase price of $200,000. The agreement between
the Company and Sideware Inc. provided that the purchase price would be adjusted
depending on the benefit ultimately received by Sideware Systems Inc. On March
18, 1999, the British Columbia Court of Appeal reversed the judgment of the
British Columbia Supreme Court, rendering the judgment (subject to any further
appeal) unenforceable against any assets of John Kostiuk in British Columbia.
Subsequent to the decision of the British Columbia Court of Appeal, the Company
returned the $200,000 paid by Sideware Systems Inc. The Company has filed an
Application for Leave to Appeal to
6
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the Supreme Court of Canada. Any recovery in the proceeding must be
considered speculative.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Not applicable.
ITEM 5. OTHER MATTERS
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER EXHIBIT
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3.1 Articles of Incorporation, dated February 27, 1987
3.2 Articles of Amendment, dated July 14,1998
3.3 Articles of Amendment, dated June 28, 1990
3.4 Articles Of Amendment of the Company, dated February 8, 1993
3.5 Articles of Amendment of the Company, dated April 6, 1993
3.6 Articles of Amendment of the Company, dated December 6, 1993
3.7 By-Laws of the Company
4.1 Specimen Stock Certificate
10.1 License Agreement between the Company and Willard W. Olson,
dated January 5, 1995.
10.2 Product Development Agreement between the Company and United
Technologies Microelectronic Systems Inc., dated July 6, 1998.
10.3 Manufacturing and Sales Agreement between the Company and
United Technologies Microelectronic Systems Inc., dated July 6,
1998.
7
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<S> <C>
10.4 Operating Agreement between the Company and Sideware Systems
Inc., dated November 1, 1995
10.5 Worldwide Non-Exclusive License Agreement between the Company
and NetMedia Systems Inc., dated November 2, 1995.
10.6 Joint Venture Agreement by and among the Company, Sideware
Systems Inc., and NetMedia Systems Inc., dated November 23,
1995.
10.6 Assignment of Lease and Modification of Lease Agreement dated
August 17, 1998 between HOOPP Realty Inc., Techwest Management
Inc., Sideware Systems Inc., and BrainTech, Inc.
11.1 Computation of net loss per share
21.1 Subsidiaries of the Registrant
27.1 Summary Financial Data for the three month period ended March
31, 1999.
</TABLE>
All of the above Exhibits with the exception of Exhibits 11.1 and 27.1 are
already on file as a result of the Company filing a Form 10-SB.
The Company did not file any reports on Form 8-K during the period covered by
this Quarterly Report.
8
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SIGNATURES
In accordance with Section 13 of the Securities Exchange Act of 1934, the
registrant caused this Quarterly Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: July 22, 1999 BrainTech, Inc.
/s/ Grant Sutherland
-------------------------
W. Grant Sutherland
Director
Chairman of the Board of Directors
Chief Financial Officer
9
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Consolidated Financial Statements of
BRAINTECH, INC.
(Expressed in U.S. Dollars)
(Unaudited - prepared by management)
Three months ended March 31, 1999 and 1998
<PAGE>
BRAINTECH, INC.
Consolidated Balance Sheets
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
(Unaudited - prepared by management)
March 31, 1999 and 1998
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1999 1998
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<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 621 $ -
Accounts receivable 25,190 37,019
Share subscriptions receivable 285,000 300,000
Marketable securities (note 4) - 3,600
Prepaid expenses 19,274 3,186
--------------------------------------------------------------------------------------------------------------
330,085 343,805
Due from directors and officers (note 5(a)) 10,130 10,130
Capital assets (note 6) 86,315 12,758
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$ 426,530 $ 366,693
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Liabilities and Stockholders' Deficit
Current liabilities:
Bank indebtedness $ - $ 11,416
Accounts payable and accrued liabilities 60,459 11,926
Due to related companies (note 5(b)) 447,234 241,559
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507,693 264,901
Amounts in dispute (note 9(b)) 606,000 606,000
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1,113,693 870,901
Stockholders' deficit:
Common stock (note 7):
Authorized: 50,000,000 shares, with $0.001 par value
Issued 34,771,333 shares (1998 - 27,783,333) 34,771 27,783
Additional paid-in capital (note 7) 5,449,360 3,330,948
Accumulated deficit (58,800) (58,800)
Deficit accumulated during the development stage (6,112,494) (3,804,139)
--------------------------------------------------------------------------------------------------------------
(687,163) (504,208)
Future operations (note 2)
Contingencies (note 9)
Commitments (note 10)
Subsequent events (note 12)
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$ 426,530 $ 366,693
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</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
BRAINTECH, INC.
Consolidated Statements of Operations
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
(Unaudited - prepared by management)
- --------------------------------------------------------------------------------------------------------------------------
Period from
inception on
January 3, 1994 Three months ended March 31,
to March 31, ------------------------------------
1999 1999 1998
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<S> <C> <C> <C>
Sales $ 57,510 $ - $ 31,005
Cost of sales 30,005 - 16,200
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Gross margin 27,505 - 14,805
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Expenses:
Research and development 1,263,052 123,492 5,052
Consulting and contractors 740,606 4,045 10,231
Salaries and benefits (note 11) 1,908,657 58,721 43,870
Selling, general and administrative 2,072,928 170,667 114,778
Non-operating expenses:
Loss on disposal of capital assets 20,136 - -
Write-down of marketable securities 100,000 - -
Write-down of intangible assets 17,189 - -
Write-down of organization costs 17,431 - -
- ---------------------------------------------------------------------------------------------------------------------------
(6,139,999) (356,925) (173,931)
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Net loss $ (6,112,494) $ (356,925) $ (159,126)
- ---------------------------------------------------------------------------------------------------------------------------
Loss per share information:
Basic $ (0.27) $ (0.01) $ (0.01)
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</TABLE>
See accompanying notes to consolidated financial statements.
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BRAINTECH, INC.
Consolidated Statements of Stockholders' Deficit
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
(Unaudited - prepared by management)
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Deficit
accumulated
Additional during the
Common paid-in Accumulated development
Shares stock capital deficit stage
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<S> <C> <C> <C> <C> <C>
Balance, January 3, 1994 17,400,000 $ 17,400 $ 1,039,271 $ (58,800) $ -
Loss for the period - - - - (1,006,716)
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Balance, December 31, 1994 17,400,000 17,400 1,039,271 (58,800) (1,006,716)
Loss for the period - - - - (748,310)
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Balance, December 31, 1995 17,400,000 17,400 1,039,271 (58,800) (1,755,026)
Common stock transactions
(net of issue costs):
Issued for cash at $.1895 per share 950,000 950 173,440 - -
Issued for cash at $.25 per share 733,333 733 183,167 - -
Issued for cash at $.20 per share 3,000,000 3,000 592,500 - -
Shares issued for services rendered 1,200,000 1,200 238,800 - -
Loss for the period - - - - (959,945)
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Balance, December 31, 1996 23,283,333 23,283 2,227,178 (58,800) (2,714,971)
Common stock transactions
(net of issue costs):
Issued for cash at $.20 per share 2,000,000 2,000 396,991 - -
Issued for cash at $.15 per share 1,000,000 1,000 148,279 - -
Shares issued for services rendered 300,000 300 59,700 - -
Compensatory benefit of employee
stock options - - 200,000 - -
Loss for the period - - - - (930,042)
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Balance, December 31, 1997 26,583,333 26,583 3,032,148 (58,800) (3,645,013)
Common stock transactions
(net of issue costs):
Issued for cash at $.25 per share 1,600,000 1,600 398,400 - -
Issued for cash at $.20 per share 2,188,000 2,188 435,412 - -
Compensatory benefit of employee
stock options - - 927,800 - -
Loss for the period - - - - (2,110,556)
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Balance, December 31, 1998 30,371,333 30,371 4,793,760 (58,800) (5,755,569)
Common stock transactions
(net of issue costs):
Issued for cash at $0.15 per share 4,400,000 4,400 655,600 - -
Loss for the period - - - - (356,925)
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Balance, March 31, 1999 34,771,333 $34,771 $5,449,360 $(58,800) $(6,112,494)
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</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
BRAINTECH, INC.
Consolidated Statements of Cash Flows
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
(Unaudited - prepared by management)
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Period from
inception on
January 3, 1994 Three months ended March 31,
to March 31, ------------------------------
1999 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
(note 1)
<S> <C> <C> <C>
Cash flows from operating activities:
Loss for the period $ (6,112,494) $ (356,925) $ (159,126)
Items not involving cash:
Amortization 42,675 5,220 3,092
Bad debt 75,108 - -
Write-down of marketable securities 100,000 - -
Write-down of intangible assets 17,189 - -
Write-down of organization costs 17,431 - -
Loss on disposal of capital assets 20,136 - -
Shares issued for services rendered 300,000 - -
Compensatory benefit of
employee stock options 1,127,800 - -
Change in operating assets and liabilities:
Accounts receivable (25,190) (2,757) (15,557)
Share subscriptions receivable (285,000) (285,000) (300,000)
Prepaid expenses (19,274) (6,930) (1,478)
Accounts payable and accrued liabilities 35,281 (23,542) (8,574)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used for operating activities (4,706,338) (669,934) (481,643)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of marketable securities (100,000) - -
Purchase of capital assets (148,067) (16,298) (2,578)
Proceeds from notes receivable (130,181) - -
Proceeds from disposal of real estate 306,752 - -
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities (71,496) (16,298) (2,578)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Notes receivable 55,073 - -
Borrowings from directors and officers (2,826) - -
Due to (from) related companies 447,234 4,374 30,117
Mortgages payable (207,739) - -
Common shares issued for cash 4,242,601 660,000 300,000
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 4,534,343 664,374 330,117
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (243,491) (21,858) (154,104)
Cash and cash equivalents, beginning of period 244,112 22,479 142,688
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 621 $ 621 $ (11,416)
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Supplemental information:
Interest paid $ 2,902 $ - $ -
Taxes paid $ - $ - $ -
Non-cash financing activities:
Shares issued for services rendered $ 300,000 $ - $ -
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
BRAINTECH, INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited - prepared by management)
Three months ended March 31, 1999 and 1998
- -------------------------------------------------------------------------------
1. ORGANIZATION:
Braintech, Inc. (the "Company") was incorporated on March 4, 1987 under the
laws of the State of Nevada as Tome Capital, Inc. The Company sold
1,500,000 shares to the public on May 11, 1987, pursuant to Rule 504 of the
Security Act of 1933, as amended.
The Company initially was in the business of real estate development. On
January 3, 1994 the Company changed its name to Braintech Inc. and began
operations as a high tech development Company, developing advanced video
recognition software. All sales of its product and services are made in
this industry segment.
2. FUTURE OPERATIONS:
During the three months ended March 31, 1999, the Company incurred a loss
of $356,925 and used cash for operating activities of $384,934. From
inception of the business on January 3, 1994, the Company has incurred
cumulative losses of $6,112,494 and used cash for operating activities of
$4,421,338.
These 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.
Operations to date have been primarily financed by equity transactions. The
Company's future operations are dependent upon continued support by
shareholders, the achievement of profitable operations and the successful
completion of management's plan to obtain additional equity financing,
although there can be no assurances that the Company will be successful. As
described in note 12, subsequent to March 31, 1999 the Company issued
common shares for net proceeds of $363,750. 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.
3. SIGNIFICANT ACCOUNTING POLICIES:
(a) Basis of presentation:
These consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States and
present the financial position, results of operations and cash flows of
the Company and its wholly owned subsidiary Brainware Systems Inc.,
incorporated under the Company Act of British Columbia on March 30,
1994. All material intercompany balances and transactions have been
eliminated.
Through December 31, 1997, the consolidated financial statements of the
Company issued to shareholders were presented in accordance with
generally accepted accounting principles in Canada. The application of
United States accounting principles to these consolidated financial
statements has been made on a retroactive basis. In addition, to March
31, 1999, for United States accounting and reporting purposes the
Company was considered to be in the development stage as it was
devoting substantial efforts to developing its business operations.
<PAGE>
BRAINTECH, INC.
Notes to Consolidated Financial Statements, page 2
(Expressed in U.S. Dollars)
(Unaudited - prepared by management)
Three months ended March 31, 1999 and 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(b) Cash and cash equivalents:
Cash and cash equivalents include highly liquid investments, such as
term deposits, having original maturities of three months or less at
the date of acquisition, that are readily convertible to contracted
amounts of cash.
(c) Research and development costs:
Research and development costs are expensed as incurred.
(d) Revenue recognition:
The Company recognizes revenue when title has passed to the customer,
the collectibility of the consideration is reasonably assured and the
Company has no significant remaining performance obligations. An
allowance for estimated future returns is recorded at the time revenue
is recognized.
(e) Marketable securities:
Marketable securities are comprised of equity securities available for
sale and are stated at market value. Decreases in market value that are
considered to be other than temporary are charged to operations.
(f) Capital assets:
Capital assets are carried at cost less accumulated amortization.
Amortization is calculated annually as follows:
<TABLE>
<CAPTION>
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Asset Basis Rate
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Furniture and fixtures declining-balance 20%
Computer equipment declining-balance 30%
Trade show assets declining-balance 20%
Computer software straight-line 50%
Leasehold improvements straight-line lease term
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(g) Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amount of revenue and
expenses during the reporting period. Actual amounts may differ from
these estimates.
<PAGE>
BRAINTECH, INC.
Notes to Consolidated Financial Statements, page 3
(Expressed in U.S. Dollars)
(Unaudited - prepared by management)
Three months ended March 31, 1999 and 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(h) Foreign currency:
Transactions denominated in foreign currencies are translated in U.S.
dollars at the rate prevailing at the time of the transactions.
At the balance sheet date, monetary assets and liabilities denominated
in a foreign currency are translated at the current rate of exchange.
Exchange gains and losses arising on translation or settlement of
foreign currency denominated monetary items are included in the
determination of net income for the current period.
(i) Stock-based compensation:
The Company has elected to apply Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and
related interpretations in accounting for its stock options. Under APB
25, compensation expense is only recorded to the extent that the
exercise price is less than fair value on the date of grant. The
Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards 123, "Accounting for Stock-Based
Compensation" ("SFAS 123").
(j) Income taxes:
The Company follows the asset and liability method of accounting for
income taxes. Deferred tax assets and liabilities are recognized based
on the estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year
in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
(k) Concentration of credit risk:
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash
equivalents.
The Company maintains cash equivalents with various financial
institutions located in Canada and the United States. The Company's
policy is to limit the exposure at any one financial institution and to
invest solely in highly liquid investments that are readily convertible
to contracted amounts of cash.
(l) Loss per share:
Loss per share is calculated based on the weighted average number of
shares outstanding. Fully diluted loss per share has not been presented
as outstanding options are anti-dilutive.
(m) Comprehensive income:
Net income for the Company is the same as comprehensive income.
<PAGE>
BRAINTECH, INC.
Notes to Consolidated Financial Statements, page 4
(Expressed in U.S. Dollars)
(Unaudited - prepared by management)
Three months ended March 31, 1999 and 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4. MARKETABLE SECURITIES:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
March 31, March 31,
1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1,600 shares of Beverage Stores Inc., at market $ - $ 3,600
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company has recorded losses in prior years for permanent decreases
in value
5. RELATED PARTY BALANCES AND TRANSACTIONS:
(a) Due from directors and officers:
The amounts due from directors and officers represent cash advances
provided to current directors and officers of the Company.
(b) Due to related companies:
The amount due to related companies under common control results from
inter-company expense allocations and cash advances.
(c) Transactions with directors and officers:
During the three month period ended March 31, 1999, the Company was
charged $52,849 (March 31, 1998 - $6,788) for management and consulting
services provided by directors and officers.
6. CAPITAL ASSETS:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
March 31,
1999
- -------------------------------------------------------------------------------------------------------------------
Accumulated Net book
Cost amortization value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Furniture and fixtures $ 16,419 $ 2,521 $ 13,898
Computer equipment 63,202 12,100 51,102
Trade show assets 8,446 1,225 7,221
Computer software 23,882 21,919 1,963
Leasehold improvements 14,008 1,877 12,131
- -------------------------------------------------------------------------------------------------------------------
$ 125,957 $ 39,642 $ 86,315
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
BRAINTECH, INC.
Notes to Consolidated Financial Statements, page 5
(Expressed in U.S. Dollars)
(Unaudited - prepared by management)
Three months ended March 3, 1999 and 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
6. CAPITAL ASSETS (CONTINUED):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
March 31,
1998
- -------------------------------------------------------------------------------------------------------------------
Accumulated Net book
Cost amortization value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computer equipment $ 4,687 $ 931 $ 3,756
Computer software 21,448 12,447 9,001
- -------------------------------------------------------------------------------------------------------------------
$ 26,135 $ 13,378 $ 12,757
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
7. COMMON STOCK:
(a) Of the shares outstanding at March 31, 1999, 5,280,000 shares (March
31, 1998 - 6,830,000) are subject to trading restrictions. These
include the 1,500,000 shares retained by the Company, as described in
note 7(b). The Company believes that any hold periods relating to the
remaining 3,780,000 shares have expired but the shareholders have not
applied to remove the restrictive designation.
(b) 5,500,000 shares were issued for technology in 1993 and recorded at par
value of $5,500. 1,500,000 shares have been retained by the Company
because the development of the technology had not been completed.
(c) Additional paid-in capital arises on the issuance of common shares at
a price in excess of par value.
(d) Stock options:
The Company has reserved 7,500,000 common shares pursuant to a stock
option plan. Options to purchase common shares of the Company may be
granted by the Board of Directors and vest immediately.
Stock option activity during the three month period ended March 31,
1999 is as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
Weighted
average Weighted Outstanding Outstanding
Expiry exercise average December 31, Forfeited March 31,
dates price fair value 1998 Granted Exercised /expired 1999
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
November 28, 2002 $0.20 $0.19 4,097,000 - - - 4,097,000
November 28,2002 $0.20 $0.76 1,210,000 - - 35,000 1,175,000
November 28,2002 $0.20 $0.77 125,000 - - - 125,000
-----------------------------------------------------------------------------------------------------------
5,432,000 - - 35,000 5,397,000
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
</TABLE>
The weighted average fair value of options was calculated using the
Black-Scholes option pricing formula.
<PAGE>
BRAINTECH, INC.
Notes to Consolidated Financial Statements, page 6
(Expressed in U.S. Dollars)
(Unaudited - prepared by management)
Three months ended March 31, 1999 and 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
7. COMMON STOCK (CONTINUED):
The Company has adopted the disclosure provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation" ("FAS 123") but has elected to continue measuring
compensation costs using the intrinsic value based method of
accounting. Under the intrinsic value based method, employee stock
option compensation is the excess, if any, of the quoted market value
of the stock at the date of grant over the amount an optionee must pay
to acquire the stock. Included in expenses for the three month period
ended March 31, 1999 is $Nil representing a compensatory benefit (three
months ended March 31, 1998 $Nil)
Had compensation cost been determined based on fair value at the grant
dates of the stock options and charged to earnings consistent with the
measurement provision of FAS 123, the impact would be as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Period from
Inception on
January 3,
1994 Three months ended March 31
to March 31, -------------------------------------
1999 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loss for the period, as reported $ (6,112,494) $ (356,925) $ (159,126)
Estimated fair value of option grants (2,185,223) - -
Less compensatory benefit included in
salaries and benefits 1,127,800 - -
- -------------------------------------------------------------------------------------------------------------------
Pro forma loss $ (7,169,917) $ (356,925) $ (159,126)
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Loss per share $ (0.28) $ (0.01) $ (0.01)
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
8. INCOME TAXES:
To December 31, 1996, the Company has incurred losses for income tax
purposes in Canada and the United States of approximately $25,000, which
are available to reduce income for tax purposes through the year 2000.
The unrecorded benefit of these loss carry forwards is approximately
$12,500. Under the provisions of the Statement 109, the effect of this
benefit has been fully offset by a valuation allowance due to the
uncertainty of the realization of the benefits.
<PAGE>
BRAINTECH, INC.
Notes to Consolidated Financial Statements, page 7
(Expressed in U.S. Dollars)
(Unaudited - prepared by management)
Three months ended March 31, 1999 and 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
9. CONTINGENCIES:
The Company is engaged in the following legal disputes:
(a) On February 1, 1999 a former employee of the Company commenced legal
proceedings against the Company claiming approximately $100,000 in
damages for alleged breach of a stock option agreement and
approximately $7,500 alleged to be owing pursuant to a consulting
agreement. The Company has filed a defence and counterclaim alleging
breach of fiduciary duty and negligence. While the ultimate outcome is
uncertain, management of the Company believes it will be successful in
defending this action and accordingly no amount has been provided in
these financial statements.
(b) On March 16, 1999 three corporations commenced legal proceedings
against the Company and certain of its present and former directors are
claiming damages in the amount of $606,000 for breach of contract and
conversion of stock certificates. The plaintiffs have not sought
recovery of any shares of the Company. The Company has filed a defence
and counterclaim alleging that the plaintiffs and a former promoter of
the Company caused share certificates of the defendant to be issued to
the plaintiffs improperly, and caused funds of the Company to be used
for unauthorized and improper purposes. The Company has recorded the
full amount of the $606,000 contingent claim.
10. COMMITMENTS:
The Company has the following minimum lease payments under operating leases
for its premises:
<TABLE>
<CAPTION>
<S> <C>
Nine month period to December 31, 1999 $ 145,000
Year ended December 31, 2000 198,000
Year ended December 31, 2001 202,000
Year ended December 31, 2002 206,000
Year ended December 31, 2003 139,000
-------------------------------------------------------------------------------
$ 890,000
-------------------------------------------------------------------------------
</TABLE>
11. SALARIES AND BENEFITS:
Salaries and benefits are comprised of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Period from
Inception on
January 3,
1994 Three months ended March 31
to March 31, ---------------------------
1999 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Payments and accrued liabilities $ 780,857 $ 58,721 $ 43,870
Compensatory benefit of employee
stock options 1,127,800 - -
- -------------------------------------------------------------------------------------------------------------------
$ 1,908,657 $ 58,721 $ 43,870
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
BRAINTECH, INC.
Notes to Consolidated Financial Statements, page 8
(Expressed in U.S. Dollars)
(Unaudited - prepared by management)
Three months ended March 31, 1999 and 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
12. SUBSEQUENT EVENTS:
On June 4, 1999, the Board of Directors resolved to sell 2,600,000 shares
of common stock at $0.15 per share, for aggregate proceeds of $390,000 less
estimated share issuance costs of $26,250 for net proceeds of $363,750.
<PAGE>
Exhibit 11.1
CALCULATION OF NET LOSS PER SHARE
<TABLE>
<S> <C> <C> <C> <C>
Shares - opening 30,371,333
balance
Share issuances Mar 26/99 4,400,000 4/90 195,555
Weighted Average 30,566,888
Loss ($356,925)
Loss per share ($0.01)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTH PERIOD ENDED MARCH 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 621
<SECURITIES> 0
<RECEIVABLES> 25,190
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 330,085
<PP&E> 125,957
<DEPRECIATION> 39,642
<TOTAL-ASSETS> 426,530
<CURRENT-LIABILITIES> 507,693
<BONDS> 0
0
0
<COMMON> 34,771
<OTHER-SE> (721,934)
<TOTAL-LIABILITY-AND-EQUITY> 426,530
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 356,925
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (356,925)
<INCOME-TAX> 0
<INCOME-CONTINUING> (356,925)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (356,925)
<EPS-BASIC> (0.01)
<EPS-DILUTED> 0
</TABLE>