<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 21, 2000
REGISTRATION NO. 333-30162_______
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 2 TO FORM S - 1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
BRAINTECH, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
NEVADA 98-0168932
_______________________________ ____________________________ __________________
(State or other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
930 West First Street, Suite 102, North Vancouver,
British Columbia, Canada V7P 3N4
Telephone (604) 988-6440
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
National Registered Agent
1090 Vermont Avenue, Suite 910
Washington, D.C. 20005
Telephone (202) 371-8090
_________________________________________________________
(Name, address, including zip code, and telephone number,
including area code,of agent for service)
COPIES TO:
Grant Sutherland, Chairman
BrainTech, Inc.
1600 - 777 Dunsmuir Street
Vancouver, British Columbia
V7Y 1K4
Tel: (604) 688-0047 Fax: (604) 688-0094
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act, check the following box. [x]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
Title of Each Class of Proposed Maximum Proposed Maximum
Securities to be Amount to be Offering Price Per Aggregate Offering Amount of
Registered Registered Share(1) Price(1) Registration Fee
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares 11,095,000 $3.00 $33,285,500 $8,787
----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of computing the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to Section 8(a), shall determine.
<PAGE>
BRAINTECH, INC.
Cross Reference Sheet to Item 501(b) of Regulation S-K Showing Location in
prospectus of Information Required by Items of Form S-1
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM NUMBER LOCATION OR CAPTION IN PROSPECTUS
<S> <C>
1. Forepart of Registration Statement and Outside Outside Front Cover Page
Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Pages
Prospectus
3. Summary Information, Risk Factors Prospectus Summary; Risk Factors; Selected Consolidated
Financial Data;
Ratio of Earnings to Fixed Changes Not applicable
4. Use of Proceeds Prospectus Summary; Use of Proceeds
5. Determination of Offering Price Risk Factors; Nature of Trading Market; Plan of
Distribution
6. Dilution Not Applicable.
7. Selling Security Holders Selling Shareholders
8. Plan of Distribution Plan of Distribution
9 Description of Securities to be Registered Description of Capital Stock
10. Interests of Named Experts and Counsel Not applicable
11. Information with respect to the Registrant
(a) (1) Description of Business Prospectus Summary; Business - The Company
(2) Description of Property Business - Description of Property
(3) Legal Proceedings Business - Legal Proceedings
(4) Control of Registrant Principal Shareholders
(5) Nature of Trading Market Nature of Trading Market
(6) Exchange Controls and Other Enforcement of Civil Liabilities; Description of
Limitations Affecting Security Holders Capital Stock
(7) Taxation Not Applicable
(8) Selected Financial Data Selected Consolidated Financial Data;
(9) Management's Discussion and Analysis Management's Discussion and Analysis of Financial
of Financial Condition and Results Condition and Results of Operations
of Operations
(10) Quantitative and Qualitative Management's Discussion and Analysis of Financial
Disclosures about Market Risk Condition and Results of Operations - Quantitative and
Qualitative Disclosures about Market Risk
(11) Directors and Officers of Registrant Management - Directors, Executive Officers and Key
Employees
(12) Compensation of Directors and Officers Management - Executive Compensation
(13) Options to Purchase Securities from Management - Executive Compensation; Description of
the Registrant or Subsidiaries Capital Stock - Options to Purchase Securities from the
Company
(14) Interest of Management in Certain Transactions
Certain Transactions
(b) Financial Statements Financial Statements
12. Disclosure of Commission Position on Not Applicable.
Indemnification for Securities Act Liability
</TABLE>
<PAGE>
Subject To Completion, Dated June 21, 2000
PROSPECTUS
BRAINTECH, INC.
8,095,000 Shares of Common Stock
This is an offering of up to 8,095,000 shares of BrainTech, Inc. common
stock by the persons named in this prospectus as "selling shareholders".
The selling shareholders will control the number of shares offered for sale.
The selling shareholders are not required to sell all, or any, of the shares.
The selling shareholders will also control how the shares are offered for
sale. The selling shareholders may enter into underwriting agreements, and
may pay underwriting discounts or commissions. The selling shareholders will
control the prices at which the shares are offered.
Our common shares trade through the OTC-Bulletin Board under the symbol
"BNTI".
INVESTING IN OUR COMMON SHARES INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 3.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THE DISCLOSURES IN THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENCE.
The date of this prospectus is June 16, 2000
<PAGE>
1
PROSPECTUS SUMMARY
--------------------------------------------------------------------------------
BRAINTECH, INC.
The core of our business is the development of automated vision systems and
related hardware and software products.
We have recently completed our first two sales of customized vision systems -
a system for sorting and inspecting brake shoes and a system for sorting
transmission casings.
In March 2000 we entered into an alliance agreement with ABB Flexible
Automation Group Inc. to identify and develop new projects for customized
vision systems. The ABB agreement is our best prospect for generating future
sales. For the immediate future, we plan to concentrate our efforts on
developing our relationship with ABB, and on attempting to secure additional
contracts to develop vision systems in cooperation with ABB.
We have developed specialized hardware and software products to assist in the
development of vision systems. The BrainTron processor performs mathematical
operations used in recognizing and classifying visual images. The Odysee
Development Studio is a software program which allows us to combine the
different software components of a vision system quickly and efficiently. We
have never generated significant revenue from independent sales of these
products, and plan to use them principally internally, in developing
customized vision systems.
In July 1998 we also commenced development of the IMPAC accelerator board.
The IMPAC board was originally intended to perform logical and mathematical
operations used in vision systems. Our current intention is to investigate
potential applications for the IMPAC board which sort and filter data
transmitted over the Internet. Our investigations into the potential
applications of the IMPAC board are at a preliminary stage, and our prospects
from generating revenue from the IMPAC board are speculative. In addition,
subsequent to our alliance with ABB, development of the IMPAC board has
become a secondary priority.
We have never generated significant sales revenue from any of our products or
services, and our prospects for doing so in the future are uncertain. An
investment in our shares is speculative and involves a high degree of risk.
Our executive offices are located at 930 West 1st Street, Suite 102, North
Vancouver, British Columbia, Canada V7P 3N4, and our telephone number is
(604) 988-6440. Our world-wide web address is bnti.com.
--------------------------------------------------------------------------------
<PAGE>
2
--------------------------------------------------------------------------------
THE OFFERING
<TABLE>
<S> <C>
Common shares being offered by the
Selling shareholders: 8,095,000
Common shares to be outstanding
after the offering: 45,794,333
Use of proceeds: We will not receive any proceeds
of sale from the shares
OTC-Bulletin Board Symbol: BNTI
</TABLE>
SUMMARY OF CONSOLIDATED FINANCIAL INFORMATION
The following table summarizes our consolidated historical financial and
operating data for the periods indicated. The historical financial data is
not necessarily indicative of our future results.
<TABLE>
<CAPTION>
Year ended Year ended Year ended Year ended Year ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1999 1998 1997 1996 1995
(000's) (000's) (000's) (000's) (000's)
<S> <C> <C> <C> <C> <C>
Sales Revenue $Nil $58 $Nil $Nil $Nil
Profit (Loss) (1,236) (2,111) (930) (960) (748)
for the period
(Loss) per share (0.03) (0.07) (0.04) (0.05) (0.04)
for the period
</TABLE>
Our financial statements are presented in United States dollars, and dollar
figures stated in this prospectus refer to United States dollars (except
where specified otherwise). As our head office is in Canada, many of our
transactions (including payment of salaries to our employees) are completed
in Canadian dollars ("Cdn$"). For purposes of this prospectus, other than
amounts extracted from our financial statements, Canadian dollar amounts have
been converted to United States dollars at an exchange rate of Cdn$1.00 =
US$0.68.
--------------------------------------------------------------------------------
<PAGE>
3
RISK FACTORS
INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. PROSPECTIVE
INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS BEFORE
PURCHASING OUR COMMON STOCK.
BECAUSE WE HAVE EARNED INSIGNIFICANT REVENUES TO DATE, WE FACE A RISK OF
INSOLVENCY.
We have never earned significant operating revenue. We have been dependent on
equity financing to pay operating costs and to cover operating losses.
We have sufficient cash to pay ongoing operating expenses, at their current
level, for approximately the balance of 2000. To continue operation beyond
that we will have to generate operating revenue or raise additional capital.
If we are unable to do so, we face a risk of insolvency.
Our audited financial statements include a note stating that there is
substantial doubt about our ability to continue as a going concern.
BECAUSE OUR SALES PROSPECTS ARE DEPENDENT ON A SINGLE PURCHASER, OUR
PROSPECTS FOR EARNING REVENUE IN THE FUTURE ARE UNCERTAIN.
Our best prospect for generating sales revenue is through our alliance
agreement with ABB Flexible Automation Group Inc. Apart from our alliance
with ABB, we have no established distribution channels or marketing
arrangements which have a prospect of generating significant sales. If we are
unable to generate sales through ABB, our prospects for generating revenue
are speculative.
BECAUSE OUR ALLIANCE WITH ABB IS NEW, WE HAVE NO ASSURANCE THAT IT WILL LEAD
TO ADDITIONAL SALES.
We made our alliance agreement with ABB in March 2000, and have completed
only one project with ABB to date. We intend to develop our relationship with
ABB, and to try to make additional sales through that relationship. However,
our relationship is in its beginning stages, and does not yet have a proven
track record. Our prospects for generating sales under the ABB alliance are
still uncertain.
BECAUSE THE IMPAC BOARD IS IN A PRELIMINARY DEVELOPMENT STAGE, OUR PROSPECTS
FOR GENERATING REVENUE FROM IMPAC ARE SPECULATIVE.
During 1999 we completed a prototype for the IMPAC accelerator board, and we
plan to investigate potential Internet-related applications for the IMPAC
board. However, those investigations are at a preliminary stage, and we have
not yet identified specific applications or markets in which the IMPAC board
might be profitably exploited. In addition, development of any specific
application for the IMPAC board will require substantial capital funding and
development time, for which we have not yet allocated any resources.
Accordingly, our prospects for generating revenue from IMPAC in the future
are speculative.
<PAGE>
4
BECAUSE WE HAVE HAD INSIGNIFICANT SALES TO DATE, WE CANNOT PROJECT WHAT OUR
OPERATING COSTS WILL BE IF WE BEGIN TO GENERATE SALES.
If we are able to generate substantial sales, we will likely have to hire
additional personnel to service our customers, and to continue development of
our technology. We will also likely incur additional marketing and overhead
expenses. As a result of our lack of historical sales, we cannot make
reliable projections of the number of additional personnel we will require,
the cost of employing those personnel, or the level of marketing and overhead
expenses we will incur. We thus have no assurance that any revenue we earn
will be sufficient to cover the cost of earning that revenue, or to generate
operating profits.
BECAUSE WE ARE A SMALL COMPANY WITH INSIGNIFICANT REVENUES, WE MAY BE
UNATTRACTIVE TO CUSTOMERS, AND THUS UNABLE TO COMPETE.
The vision systems market is highly competitive, and a number of other
suppliers in that market have generated significant sales revenue. According
to data published by the Automated Imaging Association, approximately 75
North American suppliers had revenue exceeding $5 million during 1998.
Companies already earning substantial revenue may be more attractive to
potential customers making it difficult for us to attract customers. Many of
our competitors in the vision systems industry may also be located closer to
large industrial cities, making it easier for them to attract customers.
BECAUSE WE ARE A SMALL COMPANY, WE MAY NOT BE ABLE TO EXPLOIT THE POTENTIAL
OF THE IMPAC ACCELERATOR BOARD.
The computer industry in general is dominated by large corporations which have
assets much greater than ours, which are constantly improving the power and
efficiency of their own products. These companies might be able to develop
products duplicating the features of IMPAC board at modest cost.
We face a continual risk that market opportunities or product features which
we intend to exploit can, within a short period of time, become dominated by
much larger and wealthier corporations, rendering our products obsolete or
non-competitive. We also face the risk that continuing improvements to
conventional computer microprocessors will, within a relatively short period
of time, exceed any performance advantages which the IMPAC board may have.
In May 2000 United Technologies Microelectronics Corp. announced the
development of a product known as the e.Card, which uses a content
addressable memory chip similar to the one in our IMPAC board to perform
certain data lookup and matching operations. We do not know how fully the
e.Card competes with the IMPAC board in its functions and features. However,
we face the risk that any potential market for the IMPAC board may become
dominated by the e.Card, rendering the IMPAC board non-competitive.
BECAUSE OUR WORK FORCE IS SMALL, OUR BUSINESS COULD BE DAMAGED BY THE
DEPARTURE OF A SINGLE EMPLOYEE, OR A SMALL NUMBER OF EMPLOYEES.
We have only four full time employees, and we thus employ only a small number
of employees in specific fields important to our business. The departure of a
single employee or a small number of employees could materially impair our
business.
We do not have written employment contracts with our full time employees. As
a result, they can terminate their employment with us on little or no notice.
In addition, we do not have key man insurance on any of our employees.
<PAGE>
5
Qualified technical personnel are in great demand in all high technology
industries. Accordingly, it may be difficult for us to replace any employees
who depart.
BECAUSE OUR WORK FORCE IS SMALL, WE MAY NOT HAVE ADEQUATE PERSONNEL OR
SYSTEMS TO COPE WITH AN INCREASE IN SALES.
As a result of our alliance with ABB, we could experience significant growth
in orders, sales, and revenue. Because we have so few full time employees, we
may not be able to manage the strains that growth may place on our business.
We may also have difficulty in hiring additional personnel, owing to the high
demand for qualified technical personnel.
BECAUSE OF EXISTING LEGAL CLAIMS, WE FACE A RISK OF MATERIAL ADVERSE
JUDGMENTS.
We face claims totalling approximately $700,000, exclusive of interest and
court costs, in two legal actions. While we are defending the claims
aggressively, the outcome of the legal actions is uncertain, and could result
in substantial judgments against us. Given our current financial position,
these judgments could seriously impair our business or our ability to
continue as a going concern.
In one of the actions, the plaintiffs have filed an application for summary
trial judgment. We are opposing the application. If successful, the
application could result in a judgment against us for approximately $600,000,
plus over $150,000 in interest and costs, within the next two months. Given
our current financial position, a judgment of this size could seriously
impair our business or our ability to continue as a going concern.
BECAUSE OF PAST STOCK TRANSACTIONS, WE MAY HAVE MORE STOCK OUTSTANDING THAN
OUR RECORDS SHOW.
Between August 1998 and July 1990 our company was named Nevada Manhattan
Mining Inc. During that time, previous management may have issued shares or
share purchase warrants which were not properly recorded in the corporate
records, and of which present management are unaware. We have recently
received inquiries from people who claim to have acquired shares and warrants
during that time. We face the risk that we may have to recognize shares which
these people claim to own, and that we may thus have additional shares
outstanding beyond the number shown in our corporate records. We also face
the risk that we may not have a reliable means of evaluating the claims of
parties who claim to have acquired shares or share purchase warrants under
previous management, and that we may thus be forced to recognize claims which
are not in fact valid.
We have no reliable means of determining how many shares or share purchase
warrants may be involved, although at present we have no reason to believe
that the number will be material.
BECAUSE WE SHARE CERTAIN COSTS WITH ANOTHER DEVELOPMENT STAGE COMPANY, OUR
OPERATING COSTS COULD INCREASE IN THE FUTURE.
We share some of our premises and personnel with Sideware Systems Inc.
Sideware Systems Inc. is a public company whose shares trade on the Canadian
Venture Exchange and the OTC Bulletin Board. Grant Sutherland, Owen Jones,
and James Speros, our directors, are also directors of Sideware Systems Inc.
Sideware Systems Inc. is a development stage company which has not achieved
profitable operation.
We currently share the cost of the common premises and personnel with
Sideware Systems Inc. However, there is no assurance that Sideware Systems
Inc. will be able to pay the portion of the costs for which it is
responsible, with the result that our cash requirements to continue operation
may increase
<PAGE>
6
substantially.
BECAUSE WE DO NOT HAVE PATENT PROTECTION FOR ANY OF OUR PRODUCTS, OUR
INTELLECTUAL PROPERTY MAY BE COPIED OR MISAPPROPRIATED.
We have not applied for patent protection for any of our products, including
the BrainTron processor or the Odysee Development Studio. Accordingly, we
have no legal means to prevent other companies from developing products which
perform similar functions in a similar way.
We believe that software code which we have written for both the BrainTron
processor and the Odysee Development Studio is protected by copyright law.
However, copyright law does not prevent other companies from developing their
own software to perform the same functions as our products.
BECAUSE THE MARKET PRICE OF OUR COMMON STOCK HAS BEEN PARTICULARLY VOLATILE,
PURCHASERS OF OUR COMMON STOCK FACE A HIGH DEGREE OF MARKET RISK.
The market price of our common stock has recently experienced extreme
fluctuations. Since January 1, 2000 the market price of our common stock has
varied between $0.625 and $5.50. As we have not announced any material
changes to our revenue or earnings, we believe that the fluctuations in our
stock price have resulted primarily from market perceptions of the
speculative value of our business opportunities. The susceptibility of our
stock price to fluctuation exposes purchasers of our stock to a high degree
of risk.
BECAUSE OUR STOCK PRICE HAS BEEN VOLATILE, WE MAY HAVE DIFFICULTY IN RAISING
ADDITIONAL CAPITAL.
If we do not begin to generate substantial sales revenue during 2000, or if
we decide to pursue new development projects, or if we suffer an adverse
outcome in our court proceedings, we will likely have to raise additional
capital. The volatility of our stock price may deter potential investors.
BECAUSE THE SHARES OFFERED ARE A SUBSTANTIAL PORTION OF OUR OUTSTANDING
STOCK, OFFERING OF THE SHARES FOR SALE MAY PUT DOWNWARD PRESSURE ON OUR STOCK
PRICE.
The shares which may be offered under this prospectus represent approximately
16% of our issued and outstanding stock. Prior to filing this prospectus,
those shares were "restricted securities" under Rule 144 to the Securities
Act of 1933. 4,400,000 of the shares were eligible for resale subject to the
volume and notice restrictions of Rule 144. The balance were not eligible for
resale on the market. The market price of our stock could drop significantly
if the selling shareholders sell all or a large portion of the shares offered
under this prospectus, or are perceived as intending to sell them.
BECAUSE OUR STOCK MAY BE SUBJECT TO "LOW PRICE STOCK" RULES, THE MARKET FOR
OUR STOCK MAY BE LIMITED.
The Securities and Exchange Commission has adopted regulations which
generally define a "penny stock" to be any equity security that has a market
price less than $5.00. Our stock is presently covered by those rules, and may
continue to be so. The penny stock rules require broker-dealers to make a
special suitability determination before selling our stock to investors who
are not either regular customers or accredited investors. As a result, the
potential market for our stock may be limited.
CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS
This prospectus contains forward-looking statements which involve risks and
uncertainties. These statements relate to future events or our future
financial performance, and are identified by terminology such as "may",
"will", "should", "scheduled", "plan", "intend", "estimate", "potential",
"continue", "believe", "anticipate", "expect", and similar expressions. These
statements are only predictions. Actual results may differ significantly from
the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed
under the heading "RISK FACTORS".
Readers are cautioned not to place undue reliance on forward-looking
statements, which speak only as of the date of this prospectus. We undertake
no obligation to publicly release any revisions to these forward-looking
statements to reflect events or circumstances after the date of this
prospectus or unanticipated events.
<PAGE>
7
ADDITIONAL INFORMATION
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission in Washington D.C. with respect to the securities offered
under this prospectus. This prospectus forms part of the registration
statement. Certain parts of the registration statement, including schedules
and exhibits, have been excluded from this prospectus in accordance with the
rules and regulations of the Commission.
In addition, we are subject to the reporting requirements of the Securities
and Exchange Act of 1934. In accordance with those reporting requirements, we
file reports, including annual reports on Form 10-KSB, and other information
with the Commission. The registration statements and other documents we have
filed with the Commission may be inspected and copied at the Public Reference
Room of the Commission at Room 1024, Judicial Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Information on the operation of the Public Reference
Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC also
maintains a web site that contains reports and other information we file
electronically. The address of the web site is http://www.sec.gov.
ENFORCEMENT OF CIVIL LIABILITIES
Some of our directors and officers are residents of Canada and the majority
of our assets are in Canada. In addition, some of the experts named in this
prospectus carry on business in Canada, and may hold some or all of their
assets outside the United States. As a result, purchasers of the shares
offered under this prospectus may not be able to enforce civil liabilities
under United States federal securities laws against these persons. Purchasers
of shares may also be unable to serve legal process on these persons within
the United States, or realize in the United States on judgments of courts of
the United States. There is also doubt as to whether Canadian courts will
enforce judgments of courts of the United States or liabilities created by
United States legislation against us, our directors and officers, or experts
named in this prospectus.
USE OF PROCEEDS
The selling shareholders will receive the proceeds from the shares offered
under this prospectus. We will not receive any of those proceeds.
NATURE OF TRADING MARKET
Our common shares are currently trading through the OTC Bulletin Board under
the symbol "BNTI".
The following table shows the high and low sale prices for our common shares
for the quarters indicated.
<TABLE>
<CAPTION>
2000 High Low Close
---- ---- --- -----
<S> <C> <C> <C>
($) ($) ($)
First Quarter 5.50 0.625 1.93
1999
Fourth Quarter 1.18 0.20 1.06
Third Quarter 0.33 0.21 0.27
Second Quarter 0.43 0.17 0.31
First Quarter 0.31 0.14 0.17
<PAGE>
8
1998
Fourth Quarter 0.37 0.195 0.25
Third Quarter 1.08 0.234 0.27
Second Quarter 0.94 0.43 0.73
First Quarter 0.63 0.29 0.50
1997
Fourth Quarter 0.39 0.15 0.21
Third Quarter 0.48 0.20 0.34
Second Quarter 0.51 0.26 0.30
First Quarter 0.57 0.29 0.41
</TABLE>
The source of this information is the OTC Bulletin Board. The quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission
and may not represent actual transactions.
The closing price for our shares on June 14, 2000 was $0.69.
As at June 14, 2000 we have 45,794,333 shares issued and outstanding. We have
approximately 230 registered shareholders. Approximately 27 million shares
are registered in the name of CEDE & Co., a depository. Based on research
into the indirect holdings registered in the names of depositories and
financial institutions, we estimate that we have over 10,000 beneficial
shareholders.
DIVIDEND POLICY
We have never paid cash dividends on our capital stock. We currently intend
to retain any profits we earn to finance the growth and development of our
business. We do not anticipate paying any cash dividends in the foreseeable
future.
CAPITALIZATION
The following table shows our consolidated capitalization as of December 31,
1999. This table should be read in conjunction with our consolidated
financial statements and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
December 31, 1999
(dollars in thousands)
(audited)
<S> <C>
Cash and cash equivalents 431
Short-term debt and current portion of long-term debt: Nil
Short-term debt facility Nil
Current portion of long-term debt Nil
<PAGE>
9
Total Nil
Long-term debt: Nil
Contingent Liability 606
Total 1,037
Shareholder's equity:
Common Stock, 50 million shares authorized 41
39,721,333 issued and outstanding
Additional paid-in capital 6,910
Retained earnings (7,050)
Total capitalization 938
</TABLE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below for the years ended
December 31, 1999, 1998, 1997, 1996, and 1995 were derived from our audited
consolidated financial statements. The data set forth for the three month
periods ended March 31, 2000 and 1999 were derived from our unaudited
quarterly financial statements. The financial data should be read in
conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" and our consolidated financial statements and the
notes thereto.
<TABLE>
<CAPTION>
Three months ended Years ended December 31
March 31
2000 1999 1999 1998 1997 1996 1995
(000's) (000's) (000's) (000's) (000's) (000's) (000's)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales Revenue $ 70 $Nil $Nil $58 $Nil $Nil $Nil
Profit (Loss) for the (328) (357) (1,236) (2,111) (930) (960) (748)
period
Profit (Loss) per (0.01) (0.01) (0.03) (0.07) (0.04) (0.05) (0.04)
share
Total assets 1,116 427 616 143 193 170 115
Total S/H Equity 432 (687) (99) (990) (645) (523) (757)
Total R&D expend. 151 123 579 321 149 260 179
</TABLE>
We have no long-term debt and have not paid any dividends.
<PAGE>
10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Our company was incorporated in 1987. In 1994 we began developing products
for use in vision recognition systems.
As of December 31, 1999, we have incurred aggregate net losses of
approximately $7.0 million since entering the technology field. We expect to
continue to incur operating losses until at least the end of the third
quarter of 2000. Our prospects for generating profits following that will
depend primarily on generating sales through our alliance with ABB Flexible
Automation Group Inc.
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 2000 COMPARED WITH QUARTER ENDED MARCH 31, 1999
During the three month period ended March 31, 2000, we recorded revenue from
operations of $69,886. This amount included:
(a) $58,429 for a brake shoe sorting and inspection system developed for
Satisfied Brake Products Inc.; and
(b) $11,387 for the Wizmaster program developed for Sideware Systems Inc.
We recorded no revenue from operations during the three month period ended
March 31, 1999.
Cost of sales for the three month period ended March 31, 2000 were $31,199.
This amount consisted of:
(a) $26,105 paid to a systems integrator working on the Satisfied Brake
Products Inc. project; and
(b) approximately $5,000 for equipment for our transmission casing
inspection project with ABB.
As we had no revenue during the three month period ended March 31, 1999, we
recorded no cost of sales during that period either.
Research and development expenses for the three month period ended March 31,
2000 were $151,027, compared with $123,492 for the three month period ended
March 31, 1999. Salaries allocated to research and development decreased from
approximately $98,000 for the three month period ended March 31, 1999 to
approximately $90,000 for the three month period ended March 31, 2000.
Payments to North Shore Circuit Design for work on the IMPAC accelerator
board increased from approximately $20,000 to approximately $47,000.
<PAGE>
11
Selling, general, and administrative expenses decreased from $229,338 for the
three month period ended March 31, 1999 to $215,152 for the three month
period ended March 31, 2000. Several factors contributed to the change. The
principal factors were as follows:
(a) Legal expenses increased from $18,800 to $56,400, principally due to the
cost of filing a registration statement under the Securities Act of 1933,
and the cost of preparing proxy materials for our shareholders' meeting.
(b) Filing and transfer fees increased from $687 to $11,307, principally as a
result of fees paid on the filing of this prospectus.
(c) During the three month period ended March 31, 1999 we incurred a foreign
exchange loss of $46,595. The comparative figure for 2000 was $18,903.
Our foreign exchange losses result principally from adjusting entries
made in respect of transactions recorded in United States dollars, but
actually carried out in Canadian dollars.
(d) During the three month period ended March 31, 1999 we paid $12,238 for
public relations services. There were no similar payments during the
three month period ended March 31, 2000.
(e) Travel and promotion expenses decreased from $23,127 to $10,331,
principally as a result of reduced trade show participation.
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
During the year ended December 31, 1999 we did not receive any operating
revenue. We completed the majority of the work on our brake shoe sorting and
inspection system for Satisfied Brake Products Inc., and held a deposit of
$21,506 in respect of that work. In addition, we completed the Wizmaster
project for Sideware Systems Inc. However, as neither project was fully
invoiced or paid prior to December 31, 1999, revenue from those projects was
recognized in the first quarter of 2000.
During the fiscal year ended December 31, 1998, we received operating revenue
of $57,510 from the sale of vision systems and related services. We received:
(a) $18,000 from Epson Portland Inc. for sale of the Company's print quality
inspection system;
(b) $30,000 from Cordis, a Johnson & Johnson company, for a feasibility study
in respect of a shunt inspection system;
(c) $7,500 from Tantus Electronics Corp. in respect of a proposed fruit
inspection system for Sunkist Growers; and
(d) $2,010 from NGI Technology, Inc. for a purchase of the BrainTron
processor.
Cost of sales for the fiscal year ended December 31, 1998 were $30,005. This
figure included $1,250 in hardware costs and $28,755 in internal manpower
costs. The internal manpower costs related to work done on those projects
which generated revenue, as described above. As we had no operating revenue
for the year ended December 31, 1999, we had no cost of sales during that
period either.
Research and development expenses for the year ended December 31, 1999 were
$579,441, compared with $321,378 for the year ended December 31, 1998.
Research and development expenses include salaries and bonuses allocated to
research and development, which totalled $315,458 during 1999 and $230,553
during 1998. Research and development expenses for 1999 and 1998 also include
payments to North Shore Circuit Design of Austin, Texas, principally for work
on the IMPAC accelerator board. Those payments
<PAGE>
12
totalled $204,800 during 1999 and $116,294 during 1998. We report our
research and development expenses net of government grants, which totalled
$5,460 during 1999 and $45,890 during 1998. The grant funds were used for the
development of the Odysee Development Studio.
Consulting and contractor expenses were $nil for the year ended December 31,
1999, compared with $24,785 for the year ended December 31, 1998. Consulting
and contractor expenses for 1998 included approximately $17,000 spent in
preparing a business plan. There was no similar expense during 1999.
Our selling, general, and administrative expenses decreased from $1,786,410
for the year ended December 31, 1998 to $650,715 for the year ended December
31, 1999. Our selling, general, and administrative expenses include several
categories of expenditure, including salaries not allocated to research and
development. Accordingly, several factors contributed to the decrease. The
principal factors were as follows:
(a) Our compensation expense for employee stock options decreased from
$927,800 to $2,000. We incur a compensation expenses when we issue
stock options to employees with an exercise price below the prevailing
price for our stock.
(b) Salaries and benefits decreased from $298,430 to $143,865. The
principal reason for this decrease was the adjustment to our cost
sharing agreement with Sideware Systems Inc., described below under the
heading "Certain Transactions".
(c) During 1999 we incurred a foreign exchange loss of $50,619. By
comparison, during 1998 we incurred a foreign exchange gain of $36,743.
Our foreign exchange gains and losses result principally from adjusting
entries made in respect of transactions recorded in United States
dollars, but actually carried out in Canadian dollars.
(d) Accounting costs increased from approximately $54,000 to approximately
$66,000. The principal reasons for this increase were costs incurred in
filing reports required under the Securities and Exchange Act of 1934
and costs incurred in resolving accounting issues relating to our stock
option plan.
(e) Travel and trade show costs decreased from approximately $56,000 to
approximately $41,000, principally as a result of reduced trade show
participation.
(f) Premises costs decreased from approximately $63,000 to approximately
$16,400, principally as a result of the adjustment made to our cost
sharing agreement with Sideware Systems Inc.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
During the year ended December 31, 1998 we received operating revenue of
$57,510 from the sale of prototype vision systems and related services. A
breakdown of this revenue, and the associated cost of sales, is given in the
preceding section. During the year ended December 31, 1997 we did not receive
any operating revenue. As we had no operating revenue during 1997, we had no
cost of sales either.
Research and development expenses for the year ended December 31, 1998 were
$321,378, compared with $148,527 for the year ended December 31, 1997.
Research and development expenses during 1998 included $116,294 paid to North
Shore Circuit Design of Austin, Texas for work on the IMPAC accelerator board
and on a prototype vision system. By comparison, during 1997 we paid North
Shore Circuit Design $11,000 for work on the prototype vision system, which
amount was allocated to "Consulting and contractors" in our December 31, 1997
financial statements. The balance of the increase in research and
development expenses from 1997 to 1998 was due principally to an increase in
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13
the number of our research and development personnel.
Consulting and contractor expenses increased to $24,785 for the year ended
December 31, 1998 from $17,770 for the year ended December 31, 1997.
Consulting and contractor expenses during 1998 included approximately $17,000
spent in preparing a business plan. There was no similar expense during 1997.
During 1997 we paid North Shore Circuit Design approximately $11,000 for work
on a prototype vision system. As stated above, during 1998 payments to North
Shore Circuit Design were allocated to research and development.
General, selling, and administrative expenses increased from $763,745 for the
year ended December 31, 1997 to $1,786,410 for the year ended December 31,
1998. The principal factors which contributed to the increase were as follows:
(a) Our compensation expense for stock options increased from $200,000 to
$927,800.
(b) Salaries and benefits increased from $215,014 to $298,430, principally
as a result of hiring additional personnel.
(c) Legal costs increased from approximately $80,000 during 1997 to
approximately $116,000 during 1998, principally as a result of costs
incurred in registering our shares pursuant to the Securities Exchange
Act of 1934 and in legal disputes.
(d) Accounting costs increased from approximately $14,000 to approximately
$54,000, principally as a result of costs incurred in registering our
shares under the Securities and Exchange Act of 1934.
(e) Travel and trade show costs increased from approximately $40,000 to
approximately $56,000, principally as a result of increased trade show
participation.
(f) Equipment rental increased from approximately $800 to approximately
$15,000. This increase resulted from payments which we made to
reimburse Techwest Management Inc. for a portion the cost of certain
equipment. The equipment in question was acquired by Techwest
Management Inc. through a sale to, and lease back from, a financial
institution. As both our company and Sideware Systems Inc. used the
equipment, each company reimbursed Techwest Management Inc. for 50% of
the lease payments.
(g) During 1998 we also paid approximately $31,000 (inclusive of applicable
taxes) as compensation for the services of Grant Sutherland, our
corporate Chairman. Mr. Sutherland did not receive any cash
remuneration during 1997.
<PAGE>
14
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities". This
statement is effective for fiscal quarters of fiscal years beginning after
June 15, 2000. SFAS 133 establishes consistent accounting and reporting
standards for derivative instruments and hedging activities. As of December
31, 1999 we have not adopted this standard and do not expect to do so prior
to its required application date. To December 31, 1999 we do not believe we
have entered into significant instruments that are subject to SFAS 133.
However, we are continuing to review and evaluate SFAS 133 and its impact.
EFFECTS OF FOREIGN CURRENCY EXCHANGE RATES AND INFLATION
While we record our financial statement in United States dollars, many of our
expenses are incurred in Canadian dollars. As a result, fluctuations in the
Canadian dollar exchange rate can affect our expenses, and thus our profit or
loss. During the year ended December 31, 1999 we incurred a foreign exchange
loss of $50,619. The foreign exchange loss resulted principally from
adjusting entries made in respect of transactions recorded in United States
dollars, but actually carried out in Canadian dollars. As at the date of this
prospectus, we have not engaged in exchange rate hedging activities. To the
extent we implement such hedging activities in the future, we cannot assure
that we will be successful.
In the years ended December 31, 1998 and December 31, 1999 inflation has had
a limited impact on our operations. However, there can be no assurance that
inflation will not have a material adverse effect on our results of
operations in the future.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As at December 31, 1999 we have not entered into or acquired financial
instruments that have a material market risk. We have no financial
instruments for trading or other purposes or derivative or other financial
instruments with off balance sheet risk. All financial assets and liabilities
are due within the next twelve months and are classified as current assets or
liabilities in the consolidated balance sheet provided with this prospectus.
The fair value of all financial instruments at December 31, 1999 is not
materially different from their carrying value.
To December 31, 1999, substantially all revenues and the majority of our cash
costs have been realized or incurred in Canadian dollars. To date we have not
entered into foreign currency contracts to hedge against foreign currency
risks between the Canadian dollar or other foreign currencies and our
reporting currency, the United States dollar. Accordingly, we are at risk for
the effect of foreign currency fluctuations between the Canadian dollar and
the United States dollar.
<PAGE>
15
BUSINESS
THE COMPANY
Our company was incorporated in Nevada on March 4, 1987 under the name Tome
Capital Inc. We changed our name to Nevada Manhattan Mining Inc. on August
15, 1988, then back to Tome Capital Inc. on July 5, 1990, to Offshore
Reliance Ltd. on February 19, 1993, to Cozy Financial Corporation on April
20, 1993 and to BrainTech, Inc. on January 3, 1994. We did not carry on
active business prior to the beginning of 1994.
We were registered as an extra-provincial company under the British Columbia
COMPANY ACT on January 17, 1996.
OUR SUBSIDIARY
We have one wholly owned subsidiary, BrainWare Systems Inc., incorporated in
British Columbia, Canada on March 3, 1994. BrainWare Systems Inc. carries out
our research and development activities, and employs our technical personnel.
The description of our business in this prospectus includes the business of
both BrainTech, Inc. and BrainWare Systems Inc.
TECHNICAL TERMS
Our business is technical, and as a result, we use technical terms in
describing it. We have included the following glossary to assist in
understanding our description.
- "algorithm" refers to the underlying logical method or sequence of steps
by which a given calculation or manipulation of data is performed.
- "block" refers to a section of a computer processing board whose
components perform related functions, and which are conveniently
designed as a group.
- "driver" means a computer program which enables a computer to
communicate with a specific device (such as a printer or additional
processing unit).
- "fuzzy mathematics" is a branch of mathematical logic in which
propositions are not classified as absolutely true or absolutely
untrue, but rather as true to a degree, or untrue to a degree. Fuzzy
mathematics has been used in a number of engineering and control
applications.
- "fuzzy set" means a range of values used in calculations done through
fuzzy mathematics. If the object of a fuzzy mathematics operation is to
determine whether a measured quantity equals a certain specified value,
the two quantities will be considered equal if the measured quantity
falls within the fuzzy set constructed around the specified value.
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16
- "interface" means a convention by which two software systems or programs
communicate.
- "machine vision" refers to technology that collects and analyses visual
images in a digital electronic format, and which uses that data to draw
conclusions with little or no operator intervention.
- "module" refers to a part of computer system or program that performs
functions which are conveniently designed or performed as a group.
Designing computer systems in separate modules, which are then linked
together, can reduce development costs and make subsequent
modifications easier.
- "physical signature" means a vector of numbers representing an image
which a vision system has identified as an object or visual pattern of
interest, or a potential object or visual pattern of interest.
- "routine" means a computer program, or a portion of a computer program,
which performs a specific task.
- "signature" means a vector of numbers representing a specific object or
visual pattern which a vision system is attempting to identify or
recognize. Part of the function of a machine vision system is to
compare a physical signature to a signature, to determine how well they
match.
- "vector" refers to a set of numbers, with each number relating to a
specific physical quantity or measurement.
HISTORICAL DEVELOPMENT
We entered the technology field in the first quarter of 1994. Since then, we
have devoted most of our efforts to developing products used in machine
vision systems, and in developing machine vision systems.
In June 1995 we completed development of the first generation BrainTron
Processor, which carries out functions relating to the identification,
classification and matching of visual images.
During 1998 we made our first attempts at securing contracts to develop
custom vision systems. We prepared feasibility studies or prototype systems
in the following fields: print quality inspection, frost damage inspection
for fruit, and quality inspection for surgical stents (used to reinforce weak
blood vessels following angioplasty surgery). We were not able to secure
contracts to sell or install any of these systems.
During 1998 we also commenced development of:
(a) the Odysee Development Studio, a program designed to streamline the
design of custom vision systems;
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17
(b) the second generation BrainTron processor, which employs more advanced
mathematical algorithms for identifying and classifying digital images;
and
(c) the IMPAC accelerator board, which is designed to compare and match
mathematical vectors at high speed.
During 1999 we obtained our first substantial contract for the installation
of a custom machine vision system. We completed development of the Odysee
Development Studio, and prototypes for the IMPAC accelerator board and the
second generation BrainTron processor. We also developed "Wizmaster", a
program designed for incorporation into the Dr. Bean Internet product of
Sideware Systems Inc.
In March 2000 we entered into an alliance agreement with ABB Flexible
Automation Group Inc., part of the Canadian division of the ABB Group. The
ABB Group are a leading supplier of industrial robotics systems. We have
agreed with ABB to cooperate in identifying and pursuing sales opportunities
which combine the expertise of the two companies. In May 2000 we completed
our first project under the ABB alliance.
For the balance of 2000 our principal business objective is to develop our
alliance with ABB, and to secure additional contracts for the design and
installation of custom vision systems through that alliance. We also plan to
continue with our assessment of potential applications for the IMPAC board.
However, following our alliance with ABB, that has become a secondary
priority.
We have never been able to generate enough sales revenue to sustain ongoing
operations, and we do not have established distribution channels for our
services or products. In order to continue as a going concern, we will have
to begin generating substantial sales revenue.
SERVICES AND PRODUCTS
Part of our business includes the development and supply of custom vision
systems. Systems like the ones we develop are often referred to as
application specific machine vision systems. Application specific machine
vision systems are generally custom designed to perform a specific function.
MACHINE VISION SYSTEMS - INDUSTRY BACKGROUND
The growth of the machine vision industry is dictated, on the one hand, by
the technical difficulty of achieving accurate "computerized vision", and on
the other hand, by the vast theoretical scope of the potential applications.
The principal technical difficulties include the problems of compensating for
background noise that masks or distorts objects, separating objects from
their backgrounds, determining
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18
how much "similarity" must exist before two visual patterns are considered to
represent the same object, and comparing physical objects which are only
approximately "similar" in the first place.
As the technical difficulties are solved, the potential benefits and
applications of computerized vision are large. In industrial quality control,
computerized vision can replace, and perform inspections more accurately
than, human inspectors. In industrial automation, computerized vision can be
used to control industrial machines or robots. In security systems,
computerized vision can be used to detect human visitors or intruders in
video camera images. In military applications, computerized vision can be
used in automated targeting systems. In medical applications, it can be used
to improve diagnostic reliability.
The Automated Imaging Association is a non-profit organization headquartered
in Ann Arbour, Michigan whose members include companies operating in the
vision systems industry. The association collects, and publishes annually,
statistics about the machine industry. Statistics published by the
association during the first half of 1999 included the following:
- In 1998 the North American market for machine vision systems
was approximately $1.25 billion in revenue, or approximately 30,900
units. These figures represented increases of approximately 1.5% in
revenue or 22.7% in units over corresponding figures for 1997.
- The principal industrial applications of machine vision systems are
product inspection, location analysis, and visual pattern recognition.
Location analysis involves controlling machines or robots, or
controlling the fitting and assembly of products.
- In 1998, inspection applications accounted for approximately 85% of
the market by revenue, and approximately 42% by units. Location analysis
applications accounted for approximately 11% of the market by revenue,
and approximately 45% by units. Pattern recognition applications
accounted for approximately 4% of the market by revenue and 13% of the
market by units.
- The principal end users in the North American market for vision systems
during 1998 were the following industries:
<TABLE>
<CAPTION>
Industry % by Revenue % by Units
-------- ------------ ----------
<S> <C> <C>
Semiconductors 34% 23%
Electronics 16% 21%
Containers 3% 6%
Food 8% 4%
Wood 5% 1%
Transportation 7% 9%
Fabricated metals 2% 2%
Plastic 4% 5%
Printing 3% 6%
Medical / Pharmaceutical 3% 8%
</TABLE>
- During 1998 suppliers of application specific machine vision systems
accounted for approximately 54% of the market by revenue and 10% by
units. Suppliers of general purpose vision systems accounted for 14% of
the market by revenue and 35% by units. The remainder of the market was
split among various sectors, including 3D based vision systems, web
scanners, and x-ray vision based vision systems.
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19
- During 1998 direct sales by suppliers accounted for approximately
58% of sales revenue. The remainder were through distributors or
manufacturers' representatives.
The products and services we provide are suitable for both product inspection
and location analysis applications. The two vision systems we have sold to
date were primarily inspection and sorting systems. Owing to the prominence
of ABB in the field of robotics, we believe there is a likelihood that vision
systems we develop in the future will also involve location analysis
applications.
Both of the systems we have sold to date are used in the manufacture of
automotive parts, but we believe that we are capable of developing systems
that can be applied in a large number of industrial sectors. We have not to
date completed any projects or proposals in the two industries which make the
greatest use of vision systems, the semiconductor and electronics industries.
Our sales efforts were historically directed at generating direct sales to
end users, consistent with the majority of the vision systems market. As a
result of our alliance with ABB, we expect that most of our future sales
efforts will be through, or in conjunction with, ABB.
MACHINE VISION SYSTEMS - TECHNICAL DESCRIPTION
Machine vision involves analysing visual images in a digital electronic form.
To do so, a machine vision system must first express a visual image in
digital form. The system must then analyse the digital data to recognize
patterns or specific objects.
We separate the development of a vision system into the following modules,
which correspond to the logical steps which must be followed in analysing an
electronic visual image.
ACQUISITION AND DIGITIZATION MODULE. The acquisition and digitization module
receives input such as the signal from a video monitor, and creates a
digitized version of that input.
PREPROCESSING MODULE. The preprocessing module receives digitized output
from the acquisition and digitization module and performs certain operations
and modifications on the digital data to facilitate pattern recognition.
The preprocessing module performs the following principal functions:
- It filters out noise and other apparent anomalies in the digital data.
- It segments the data by identifying subsets of the digital data which
represent candidates for physical objects that the vision system is
intended to recognize.
- It transforms data by deriving selected numerical characteristics of the
data subsets identified as potential objects. The numerical
characteristics may include such quantities as the length or width of
the object, or a series of numbers describing its colour or texture. The
numerical quantities thus derived are stored as a vector, referred to as
the "physical signature" of the potential object.
TRAINING AND MATCHING MODULE. The training and matching module performs two
essential functions.
- It receives the physical signatures of potential objects and attempts to
match them to the signatures of specified objects already stored in
memory - the objects the system is trying to locate or recognize. The
training and matching module "classifies" physical signatures by
calculating how well they match the signatures stored in memory.
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20
- It refines the stored signatures to which future physical signatures can
be matched, that is it "trains" the system for more accurate object
recognition in the future. Depending on the mathematical algorithm used
to identify matching signatures, the training and matching module can
adjust the appropriate memory signatures, or the mathematical parameters
or functions used in matching physical signatures to the signatures
stored in memory.
Since physical objects are unlikely to be perfectly identical, or to
be described perfectly by a digitized version of visual input,
classification necessarily involves the comparison of approximate
quantities. The classification of physical signatures thus requires a
mathematical algorithm for deciding how closely a physical signature and
a signature match. A variety of mathematical models, including fuzzy
mathematics and standard probability error functions, can be used to
fulfil this requirement. While the technical details of the mathematical
models differ, they have the common object of producing a numerical
measure of how closely two mathematical data vectors match.
CONTROL AND FEEDBACK MODULES. The control and feedback module controls input
to, and output from, the system. The control and feedback module determines
the extent to which the system is being trained. It also permits direct
operator participation in certain steps of the process, such as the
identification of candidate objects or new objects. When a physical signature
does not match any of the signatures stored in memory, the control and
feedback module can also initiate procedures to create a "new" signature in
memory, to be used in identify the "new" object in the future.
MACHINE VISION SYSTEMS - CUSTOMER PROJECTS
Our attempts to sell customized vision systems were unsuccessful until the
final quarter of 1999. We have since completed our first two sales, and we
have secured a strategic alliance through which we will attempt to secure
further sales.
In September 1999 we entered into a contract to develop a system for
inspecting and sorting brake shoes for Satisfied Brake Products Inc. of
Cornwall, Ontario. We agreed to develop the machine vision components of the
system. A company named Mercator Robotec Inc. agreed to provide system
integration services, to link our machine vision components with the
mechanical control systems of the customer's production line. The machine
vision components of the system were required to identify and separate
approximately 200 different types of brake shoes, and to inspect the brake
shoes visually for defects.
The price for the system was approximately US$68,000. We received
approximately half of that price, with the other half going to Mercator
Robotec Inc. The system was completed in January 2000, and is currently in
operation. Our contract with Satisfied Brake Products Inc. represented our
first major contract for the sale of a custom vision system.
In March 2000 we entered into an alliance agreement with ABB Flexible
Automation Group, Inc., part of the Canadian division of the ABB Group. The
ABB Group is a technology group based in Europe, employing over 165,000
people in more than 100 countries. The ABB Group is a leading supplier of
robotic automation systems and services to several industries, including the
automotive and metal fabrication industries.
Under the alliance agreement we have agreed to co-operate with ABB in
identifying, developing, and pursuing business opportunities which combine
the expertise and technology of the two companies. Either company, upon
becoming aware of such an opportunity, will notify the other, and the
companies will co-operate in preparing proposals, specifications, and
contracts. The companies have agreed to work with each other exclusively to
the greatest extent reasonably practicable. However, the exclusivity
provisions do not apply if either company has a bona fide business reason,
such as preference of a customer, for contracting with a different company.
Either party may terminate the alliance agreement on 120 days notice.
We received an initial purchase order from ABB Flexible Automation Group,
Inc. to develop a vision system to identify and sort automobile transmission
casing parts. The price for the vision system was approximately $18,000. We
completed and installed the system in May 2000, and we have received payment.
In November 1999 we also prepared a feasibility study for Toyota Canada Ltd.
for the development of a system for inspecting and sorting automobile wheels.
The proposed system will be required to identify and separate approximately
20 different types of automobile wheels, and to inspect the wheels visually
for defects. The proposed price for the system is approximately $90,000. We
are pursuing negotiations with Toyota Canada Ltd. to obtain a contract.
We plan to pursue additional opportunities to supply machine visions systems
for industrial applications. We believe that our alliance with ABB
represents our best prospect for securing additional sales, and we intend to
concentrate our efforts on advancing our relationship with ABB.
MACHINE VISION SYSTEMS - BRAINTRON PROCESSOR
In 1995 the Company developed the first generation of the BrainTron
processor, which performs the
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21
functions of a training and matching module, as described above. The first
generation BrainTron processor exists in hardware and software versions, both
of which operate under the Windows NT operating system. Both versions can be
used in final applications, although the software version was intended
principally for initial testing. The hardware version is a plug-in computer
card with five chips performing the following functions: communication with a
host computer, control of data movement within the processor, generation of
addresses to move data in memory, arithmetic operations, and random access
memory (RAM).
The first generation BrainTron processor uses the principles of fuzzy
mathematics to match physical signatures to signatures stored in memory.
Training functions use the Olson Reticular Brainstem algorithm, which
includes a set of rules for making fuzzy sets either larger or smaller to
reflect new data. Using the Olson algorithm, the first generation BrainTron
processor expands or contracts the fuzzy sets being used to compare
signatures and physical signatures. This process "trains" the system to
require a close match in circumstances where a close match can be expected,
and to accept a more approximate match where historical data shows that a
close match will not likely be found.
During 1998 we commenced development of the second generation BrainTron
processor. The second generation BrainTron processor uses revised
mathematical algorithms to perform the classification and training functions.
In performing its classification function, the second generation BrainTron
processor uses a different mathematical formula for measuring how well two
vectors, representing a signature and a physical signature, match. In
performing its training function, the second generation BrainTron processor
adapts a system to new pieces of information in a way that is independent of
the order in which the new information is received. We believe that the
enhancements to the second generation BrainTron processor allow it to carry
out its classification and training functions more accurately and quickly.
The second generation BrainTron processor does not use the Olson algorithm.
The software version of the second generation BrainTron processor has been
completed, and is undergoing testing. We expect to begin using the second
generation BrainTron processor in our machine vision systems shortly. We have
not yet commenced development of a hardware version of the second generation
BrainTron processor, and do not have definite plans as to when, or whether, a
hardware version will be built.
If suitable opportunities arise, we will license the BrainTron processor to
other companies. However, we expect that the BrainTron processor will be used
mainly as a component in custom vision systems which we develop for customers.
MACHINE VISION SYSTEMS - ODYSEE DEVELOPMENT STUDIO
During 1999 we completed development of the Odysee Development Studio.
Odysee is designed to make developing vision systems faster and more
economical. Odysee stores and manipulates libraries of routines to
perform the various functions which can be included in a vision system.
Odysee includes a standardized interface to which all of the routines are
adapted, so that the routines can be combined easily and efficiently into an
integrated system. Odysee permits the operator to "drag and drop" individual
routines from particular libraries to a window opened for the system under
development. Once added to the system window, the routines are automatically
linked together through the standardized Odysee interface. Odysee thus
eliminates the need to write
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22
specialized computer code to link individual routines.
We initially developed Odysee for internal use, as an internal development
tool. We have tried briefly to market Odysee, through a limited marketing
program, as a development tool for use by other software companies and system
integrators. To that end, we modified Odysee to include additional routines
and functions, beyond those useful principally for vision systems. The
additional routines include numerical calculation and statistical routines,
to perform a variety of mathematical operations, and routines which can
manipulate large databases. Our attempts to market Odysee have thus far not
been successful, and we presently plan to use Odysee principally as an
internal development tool, as initially conceived.
Development of Odysee was funded in part by a grant from the National
Research Council of Canada in the amount of $51,400.
The software by which Odysee links the various routines within its libraries
is proprietary. However, we do not have proprietary ownership of the majority
of the individual routines that can be used with Odysee, some of which are
available in the public domain.
MACHINE VISION SYSTEMS - COMPETITIVE POSITION
According to data published by the Automated Imaging Association, over 250
merchant machine vision companies were active in the vision systems market
during 1998, with over 200 of those based in North America. The association
reported that for 1998, of 214 companies operating in North America:
(a) 139 companies operated with revenues of less than $5 million;
(b) 35 companies operated with revenues in the range of $5-10 million;
(c) 18 companies operated with revenues in the range of $10-20 million;
(d) 11 companies operated with revenues in the range of $20-30 million;
(e) 6 companies operated with revenues in the range of $30-40 million; and
(f) 5 companies operated with revenues in excess of $40 million.
Accordingly, many of our potential competitors are substantially larger than
we are, and earn substantially greater revenue.
We do not know of a reliable way to evaluate our future competitive position
within the industry. We believe that a substantial number of companies
operating in the vision systems market have the capability of developing the
kind of vision systems we develop. However, we also believe that:
- The Odysee Development Studio enables us to develop vision systems
quickly and efficiently.
- With the Standard Brank Products Inc. project, we have demonstrated an
ability to complete sales to major industrial clients.
- If we are able to develop our relationship with ABB, we will be able to
generate enough business to achieve positive cash flow.
We do not have sufficient information about other individual companies
operating in the vision systems market to compare our capabilities with
theirs individually. To date, we do not have an established track record of
sales or profits to demonstrate a proven ability to attract significant
market share or to operate profitably. Our prospects for doing so depend
substantially on developing our relationship with ABB.
MACHINE VISION SYSTEMS - SUPPLIERS AND SOURCES OF MATERIALS
Substantially all of the equipment and supplies we use in the development of
vision systems are standard software, hardware, or electronic equipment,
available from a large number of suppliers. We are not presently dependent on
any particular suppliers. Following completion of the IMPAC accelerator
board, UTMC may become a major supplier. We have entered into a manufacturing
and sales agreement with UTMC which we believe will ensure availability of
IMPAC to us.
IMPAC ACCELERATOR BOARD - DESCRIPTION
<PAGE>
23
On July 6, 1998 we entered into a product development agreement with United
Technologies Microelectronic Systems Inc. ("UTMC"), now a subsidiary of
Aeroflex Inc. Under that agreement we agreed to cooperate with UTMC in the
development of IMPAC -- an Image Processor Accelerator Card.
We originally intended to use the IMPAC board to design vision systems with
increased computing speed and efficiency. IMPAC was designed to consist of
the following principal blocks:
THE COMMUNICATIONS BLOCK, to control communication between IMPAC and the
main computer in which IMPAC is installed, and between the individual blocks
of IMPAC.
THE BRAINTRON BLOCK, to contain the second generation BrainTron processor and
associated memory.
THE CAM ENGINE BLOCK, to contain UTMC's proprietary CAM engine.
THE MICROPROCESSOR BLOCK, to contain a conventional microprocessor to perform
computing functions which are not performed by the communication block, the
BrainTron block or the CAM engine block.
The acronym "CAM" refers to "content addressable memory". The CAM engine is
an integrated circuit which searches computer memory according to the content
of the memory, as opposed to the address of the memory. Rather than telling
the user the contents of memory at a specific address, the CAM engine can
tell the user the address at which the memory stores specific content, or the
closest available match to the specific content. The CAM engine may thus
create the ability to identify exact or close matches to specific data
at speeds which can not currently be achieved with PC-based software
applications.
In December 1999 we completed development and de-bugging of a prototype IMPAC
board. The prototype board includes a slot for later addition of the
BrainTron processor as we have not yet developed a hardware version of the
second generation BrainTron processor. In addition, we completed drivers
enabling IMPAC to perform basic input/output functions and to receive
programming code from a host computer, so that IMPAC can be programmed to
perform specific functions. These drivers are sufficient to permit us to
begin testing IMPAC in specific applications.
In May 2000 we completed prototype software enabling the IMPAC board to
perform elementary data lookup and matching operations. We plan to use this
software to evaluate the performance of the IMPAC board. If our evaluation
shows that the IMPAC board can perform certain types of data matching
operations with sufficient speed and efficiency, we intend to investigate
potential Internet related applications for the IMPAC board.
Examples of the potential applications for the IMPAC board include the
following.
VIRUS DETECTION APPLICATIONS. The transmission of computer viruses through
the Internet is a growing problem. The IMPAC board may provide a means of
screening Internet data streams for viruses, through its ability to compare a
sample data stream with a large number of known viruses. We expect that any
virus detection system which we develop using IMPAC will be suitable
principally for major Internet sites, as the system will likely be too
expensive for individual PC users.
<PAGE>
24
INTERNET LISTENING POSTS. The IMPAC board may provide a means of enhancing
the security of Internet sites by detecting, and then preventing, the
unauthorized transmission of certain types of secure information.
Investors are cautioned that:
- Our investigations into the use of the IMPAC board are at a preliminary
stage, and we have not materially advanced the development of any
Internet-related application using the IMPAC board.
- We have not yet completed an evaluation of the performance capabilities
of the IMPAC board, to determine whether it has a material performance
advantage over conventional computer microprocessors in data lookup and
matching operations.
- Even if the IMPAC board demonstrates a performance advantage over
conventional computer microprocessors, the rapid improvement in the
performance of conventional computer microprocessors may eliminate any
performance advantage of the IMPAC board within a relatively short time.
- Development of any specific applications using the IMPAC board will
require substantial funding and development time. During the development
of our prototype software for the IMPAC board, we identified a defect in
the board's operation, which will have to be remedied before any
application can be completed. During the process of developing an
application, we may discover additional deficiencies in the board's
operation.
- We have not currently allocated any resources to the development of
specific applications using the IMPAC board, and we consider further work
on the IMPAC board to be secondary priority, behind the development of our
relationship with ABB and our attempts to secure additional contracts for
custom vision systems.
- There is no assurance that we will identify or complete any
Internet-related application for the IMPAC board which can be profitably
exploited. In addition, any Internet-related application which we
develop may be offered in markets which are highly competitive. Until
our product development plans are further advanced, we have no means of
evaluating our potential competitive position in any markets we may
attempt to exploit.
<PAGE>
25
- In May 2000 United Technologies Microelectronics Corp. announced the
development of a product known as the e.Card. The e.Card incorporates
two CAM chips, and is intended to perform data lookup and matching
operations. To the best of our knowledge, unlike the IMPAC board, the
e.Card does not incorporate a conventional microprocessor such as the G3
chip of Motorola Corp. We are not in a position to assess how fully the
e.Card may compete with the IMPAC board in any potential applications.
However, we face the risk that any potential market for the IMPAC board
may become dominated by the e.Card, rendering the IMPAC board
non-competitive.
Simultaneously with our product development agreement, we entered into a
manufacturing and sales agreement with UTMC. Under the manufacturing and
sales agreement, UTMC will have responsibility for manufacturing IMPAC, which
we will purchase from UTMC. We will have responsibility for marketing and
sales of IMPAC. UTMC will assist in the marketing and sales of IMPAC by
referring customers to us, by including IMPAC on its website and in certain
catalogues of UTMC, and by such other means as UTMC considers appropriate.
UTMC will receive a commission of 10% on all business referred to us by UTMC,
or 5% in cases where we also commenced an independent sales initiative.
Following release by UTMC of their e.Card, we do not expect that any
marketing efforts by UTMC will result in substantial sales of IMPAC.
PLAN OF OPERATION -- LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1999 we raised approximately $2.1 million
in financing through private placements of shares. In addition, during the
first quarter of 2000 we received approximately $800,000 from the exercise of
incentive stock options. As at June 14, 2000 our cash balance is approximately
$625,000.
At our current level of operation, we estimate that our monthly cash
expenses are approximately $90,000 -- $100,000 per month. We base this
estimate on the following data:
(a) As at February 29, 2000 we employ 4 full time and 9 part time officers
or employees. Our monthly salary costs are approximately $35,000 per
month.
(b) For the year ended December 31, 1999 our average monthly general,
overhead and administrative costs, exclusive of salary costs, were
approximately $45,000 per month.
(c) During the year ended December 31, 1999 we paid $204,800, allocated to
"Research and development", to North Shore Circuit Design for work on
the IMPAC accelerator board. Between January 1, 2000 and May 31, 2000
payments to North Shore Circuit Design totalled approximately $71,000.
We believe that the work of North Shore Circuit Design is substantially
complete.
<PAGE>
26
(d) During the year ended December 31, 1999 we also incurred capital
expenditures of approximately $107,000, principally for leasehold
improvements, computer equipment, and software. We do not expect to
incur significant capital expenditures during the remainder of 2000
unless they result from an increase in our level of operation.
Accordingly, at our current level of operation, our existing cash balances
should be sufficient to pay our anticipated cash expenditures for
approximately the balance of 2000.
Our principal objective for the balance of 2000 is to begin generating
substantial sales revenue through the sale of customized vision systems. Our
principal prospect for doing so is through our alliance with ABB, and we
intend to concentrate our efforts on developing our relationship with ABB.
ABB are a major supplier of robotic systems, and a substantial number of
those systems have a vision component. If we are able to establish ourselves
as a principal supplier of vision systems to ABB, we believe that we will
likely receive sufficient orders to occupy our available resources, and to
generate sufficient sales revenue to achieve positive cash flow.
Apart from our alliance with ABB, we have in the past relied principally on
industry leads to potential customers. The sales revenue we generated doing
so was insignificant. Accordingly, if we are unable to generate additional
sales through the ABB alliance, our prospects for generating future sales are
speculative.
We do not plan to increase our operating expenses significantly, unless we
begin to generate sales revenue or unless we raise additional capital.
At present, we do not have specific plans to raise additional capital, or any
specific time frame within which we will attempt to do so. For the last two
years, we have relied on private sources of capital, raising money
principally through private placements to our insiders, and to friends and
business associates of our insiders. If we require additional capital during
the balance of 2000, this will likely be our first source of capital.
We have not at any time been able to generate sufficient revenue from sales
of our products or services to sustain ongoing operations, and we do not have
an established record of sales or established distribution channels for our
products or services. In order to continue as a going concern, we will have
to begin generating significant sales revenue.
RESEARCH AND DEVELOPMENT
During the year ended December 31, 1998 we incurred research and development
expenses of $321,378, which included $116,204 paid to North Shore Circuit
Design principally for work on the IMPAC accelerator board. During the year
ended December 31, 1999 we incurred research and development expenses of
$579,441, which included $204,800 paid to North Shore Circuit Design. During
the three month period ended March 31, 2000 we incurred research and
development expenses of $151,027, which included approximately $47,000 paid
to North Shore Circuit Design.
Other than payments to North Shore Circuit Design, substantially all of our
research and development expenses consist of internal personnel costs
allocated to research and development.
<PAGE>
27
INTELLECTUAL PROPERTY
We believe that software and related technical data which we have developed
constitute intellectual property belonging to us. The software and technical
data over which we assert intellectual property rights include principally
the following:
(a) software we have written and incorporated in the Odysee Development
Studio, including the software by which Odysee links the various
subroutines within its libraries;
(b) software and design specifications incorporated in the second
generation BrainTron processor;
(c) software routines which we develop from time to time in developing
vision systems; and
(d) software written in developing the Wizmaster program for Sideware Systems
Inc.
We have also registered the trademarks "BrainTech" and "BrainTron" with the
United States Patent and Trademark office.
Under our product development agreement with UTMC, we and UTMC own jointly
all intellectual property created in the development of the IMPAC accelerator
board. The stipulations as to joint ownership do not apply to pre-existing
intellectual property owned by either us or UTMC, or to improvements or
modifications to the pre-existing intellectual property.
Under a license agreement dated January 13, 1995 with Willard W. Olson, we
hold a non-exclusive license to use Olson Reticular Brainstem algorithm. The
term of the license is for 10 years, expiring in January, 2005.
The Olson algorithm is a method of pattern classification which includes
the following features:
(a) It measures the similarity of two visual patterns by developing a
mathematical measurement for the degree of similarity in various
features in the patterns.
(b) It uses fuzzy mathematics to measure the similarity in individual
features.
(c) It is adaptive, in the sense that the mathematical criteria which it
uses in comparing features can be modified to take account of new
data, as new patterns are observed. In this way, a system using the
Olson algorithm can be "trained" over time to recognize and distinguish
visual patterns more accurately.
We understand that Olson holds a license from Motorola Corp., pursuant to
which he was given the authority and legal power to grant the license given
to us under our license agreement. We do not have a complete copy of the
agreement between Motorola Corp. and Olson, which has been withheld on
grounds of confidentiality. We are thus not able to confirm directly the
authority and legal power of Olson to grant the license contained in our
license agreement with him. However, attorneys for Olson have provided us
with copies of certain provisions contained in the agreement between Motorola
Corp. and Olson, which provisions appear to us to authorize the license
granted to us pursuant to our license
<PAGE>
28
agreement with Olson. In addition, we have made it publicly known for over
three years that we have used the Olson algorithm in the development of the
first generation BrainTron processor, and have received no notice of any
objection from Motorola Corp. We have no reason to believe that our use of
the Olson algorithm is not properly authorized under our license agreement
with Olson.
The Olson algorithm is the subject matter of U.S. Patent #5,390,261, which
expires February 14, 2012, and Taiwan Patent No. 62531, currently owned by
Motorola Corp. To the best of our knowledge, neither patent has been
challenged in any form of court proceedings, with the result that there
exists no judicial confirmation of the validity or enforceability of the
patents. We can not assure that either patent is valid or enforceable.
The first generation BrainTron processor was designed incorporating the
Olson algorithm. The Olson algorithm is not utilized in the second generation
BrainTron processor.
Our ability to compete successfully will depend in part on our ability to
protect our proprietary technology and information. Apart from the BrainTech
and BrainTron trademarks, we have not applied for registration of
intellectual property rights in respect of any of our software, although
certain forms of legal protection, such as copyright ownership, are available
without registration.
Although we attempt to prevent improper disclosure of
our proprietary technology, we cannot assure that the measures we take will
be adequate, or that competitors will not be able to develop similar
technology independently. Further, we can not assure that claims allowed on
any patent we obtain will be broad enough to protect our technology, that any
patent applications will ultimately be successful, or that foreign
intellectual property laws will protect our intellectual property. We may
have to resort to litigation to enforce or determine the validity and scope
of our proprietary rights. Litigation of this nature would likely be
expensive, and its outcome uncertain.
We have no pending claims against us for infringement of any patents or other
intellectual property rights of others. We have no reason to believe that we
infringe any intellectual property rights of others, although we do not
conduct systematic patent searches to determine whether any of our products
infringe existing patent rights. Whether or not we are actually infringing
the rights of third parties, claims of infringement may be advanced against
us, forcing us either to defend costly litigation or to purchase license
rights from third parties. If we are forced to purchase license rights from
third parties, we can not assure that we will be able to do so on
commercially reasonable terms, or at all.
DESCRIPTION OF PROPERTY
Historically, we have shared our head office premises with Sideware Systems
Inc. We are presently arranging for new, separate premises of our own, which
we expect to occupy beginning July 1, 2000. When we move into the new
premises, we will cease using our present head office premises in North
Vancouver, British Columbia. However, we will still make some use of the
office space we have in downtown Vancouver. Accordingly, we describe below
both our present premises and the premises we expect to occupy in the future.
PRESENT PREMISES
Our present head office premises are located in North Vancouver, British
Columbia, Canada. Prior to September 1, 1998 the North Vancouver premises
occupied approximately 7,900 square feet. Effective September 1, 1998
additional space was added to the premises, increasing the area to 14,867
square feet. Effective June 1, 2000, a further 2,000 square feet were added
to the premises. We share the North Vancouver premises with Sideware Systems
Inc., a software development company. The term of the lease expires August
31, 2003.
Annual minimum rent under the lease is approximately $167,000 per year, or
approximately $14,000 per month. That minimum rent will escalate by
approximately 2% per year for the balance of the lease term. In addition, the
lease requires payment of additional costs relating to property taxes and
common area maintenance. Those costs are presently approximately $40,000 per
year, or approximately $2,500 per month.
<PAGE>
29
We have operated these premises under a cost sharing arrangement with
Sideware Systems Inc. Prior to October 1999 we shared the costs of the
premises with Sideware Systems Inc. equally. In October 1999 we agreed with
Sideware Systems Inc. to re-allocate the premises costs 20% to us and 80% to
Sideware Systems Inc. effective from January 1, 1999, as Sideware Systems
Inc. employs substantially more personnel, and thus makes greater use of the
premises. In the result, our current total lease costs in respect of the
North Vancouver premises are approximately $3,300 per month, or approximately
$40,000 per year.
The landlord under the lease is HOOPP Realty Inc., an arm's length company.
The tenant under the lease is Techwest Management Inc., a private company of
which Owen Jones and Grant Sutherland are each directors, and in which Owen
Jones and Grant Sutherland are each 50% shareholders. Techwest
Management Inc. passes the rental cost of the premises through to us and
Sideware Systems Inc. at cost, without any markup. We have signed the lease
as a co-covenantor, which means that we could be held responsible for all of
the rent if Sideware Systems Inc. does not pay the portion for which it is
responsible.
Effective July 1, 1999 we contracted for additional leasehold premises,
consisting of two adjacent office suites, in downtown Vancouver, B.C. The
leases for these suites run to June 30, 2002. The landlord is Pacific Center
Leaseholds Limited, an arm's length company.
One of the suites occupies approximately 4,400 square feet. We acquired our
interest in this suite in the following manner:
(a) SJM Management Ltd., a private management in which Grant Sutherland is a
one third shareholder, holds a lease of this suite running to November
30, 2000.
(b) Techwest Management Ltd. took an assignment of this lease, covering the
period from July 1, 1999 to November 30, 2000.
(c) In addition, Techwest Management Inc. signed a separate lease covering
the period November 30, 2000 to June 30, 2002.
(d) We signed the assignment described in (b) and the lease described in (c)
as an indemnifier.
The current rent for this suite is approximately $43,540 per year, or
approximately $3,630 per month. On December 1, 2000 the rent will increase to
approximately $49,500 per year, or approximately $4,130 per month. In
addition, there are monthly maintenance charges of approximately $3,400
applicable to this suite.
We will share this suite with both Sideware Systems Inc. and Sutherland
Johnston, a law firm in which Grant Sutherland is a partner. Rent will be
apportioned depending on how much use each party makes of the premises. For
the foreseeable future, we expect to pay approximately 10% of the cost of
this suite, or approximately $750 per month. However, as an indemnifier under
the lease, we can be held responsible for the full rent, if the other parties
do not pay their share.
The second suite occupies approximately 3,925 square feet. Rent for this
suite is approximately $43,860 per year, or approximately $3,655 per month.
In addition, there are monthly maintenance charges of approximately $3,400
per month. The tenant in these premises is Techwest Management Inc., and we
have signed the lease as an indemnifier. This suite is presently occupied
entirely by Sideware Systems Inc., and will remain so for the foreseeable
future. Accordingly, we do not expect to bear any portion of the costs
relating to this suite. However, as an indemnifier under the lease we can be
held responsible for the rent if it is not paid by Sideware Systems Inc. or
Techwest Management Inc.
NEW PREMISES
We are in the process of negotiating a sub-lease for premises occupying
approximately 3,075 square feet in Unit 113A&B, 980 West 1st Street, North
Vancouver, British Columbia, Canada. The proposed sub-lease contains the
following terms:
(a) The term will run from June 1, 2000 to January 30, 2002.
(b) Monthly rental will be approximately $2,200 per month during the term of
the sub-lease.
(c) In addition, we will be liable for common area maintenance charges of
approximately $700 per month.
A formal sub-lease setting out these terms is under preparation, and we
expect that it will be executed shortly.
Upon entering the new premises, we expect that we will cease to pay any part
of the rent in respect of our present North Vancouver premises. However, we
expect that we will continue to pay approximately $750 per month toward the
cost of the downtown Vancouver premises described above. Accordingly, we
expect that our total rental costs will be approximately $3,650 per month, or
approximately $44,000 per year.
The sub-lease for the new premises will be in the name of Techwest Management
Inc., which will pass the costs of the premises on to us. The landlord is
HOOPP Realty Inc., and the tenant sub-letting the premises to us is MGI
International Marine Safety Solutions Inc. Both of those companies are arm's
length companies.
<PAGE>
30
LEGAL PROCEEDINGS
We are involved in the following material court 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 us and TechWest Management Inc. Mr. Kurschner is our
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.
We have filed a defence and counterclaim. Our counterclaim claims damages for
breach of fiduciary duty and negligence. No depositions have been conducted
in the action and no 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 legal proceedings against us and certain
of our present and former directors. The Plaintiffs claim $606,000 as damages
for breach of contract and conversion of stock certificates. Our 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 we received $606,000 of the subscription amount. Prior to December 31,
1998 we recorded $606,000 as "subscriptions received" on our financial
statements. Subsequent to the commencement of court action, we have recorded
the same amount as "amounts in dispute". We have filed a defence and
counterclaim alleging that the plaintiffs and Jan Olivier, a former promoter
of our company, caused share certificates to be issued to the plaintiffs
improperly, and caused our funds to be used for unauthorized and improper
purposes.
The action has been set for trial in July 2001. In addition, on March 9,
2000, the Plaintiffs served an application for summary trial. The summary
trial procedure permits a party to try to obtain a streamlined, expedited
trial, and thus to achieve an earlier verdict. If successful, the application
for summary trial could result in a determination of the case well in advance
of the scheduled trial date in July 2001. No date has yet been set for the
summary trial hearing. The outcome of this action is uncertain.
<PAGE>
31
3. BRAINTECH, INC. V. JOHN KOSTIUK, DISTRICT COURT OF HARRIS COUNTY ACTION
96-55978; BRITISH COLUMBIA SUPREME COURT ACTION C972736 - COURT OF APPEAL
ACTION CA024459
On May 7, 1997 we 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 us over the Internet. On April 2, 1998 we 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 $136,000. Our agreement with Sideware
Systems 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 unenforceable against any
assets of John Kostiuk in British Columbia. On March 9, 2000, the Supreme
Court of Canada dismissed our application for leave to appeal from the Court
of Appeal for British Columbia, thus ending the proceedings in Canada.
Our Texas judgment is enforceable in the United States, but as far as we are
aware, Mr. Kostiuk has no assets there. The Texas judgment is not enforceable
in British Columbia, where Mr. Kostiuk lives. Accordingly, our prospects for
any recovery on the judgement are negligible.
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information, as of June 14, 2000, with
respect to our directors, executive officers and key employees.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Owen L.J. Jones 48 President, Chief Executive Officer and Director
W. Grant Sutherland 54 Chairman of the board of directors
James L. Speros 41 Vice President
</TABLE>
OWEN L.J. JONES has been our President, Chief Executive Officer and a
director since December 1993. Prior to joining our board of directors, Mr.
Jones was the V.P. Sales, Marketing and Technology of Evergreen International
Technology Inc., a software development company which is now named Sidware
Systems Inc. Mr. Jones resigned from his position with Evergreen
International Technology Inc. in December 1993. In May 1995 Mr. Jones was
elected as a director of Evergreen International Technology Inc., and later
assumed the responsibilities of President and Chief Executive Officer of that
company. Subsequent to May 1995 Mr. Jones has divided his time and effort
between our affairs and the affairs of Sideware Systems Inc. We estimate that
Mr. Jones currently spends approximately 20% of his time on our affairs, and
approximately 80% of his time on the affairs of Sideware Systems Inc.
Mr. Jones is not a director of any public companies other than BrainTech, Inc.
and Sideware Systems Inc.
W. GRANT SUTHERLAND was appointed one of our directors, and Chairman of our
board of directors, in November 1995. Mr. Sutherland is a licensed lawyer in
the Province of British Columbia, and has been engaged in the private
practice of law for 26 years, currently as a partner in the Vancouver law
firm Sutherland Johnston. Mr. Sutherland has also been a director of Sideware
Systems Inc. since May 1993.
<PAGE>
32
Since November 1995, Mr. Sutherland has devoted the majority of his time and
effort to our affairs and those of Sideware Systems Inc. We estimate that
Mr. Sutherland currently spends approximately 30% of his time on our affairs
and approximately 70% of his time on the affairs of Sideware Systems Inc. Mr.
Sutherland is not a director of any public companies other than BrainTech,
Inc. and Sideware Systems Inc.
JAMES L. SPEROS was appointed one of our directors, and our Vice President,
on September 15, 1998. Mr. Speros is also a director of Sideware Systems Inc.
and President and Chief Operating Officer of Sideware Corp., a wholly owned
subsidiary of Sideware Systems Inc. From June 1993 to January 1997 Mr. Speros
was the President and owner of two professional sports franchises, the
Baltimore Stallions and Montreal Alouettes of the Canadian Football League.
From January 1997 to February 1999 Mr. Speros was the President of
Exploration Mirandor, a mining exploration company. Since September 9, 1999
Mr. Speros has also been a director of Consolidated Maymac Petroleum Corp., a
public company trading on the Canadian Venture Exchange.
Owen Jones and Grant Sutherland were directors of Sideware Systems Inc. at
times when two bankruptcy petitions under the CANADIAN BANKRUPTCY AND
INSOLVENCY ACT were brought in the Supreme Court of British Columbia against
that company. The petitioners were former directors of Sideware Systems Inc.,
or private corporations controlled by them. Both bankruptcy petitions were
dismissed in January 1998.
Our directors will hold office until they resign, or until our next
shareholders' meeting.
EXECUTIVE COMPENSATION
Apart from incentive stock options, we do not presently compensate our
directors for services provided as directors. We provide compensation to our
directors, who are also officers, for services rendered as officers. We
currently provide the following compensation to our directors:
OWEN JONES. In June 2000 we set the salary we pay Mr. Jones at $5,000 per month,
beginning effective January 1, 2000. Between May 1, 1998 and December 31, 1999
Mr. Jones received payments totaling $6,800 per month from Techwest Management
Inc., of which we paid 20% and Sideware Systems Inc. paid 80%. Prior to June 1,
1998, Mr. Jones' monthly payments (then shared equally between us and Sideware
Systems Inc.) were $3,400 per month. Mr. Jones also holds incentive stock
options to acquire 1,527,500 shares at $0.20 per share. Mr. Jones receives
no other compensation from us or any of our subsidiaries.
GRANT SUTHERLAND. In June 2000 we set the salary we pay Mr. Sutherland at $2,500
per month, beginning effective January 1, 2000. Between May 1, 1998 and
December 31, 1999 Mr. Sutherland received payments totaling $6,800 per month,
of which we paid 20% and Sideware Systems Inc. paid 80%. Mr. Sutherland also
holds incentive stock options to acquire 107,500 shares at $0.20 per share.
Mr. Sutherland exercised options to acquire 300,000 shares at $0.20 per share
in August 1998 and 1,120,000 shares at $0.20 per share in January 2000. Mr.
Sutherland receives no other compensation from us or any of our subsidiaries.
JAMES L. SPEROS. Mr. Speros holds options to acquire 300,000 shares at $0.20
per share, but does not receive a salary from us. Mr. Speros receives no
other compensation from us or any of our subsidiaries.
The aggregate amount of cash remuneration which we paid to our directors and
officers as a group was approximately $32,640 during the fiscal year ended
December 31, 1999. None of our directors receive any pension plan or similar
benefits.
Apart from Owen Jones, our President and CEO, we do not have any named
executive officers. The following table sets out the remuneration paid to Mr.
Jones during each of our last three fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
-------------------------- --------------------------------------
Awards Payouts
--------------------------- ---------
Securities
Name and Restricted Underlying
Principal Stock Options / All other
Position Year Salary Bonus Other Awards SAR's compensation
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Owen Jones, 1999 $16,800 Nil Nil Nil 1,527,500 Nil Nil
President, CEO 1998 $35,000 Nil Nil Nil 1,500,000 Nil Nil
1997 $21,000 Nil Nil Nil 1,500,000 Nil Nil
-------------------------------------------------------------------------------------------------------------
</TABLE>
The following table sets out Option / SAR grants to Mr. Jones during the last
fiscal year
OPTION / SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
Number of Percent of total
securities options / SARs
underlying granted to
Options / SARs employees in Exercise or Grant date
Name granted fiscal year base price Expiration date present value
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Owen Jones 27,500 2.4% $0.20 April 20, 2004 Nil
-----------------------------------------------------------------------------------------------------
</TABLE>
The following table sets out the options exercised by Mr. Jones during the last
fiscal year.
AGGREGATED OPTION / SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION / SAR VALUES
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
Number of securities Value of unexercised
underlying unexercised in-the-money options
options / SARs at end of / SARs at end of fiscal
fiscal year year
------------------------ ---------------------------
Shares acquired Exercisable / Exercisable /
Name on exercise Value realized Unexercisable Unexercisable
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Owen Jones Nil Nil 1,527,000 / Nil $1,313,650 / Nil
------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
33
INCENTIVE STOCK OPTIONS
From time to time, we grant incentive stock options to directors, officers,
consultants, and employees.
The following table shows the incentive stock options held by our directors
and executive officers as at June 14, 2000.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
Name Options Number Number Exercise Market Value of Expiry
Granted Exercised Outstanding Price Underlying Shares Date
at Date of Grant
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Owen Jones 1,500,000 Nil 1,500,000 $0.20 $0.23 01/12/02
27,500 Nil 27,500 $0.20 $0.20 20/04/04
-------------------------------------------------------------------------------------------------------
Grant 1,500,000 1,420,000 80,000 $0.20 $0.23 01/12/02
Sutherland 27,500 Nil 27,500 $0.20 $0.20 20/04/04
-------------------------------------------------------------------------------------------------------
James Speros 300,000 Nil 300,000 $0.20 $0.20 20/04/04
-------------------------------------------------------------------------------------------------------
</TABLE>
The total number of incentive stock options held by our directors and
officers as at February 29, 2000 is 1,935,000. All of the options stated in
the table above are exercisable within 60 days.
Between December 31, 1999 and June 14, 2000, the following incentive
stock options were exercised by directors and officers:
Grant Sutherland 1,120,000 options
The incentive stock options described above were granted pursuant to a stock
option plan adopted in December 1997.
<PAGE>
34
PRINCIPAL SHAREHOLDERS
The following table shows certain information regarding beneficial ownership
of common stock, as of June 14, 2000 by:
(a) each shareholder whom we know to be the beneficial owner of more than 5%
of outstanding shares;
(b) each of our Directors and executive officers; and
(c) all Directors and executive officers as a group.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
NAME AND ADDRESS NUMBER OF SHARES PERCENTAGE OF SHARES
OF BENEFICIAL OWNER BENEFICIALLY OWNED (1) BENEFICIALLY OWNED (1)
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Owen L.J. Jones*(2) 3,788,500 8.0%
102 - 930 W. 1st North Vancouver, B.C.,
Canada V7P 3N4
James L. Speros*(3) 300,000 0.7%
1111 Grand Hamptons Dr.
Herndon, Virginia
20170
W. Grant Sutherland*(4) 2,992,500 6.5%
1600 - 777 Dunsmuir St.
Vancouver B.C.
V7Y 1K4
Willard W. Olson 2,500,000 5.5%
6021 East Huntress Dr.
Paradise, Arizona
85253
All executive officers and directors as a 7,081,000 14.9%
group (3 Persons)(5)
----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Denotes Director of the Company
---------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock
subject to options or warrants currently exercisable or convertible, or
exercisable or convertible within 60 days are deemed outstanding for
computing the percentage of the person holding such option or warrant
but are not deemed outstanding for computing the percentage of any other
person. Except as indicated in the footnotes to this table and pursuant
to applicable community property laws, the persons named in the table
have sole voting and investment power with respect to all shares of
common stock beneficially owned.
(2) Includes 1,527,500 shares issuable pursuant to stock options exercisable
within 60 days.
<PAGE>
35
(3) Includes 300,000 shares issuable pursuant to stock options exercisable
within 60 days.
(4) Includes 107,500 shares issuable pursuant to stock options exercisable
within 60 days.
(5) Includes 1,935,000 shares issuable pursuant to stock options exercisable
within 60 days.
We are unaware of any person who owns 10% or more of our voting securities.
We are unaware of any arrangements, the operation of which may at a
subsequent date result in a change of corporate control.
CERTAIN TRANSACTIONS
We have had several transactions with Sideware Systems Inc. Sideware is a
software development company whose shares trade on the Canadian Venture
Exchange and through the OTC-Bulletin Board quotation service. Our directors,
Owen Jones, Grant Sutherland, and James Speros, are all directors and major
shareholders of Sideware.
While we have common directors and principal shareholders with Sideware, the
companies' businesses are separate. The companies raise their financing
separately, and do not share the proceeds from their separate issuances of
securities. The companies also own separate technology, and do not share
their intellectual property except under express license agreements, such as
the Wizmaster agreement, explained below.
Our transactions with Sideware during our last three fiscal years have been
as follows:
1. COST SHARING AGREEMENT
We share our office premises in North Vancouver and Vancouver, and some of
our personnel, with Sideware. Accordingly, we share the cost of those
premises and personnel. The personnel involved include our accounting
personnel and other part time employees.
Prior to 1999 we shared the common costs equally with Sideware, under a cost
sharing agreement made in October 1996.
In October 1999 we entered into a cost sharing and allocation agreement
with Sideware. Under that agreement we agreed with Sideware Systems Inc. to
re-allocate the common costs 20% to us and 80% to Sideware, effective from
January 1, 1999. The reason for the reallocation of costs was the
substantially greater level of business conducted by Sideware, and its
corresponding greater use of the common premises and personnel.
The shared costs are administered by Techwest Management Inc., a private
management company. Techwest is a private management company in which Owen
Jones and Grant Sutherland each hold a 50% interest. Techwest passes
the shared costs through to us and to Sideware at its cost, without any
markup.
From time to time, either our payments or those of Sideware Systems Inc. have
exceeded the
<PAGE>
36
proportionate share required under the cost sharing arrangement, giving
rise to indebtedness as between us, Sideware Systems Inc. and Techwest
Management Inc. Through much of 1998 and 1999, we were indebted to Sideware
Systems Inc., as we did not have sufficient cash available to pay our
proportionate share of the common operating costs. As at the date of this
prospectus we have paid off this intercorporate indebtedness.
2. PURCHASE OF COMPUTER EQUIPMENT
During the fiscal year ended December 31, 1998 we purchased approximately
$26,000 worth of computer equipment from Sideware. During the year ended
December 31, 1999 our purchases of computer equipment from Sideware Systems
Inc. were approximately $21,000. We purchase most of our computer equipment
through Sideware Systems Inc. owing to favorable pricing on IBM equipment
available to Sideware Systems Inc. Sideware Systems Inc. charged a markup on
the initial purchases, but its current policy is to pass the equipment on to
us at cost.
3. WIZMASTER
We entered into a software development and license agreement dated
September 20, 1999 with Sideware. Under that agreement, we developed a
program named the "Wizmaster", for incorporation into Sideware's "Dr. Bean"
program. Dr. Bean is an electronic customer relations management program
which supports live chat over the internet between companies and their
customers.
Sideware agreed to pay the cost of developing Wizmaster on a cost plus 10%
basis. The total amount paid by Sideware was approximately $11,200, exclusive
of taxes. Sideware acquired, at no further charge, a perpetual worldwide
license to use Wizmaster as part of Dr. Bean. We are prohibited from
licensing Wizmaster to any other software developer (but not to systems
integrators) for a period of one year starting from the date Wizmaster
becomes generally available to purchasers of Dr. Bean.
4. KOSTIUK LITIGATION
Effective October 31, 1998 Sideware purchased an interest in the proceeds
of a judgment which we obtained on April 2, 1998 against John Kosituk, in the
amount of $300,000, in British Columbia Supreme Court Action No. C972736.
Sideware Systems Inc. paid $136,000 on account of the purchase price, which
was subject to adjustment depending on the benefit ultimately received by
Sideware pursuant to the judgment. On March 18, 1999 the British Columbia
Court of Appeal allowed an appeal from the judgment. As a result, we repaid
the $136,000.
5. NETMEDIA SYSTEMS INC. VENTURE
In November 1995 we entered into a license agreement with NetMedia Systems
Inc., a private company in which Owen Jones and Grant Sutherland held
interests, and a joint venture agreement with NetMedia Systems Inc. and
Sideware Systems Inc. None of the business contemplated by the agreements
proceeded, with the result that the agreements were terminated in October
1999. NetMedia Systems Inc. has since been dissolved.
Other transactions in which our directors have been interested, within the
last three fiscal years, have been as follows.
We have entered into transactions regarding our Vancouver office premises in
which one of our directors, Grant Sutherland, is interested. See "Description
of Property".
<PAGE>
37
We have acquired legal services from the law firm Sutherland Johnston, of
which Grant Sutherland is a partner. The amount of such legal services prior
to December 31, 1998 was not material. Subsequent to December 31, 1998
Sutherland Johnston have performed approximately $87,000 worth of legal
services for us.
During our last three fiscal years Grant Sutherland has acquired the
following shares in private placements:
- 780,000 shares at a price of $0.25 per share in a private placement
conducted in April and June 1998;
- 300,000 shares at a price of $0.20 per share in a private placement
conducted in September-November 1998;
- 1,000,000 shares at a price of $0.15 per share in a private placement
conducted in March 1999;
- 1,000,000 shares at a price of $0.15 per share in a private placement
conducted in September 1999;
- 135,000 shares at a price of $0.15 per share in a private placement
conducted in October 1999; and
- 150,000 shares at a price of $0.60 per share in a private placement
conducted in December 1999.
During our last three fiscal years Owen Jones has acquired the following shares
in private placements:
- 1,000,000 shares at a price of $0.15 per share in a private placement
conducted in March 1999.
We do not have established policies about entering into future transactions
with affiliates. Management addresses individual transactions on their
individual merits.
DESCRIPTION OF CAPITAL STOCK
SHARE CAPITAL
The authorized capital of the Company is 200,000,000 shares of common stock,
$0.001 par value, of which 45,794,333 were issued and outstanding on June 14,
2000. Prior to May 17, 2000 our authorized capital was 50,000,000 shares of
common stock. At a shareholders' meeting held May 17, 2000, our shareholders
approved an increase in our authorized capital from 50,000,000 shares to
200,000,000 shares.
The issued and outstanding share totals stated above include 1,500,000 shares
which we issued to Arthur Scott in December 1993. The shares were to be
issued in consideration for Mr. Scott completing the design of the first
generation BrainTron processor. Mr. Scott severed his relationship with us
shortly after the shares were issued, and did not complete the design work.
We have kept possession of the share certificates since they were issued. It
is our position that Mr. Scott has no entitlement to the shares.
The issued and outstanding share totals stated above do not include certain
shares which may have been issued by previous management, when our corporate
name was "Nevada Manhattan Mining Inc.", but which may not have been properly
recorded in our corporate records. During the first quarter of 2000, we
received inquiries from individuals claiming to own shares issued by Nevada
Manhattan Mining Inc., of which we had no record. We do not know the number
of shares involved, but at present we have no reason to believe that the
number is material.
<PAGE>
38
COMMON STOCK
The shares to be offered under this prospectus are common shares in our
capital stock. Holders of common shares are entitled to one vote for each
share held of record at meetings of our shareholders. Accordingly, holders of
a majority of the common shares voting in any election of directors will have
the ability to elect all the directors standing for election. All common
shares participate equally in dividends we pay, and in the proceeds of any
liquidation, dissolution or winding up. There are no pre-emption rights and
our articles of incorporation and by-laws contain no provisions that would
delay, defer, or prevent a change in control. Our articles of incorporation
and by-laws provide for the release and indemnification of our directors and
officers as to certain liabilities arising from their actions in such
capacities to the fullest extent permitted by law.
OPTIONS TO PURCHASE SECURITIES FROM THE COMPANY
INCENTIVE STOCK OPTIONS
From time to time, we grant incentive stock options to directors, officers,
consultants, and employees. We have granted a total of 7,730,000 incentive
stock options permitting optionees to acquire common shares at a price of
$0.20 per share. Of those stock options:
(a) 230,000 have expired without being exercised;
(b) 5,066,000 have been exercised up to March 31, 2000; and
(c) 2,434,000 remain outstanding as at March 31, 2000.
1,455,000 stock options were exercised prior to December 31, 1999. Between
December 31, 1999 and March 31, 2000 an additional 3,996,000 incentive
stock options have been exercised. Of those, the following incentive stock
options were exercised by directors and executive officers:
Grant Sutherland 1,120,000 options at $0.20 per share
All of the options described above were granted pursuant to our 1997 stock
option plan. In December 1999 we filed a registration statement in Form S-8
with respect to our 1997 stock option plan. We have presently granted all
options available under the 1997 stock option plan.
In February 2000 our directors approved the 2000 stock option plan, which
authorizes the granting of an additional 7,500,000 stock options. At a
shareholders' meeting held May 17, 2000 our shareholders approved the 2000
stock option plan. At the date of this prospectus, we have not granted any
options pursuant to the 2000 stock option plan.
TRANSFER AGENT
The transfer agent for our common stock is Colonial Stock Transfer Company of
455 East 400 South, Suite 100, Salt Lake City, UT 84111.
<PAGE>
39
SELLING SHAREHOLDERS
The shares offered for sale under this prospectus consist of 8,095,000
shares. The selling shareholders acquired the shares in private placements
conducted during 1999 as follows:
-- Selling shareholders listed as 1, 3 and 5 below acquired their shares at
a price of $0.15 per share in a private placement conducted in March 1999.
-- Selling shareholders listed as 6 and 7 below acquired their shares at a
price of $0.15 per share in private placements conducted in September
and October 1999.
-- Selling shareholders listed as 9 to 14 below acquired their shares at a
price of $0.60 per share in a private placement conducted in December
1999.
-- Welcome Opportunities Ltd. acquired 500,000 shares at $0.15 per share in a
private placement conducted in March 1999 and 500,000 shares at $0.15 per
share in a private placement conducted in June 1999.
-- Grant Sutherland acquired 1,000,000 shares at $0.15 per share in a private
placement conducted in March 1999 and 150,000 shares at $0.60 per share
in a private placement conducted in December 1999.
-- Beau-J Holdings Ltd., a private holding company owned by Grant
Sutherland, acquired 1,135,000 shares at $0.15 per share in private
placements conducted in September and October 1999.
The following table sets forth, as of May 1, 2000, the number of
outstanding common shares beneficially owned prior to this offering, the number
of shares offered under this prospectus, and the number and percent of
outstanding common shares that will be owned after the completion of this
offering, assuming that all of the shares are sold and upon completion of the
offering described in this prospectus, information with regard to the
beneficial ownership of our common shares by the selling shareholders.
Information in the table is based on information provided to us by the
selling shareholders and is accurate to the best of our knowledge. The
selling shareholders may not have a present intention of selling the shares
and may offer less than the number of shares indicated.
<TABLE>
<CAPTION>
TOTAL
SHAREHOLDINGS TOTAL SHAREHOLDINGS
BEFORE AFTER COMPLETION OF
SELLING SECURITY HOLDER OFFERING NO. OF SHARES OFFERING(1)
# %
<S> <C> <C> <C> <C>
1. Owen Jones (2) 3,780,500 1,000,000 2,780,500 6.0%
2. Grant Sutherland (3) 1,858,000 1,150,000 707,500 1.6%
3. 695183 Alberta Ltd. (4) See note (4) 1,000,000 See note (4) *
4. Welcome Opportunities Ltd. (5) 1,000,000 1,000,000 Nil *
5. Donald Anderson 1,070,000 900,000 170,000 *
6. Melvin Earl Beaumont (4) 1,607,500 450,000 157,500 *
7. Marguerite Beaumont (4) 450,000 450,000 Nil *
8. Beau-J Holdings Ltd. (3) See note (3) 1,135,000 See note (3) *
9. Jeffrey W. Lubore (6) 250,000 150,000 100,000 *
10. David A. Robinson 150,000 150,000 Nil *
11. Thomas M. Dunkenberger 155,000 150,000 5,000 *
12. Michael M. Hawes 162,000 150,000 12,000 *
13. Clive Forth 110,000 110,000 Nil *
14. Michael Colen 315,000 300,000 15,000 *
</TABLE>
* Less than 1%
(1) Calculated on the assumption that all shares offered by each selling
shareholder are sold. Total shareholdings stated include shares issuable
pursuant to incentive stock options exercisable within 60 days.
<PAGE>
40
(2) Owen Jones is our President and a member of our board of directors. Total
shareholdings stated for Mr. Jones include 1,527,500 shares issuable
pursuant to incentive stock options.
(3) Grant Sutherland is the Chairman of our board of directors. Total
shareholdings stated for Mr. Sutherland include 107,500 shares issuable
pursuant to incentive stock options. Total shareholdings stated for Mr.
Sutherland also include shares owned by Beau-J Holdings Ltd., a private
holding company owned by Mr. Sutherland.
(4) Total shareholdings stated for Melvin Beaumont include shares owned by
695183 Alberta Ltd., a private holding company owned by Melvin Beaumont.
Marguerite Beaumont is the wife of Melvin Beaumont.
(5) Welcome Opportunities Ltd. is a public company.
(6) Jeffrey W. Lubore is a consultant to us. Total shareholdings reported for
Mr. Lubore include 100,000 shares issuable pursuant to incentive stock
options.
To the best of our knowledge, assuming that all of the shares offered by each
selling shareholder are sold, no selling shareholder other than Owen Jones or
Grant Sutherland will own or control in excess of 1% of our voting securities.
PLAN OF DISTRIBUTION
The shares offered under this prospectus may be sold from time to time by the
selling shareholders. These sales may be made privately, through the OTC
Bulletin Board quotation service, or otherwise, at prices and at terms then
prevailing or at prices related to the then current market price, or in
negotiated transactions. The shares may be sold by each of the selling
shareholders acting as principal for its own account or in ordinary brokerage
transactions and transactions in which the broker solicits purchasers. In
effecting sales, broker-dealers engaged by the selling shareholders may
arrange for other broker-dealers to participate in the re-sales.
Broker-dealers or agents may receive compensation in the form of commissions,
discounts or concessions from selling shareholders in amounts to be
negotiated in connection with the sale. These broker-dealers and any other
participating broker-dealers may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with these sales, and any such
commissions, discounts or concessions may be deemed to be underwriting
discounts or commissions under the Securities Act. In addition, any
securities covered by this prospectus which qualify for sale pursuant to Rule
144 to the Securities Act may be sold under Rule 144 rather than pursuant to
this prospectus.
It is not possible at the present time to determine the price to the public
in any sale of the shares by the selling shareholders and each selling
shareholder reserves the right to accept or reject, in whole or in part, any
proposed purchaser of shares. The public offering price and the amount of any
applicable sales or underwriting discounts or commissions will be determined
at the time of such sale by the selling shareholders. The aggregate proceeds
to the selling shareholders from the sale of the shares will be the purchase
price of the shares less all applicable commissions and underwriters'
discounts, if any. We will pay substantially all the expenses incident to the
registration, offering and sale of the
<PAGE>
41
shares to the public by the selling shareholders (currently estimated to be
$130,000), other than fees, discounts and commissions of underwriters,
dealers or agents, if any, and transfer taxes.
LEGAL MATTERS
Certain legal matters relating to the legality of the issuance of the shares
offered by this prospectus will be passed upon by William K. Ziering,
Attorney At Law, of Four Embarcadero Center, Suite 3400, San Francisco, CA
94111-4187.
EXPERTS
The consolidated balance sheets of the Company as at December 31, 1999 and
1998, and the consolidated statements of operations, stockholders' deficit
and cash flows for the years ended December 31, 1999, 1998, and 1997 have
been included herein and elsewhere in this registration statement in reliance
upon the report of KPMG LLP, independent chartered accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants
Consolidated Balance Sheet
Consolidated Statement of Income
Consolidated Statement of Change in Shareholders' Equity
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
<PAGE>
42
==============================================================================
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH
THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY SECURITIES OTHER THAN THE
SECURITIES OFFERED BY THIS PROSPECTUS, OR AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY SECURITIES BY ANY PERSON IN ANY JURISDICTION WHERE
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IS UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY OR THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary.......................................1
Risk Factors.............................................3
Cautionary Notice regarding Forward-Looking Statements...7
Additional Information...................................7
Enforcement of Civil Liabilities.........................7
Use of Proceeds..........................................8
Nature of Trading Market.................................8
Dividend Policy..........................................9
Capitalization...........................................9
Selected Consolidated Financial Data....................10
Management's Discussion and Analysis of Financial
Condition and Results of Operation....................10
Business................................................15
Management..............................................33
Principal Shareholders..................................36
Certain Transactions....................................37
Description of Capital Stock............................40
Selling Shareholders....................................42
Plan of Distribution....................................43
Legal Matters...........................................44
Experts.................................................44
Index to Financial Statements...........................44
</TABLE>
UNTIL -, 2000 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
BRAINTECH, INC.
8,095,000 COMMON SHARES
___________________
PROSPECTUS
___________________
JUNE 16, 2000
==============================================================================
<PAGE>
43
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
We will not receive any proceeds from the sale of shares by the selling
shareholders.
We will pay substantially all the expenses incident to the registration,
offering and sale of the shares to the public by the selling shareholders
other than fees, discounts and commissions of underwriters, dealers or
agents, if any, and transfer taxes. Those expenses are estimated as follows:
<TABLE>
<CAPTION>
AMOUNT
---------------
(STATED IN US$)
<S> <C>
SEC Registration Fee............................ $ 10,000
Legal Fees and Expenses........................ 40,000
Accounting fees and expenses................... 20,000
Blue Sky Qualification fees and expenses....... 5,000
Printing....................................... 40,000
Transfer Agent and Registrar Fees.............. 5,000
Miscellaneous expenses and Qualification....... 10,000
Total................................... $130,000
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Article VIII of our By-Laws, any past or present director, officer, or
employee (or person serving as such for another corporation, at our request)
or a testator or intestate thereof, is entitled to be indemnified by us in
respect of any expenses (including without limitation attorneys' fees,
judgments, fines, and penalties) reasonably incurred by him in defending any
civil, criminal or administrative action, suit or proceeding to which he is
made a party by reason of his position with us (or other corporation at our
request). Indemnification is not available to the extent that it is adjudged
in such action, suit or proceedings that the officer, director or employee
was liable to us (or such other corporation) for negligence or misconduct in
the performance of duty.
A judgment or conviction (including a conviction based on a plea of guilty or
nolo contendere or its equivalent) shall not itself be deemed an adjudication
that the director, officer or employee was liable for negligence or
misconduct in the performance of his duties. A person claiming
indemnification may have his entitlement determined by:
(a) order of the Court or administrative body having jurisdiction in the
action, suit, or proceeding;
(b) a resolution adopted by a majority of the quorum of our board of
directors (not counting any director who has incurred expenses in
connection with the action, suit or proceeding);
<PAGE>
44
(c) a resolution of the majority of our stockholders (if there is no quorum
of directors available who have not incurred expenses in connection
with the action, suit or proceeding);
(d) a resolution of the majority of our directors entitled to vote at any
meeting; or
(e) any order of any Court having jurisdiction over us.
Any such determination that a payment by way of indemnification should be
made is binding on us.
The right of indemnification given under Article VIII of the By-Laws is not
exclusive of any such other right under any By-Law, agreement, shareholders'
resolution, provision of law, or otherwise. The provisions of Article VIII
also apply to any member of any committee appointed by our board of directors.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
All sales of unregistered securities have involved our common stock.
During the fiscal year ending December 31, 1997 we issued 3,000,000 shares in
private placements. These shares were issued pursuant to exemptions from
registration pursuant to Rule 504 of Regulation D under the Securities Act.
We received gross proceeds of $550,000.
-- 1,000,000 shares were issued to a single purchaser on March 20, 1997
at a price of $0.20 per share for gross proceeds of $200,000.
-- 1,000,000 shares were issued to a single purchaser on May 29, 1997 at
a price of $0.20 per share for gross proceeds of $200,000.
-- 1,000,000 shares were issued to a single purchaser on December 24,
1997 at a price of $0.15 per share for gross proceeds of $150,000.
In May 1997 we issued 300,000 shares at a deemed value of $60,000 to
Paragon Communications in consideration for investor relations services.
These shares were issued pursuant to exemptions from registration Section
4(2) of the Securities Act. To the best of our knowledge, the beneficial
owner of Paragon Communications was J. Scott Sitra. Paragon Communications
was a sophisticated purchaser, and had access to corporate information as a
result of the investor relations work it did for us.
<PAGE>
45
During the first half of 1998 we issued 1,600,000 shares in a private
placement. These shares were issued to 14 purchasers pursuant to exemptions
from registration pursuant to Rule 504 of Regulation D under the Securities
Act. We received gross proceeds of $400,000. This private placement was
completed on April 23 and 24, 1997, as to 1,470,000 shares, and on June 15,
1997, as to 130,000 shares. Grant Sutherland, one of our directors, was the
beneficial purchaser of 780,000 of the shares.
In July and August 1998 we issued 938,000 shares on the exercise of stock
options granted to our directors, officers, employees and consultants. We
received consideration of $187,600. Directors exercised 600,000 of the
938,000 options. These shares were issued pursuant to exemptions from
registration pursuant to Rule 504 of Regulation D under the Securities Act.
In the fall of 1998 we conducted a private placement of 1,250,000 shares at
$0.20 per share. The shares were issued to four purchasers pursuant to
exemptions from registration pursuant to Rule 504 of Regulation D under the
Securities Act. We received gross consideration of $250,000. Grant
Sutherland, one of our directors, was the beneficial purchaser of 300,000 of
the shares. This private placement was completed on September 25 and 29,
1998, as to 650,000 shares, on October 9, 1998, as to 300,000 shares, and on
November 20, 1998, as to 300,000 shares.
In March 1999 we conducted a private placement of 4,400,000 shares at $0.15
per share. The shares were issued to five purchasers pursuant to exemptions
from registration pursuant to Rule 506 of Regulation D under the Securities
Act. We received gross proceeds of $660,000. Grant Sutherland and Owen Jones,
members of our board of directors, purchased 1,000,000 shares each. All of
the purchasers were accredited investors.
In June 1999 we conducted a private placement of 2,600,000 shares at $0.15
per share. The shares were issued to seven purchasers pursuant to exemptions
from registration pursuant to Rule 506 of Regulation D under the Securities
Act. We received gross proceeds of $390,000. None of our directors
participated in this private placement. All of the purchasers were accredited
investors.
In September and October 1999 we conducted private placements of 2,935,000
shares at $0.15 per share. The shares were issued to six purchasers pursuant
to exemptions from registration pursuant to Rule 506 of Regulation D under
the Securities Act. We received gross proceeds of $440,250. Beau-J Holdings
Ltd., a private holding company owned by Grant Sutherland, one of our
directors, purchased 1,135,000 shares. Owing to administrative delays,
450,000 of the shares were issued in December 1999 and 135,000 of the shares
were issued in February 2000. All of the purchasers were accredited investors.
In December 1999 we conducted a private placement of 1,160,000 shares at
$0.60 per share. The shares were issued to seven purchasers pursuant to
exemptions from registration pursuant to Rule 506 of Regulation D under the
Securities Act. We received gross proceeds of $696,000. Grant Sutherland, one
of our directors, purchased 150,000 shares. Owing to administrative delays,
150,000 of the shares were issued in February 2000. All of the purchasers
were accredited investors.
<PAGE>
46
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
NUMBER
EXHIBIT
<S> <C>
3.1(1) Articles of Incorporation, dated February 27, 1987
3.2(1) Articles of Amendment, dated July 14,1998
3.3(1) Articles of Amendment, dated June 28, 1990
3.4(1) Articles Of Amendment of the Company, dated February 8, 1993
3.5(1) Articles of Amendment of the Company, dated April 6, 1993
3.6(1) Articles of Amendment of the Company, dated December 6, 1993
3.7(1) By-Laws of the Company
4.1(1) Specimen Stock Certificate
4.2(2) 1997 Stock Option Plan
4.3(2) 2000 Stock Option Plan
5.1(3) Opinion of William K. Ziering, Attorney-at-Law
10.1(1) License Agreement between the Company and Willard W. Olson, dated
January 5, 1995.
10.2(1) Product Development Agreement between the Company and United Technologies
Microelectronic Systems Inc., dated July 6, 1998.
10.3(1) Manufacturing and Sales Agreement between the Company and United
Technologies Microelectronic Systems Inc., dated July 6, 1998.
10.4(1) Operating Agreement between the Company and Sideware Systems Inc., dated
November 1, 1995
10.5(4) Cost Sharing and Allocation Agreement between the Company and Sideware
Systems Inc.
10.6(1) 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.
10.7(4) Software Development and License Agreement dated September 20, 1999 between
the Company and Sideware Systems Inc.
10.8(4) Lease effective as of July 1, 1999 between the Company, Techwest Management
Inc., Sideware Systems Inc. and Pacific Centre Leaseholds Ltd.
10.9(4) Assignment Agreement effective as of July 1, 1999 between the Company,
Techwest Management Inc., Sideware Systems Inc., and SJM Management Ltd.
10.10(4) Agreement between the Company, Mercator Robotec Inc. and Satisfied Brake
Products Inc.
10.11(6) Alliance Agreement dated March 26, 2000 between the Company and
ABB Flexible Automation Group Inc.
11.1(6) Computation of net loss per share
21.1(1) Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
23.2(3) Consent of William K. Ziering (included in Exhibit 5.1)
24.1(1) Power of Attorney (included in the signature page to this Registration Statement)
27.1(5) Summary Financial Data for the year ended December 31, 1999.
</TABLE>
(1) Exhibit already on file -- exhibit to our Form 10-SB
registration statement filed September 25, 1998.
(2) Exhibit already on file -- exhibit to our Schedule 14A proxy
information filed March 1, 2000.
(3) Exhibit already on file -- exhibit to our Form S-1 registration
statement filed February 11, 2000.
(4) Exhibit already on file exhibit to our Form 10-QSB covering
the quarter ended September 30, 1999 filed November 15, 1999.
(5) Exhibit already on file -- exhibit to our Form 10-KSB covering
the year ended December 31, 1999 filed March 9, 2000.
(6) Exhibit already on file -- exhibit to our Form 10-QSB covering
the quarter ended March 31, 2000 filed May 15, 2000.
<PAGE>
47
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement
(or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a
fundamental change in the information set forth in the
Registration Statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
Registration Statement or any material change to such
information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(4) To file a post-effective amendment to the Registration Statement
to include any financial statements required by section 10(a)(3) of the
Act.
<PAGE>
Consolidated Financial Statements of
BRAINTECH, INC.
(A Development Stage Enterprise)
(Expressed in U.S. Dollars)
Years ended December 31, 1999, 1998 and 1997
Period from inception on January 3, 1994 to December 31, 1999
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Braintech, Inc.
We have audited the accompanying consolidated balance sheets of Braintech,
Inc. (a development stage enterprise) as at December 31, 1999 and 1998 and
the related consolidated statements of operations, stockholders' deficit and
cash flows for each of the years in the three year period ended December 31,
1999 and for the period from inception on January 3, 1994 to December 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Braintech, Inc. as at December 31, 1999 and 1998 and the results of their
operations and their cash flows for each of the years in the three year
period ended December 31, 1999 and for the period from inception on January
4, 1994 to December 31, 1999, in conformity with generally accepted
accounting principles in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 2 to the
financial statements, the Company has suffered recurring losses from
operations and has a net capital deficiency which raise substantial doubt
about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in note 2. The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
"KPMG"
Chartered Accountants
Vancouver, Canada
February 10, 2000, except as to note 11 which is as of February 21, 2000
<PAGE>
BRAINTECH, INC.
(A Development Stage Enterprise)
Consolidated Balance Sheets
(Expressed in U.S. Dollars)
December 31, 1999 and 1998
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
1999 1998
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 431,390 $ 22,479
Accounts receivable 16,189 22,433
Inventory 3,369 -
Due from related companies (note 4(a)) 13,644 -
Prepaid expenses 7,392 12,344
--------------------------------------------------------------------------------------------------------------
471,984 57,256
Due from directors and officers (note 4(b)) 10,130 10,130
Fixed assets (note 5) 134,210 75,237
-------------------------------------------------------------------------------------------------------------------
$ 616,324 $ 142,623
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities $ 87,710 $ 84,001
Deferred revenue 21,506 -
Due to related companies (note 4(a)) - 442,860
--------------------------------------------------------------------------------------------------------------
109,216 526,861
Amounts in dispute (note 8(b)) 606,000 606,000
-------------------------------------------------------------------------------------------------------------------
715,216 1,132,861
Stockholders' deficit:
Common stock (note 6):
Authorized: 50,000,000 shares, with $0.001 par value
Issued: 41,338,333 shares (1998 - 30,371,333) 41,228 30,371
Additional paid-in capital (note 6(c)) 6,910,323 4,793,760
Accumulated deficit (58,800) (58,800)
Deficit accumulated during the development stage (6,991,643) (5,755,569)
--------------------------------------------------------------------------------------------------------------
(98,892) (990,238)
Future operations (note 2)
Contingencies (note 8)
Commitments (note 9)
Subsequent events (note 11)
Year 2000 Issue (note 12)
-------------------------------------------------------------------------------------------------------------------
$ 616,324 $ 142,623
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
On behalf of the Board:
"Owen Jones" President "Grant Sutherland" Chairman
------------------------ ------------------------
<PAGE>
BRAINTECH, INC.
(A Development Stage Enterprise)
Consolidated Statements of Operations
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Period from
inception on
January 3, 1994 Years ended December 31,
to December 31, ------------------------------------------------------
1999 1999 1998 1997
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $ 57,510 $ - $ 57,510 $ -
Cost of sales 30,005 - 30,005 -
-------------------------------------------------------------------------------------------------------------------
Gross margin 27,505 - 27,505 -
Expenses:
Consulting and contractors 736,561 - 24,785 17,770
Research and development 1,719,001 579,441 321,378 148,527
Selling, general and
administrative (note 10) 4,402,912 650,715 1,786,410 763,745
Non-operating expenses:
Loss on disposal of fixed assets 26,054 5,918 1,888 -
Write-down of investments 100,000 - 3,600 -
Write-down of intangible assets 17,189 - - -
Write-down of organization costs 17,431 - - -
-------------------------------------------------------------------------------------------------------------------
7,019,148 1,236,074 2,138,061 930,042
-------------------------------------------------------------------------------------------------------------------
Loss for the period $ (6,991,643) $ (1,236,074) $ (2,110,556) $ (930,042)
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
Loss per share information:
Basic and diluted $ (0.29) $ (0.03) $ (0.07) $ (0.04)
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
Weighted average number of
common shares outstanding 24,174,901 36,076,379 28,620,884 25,464,978
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
BRAINTECH, INC.
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Deficit
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
Deficit
accumulated
Additional during the
Common paid-in Accumulated development
Shares stock capital deficit stage
-------------------------------------------------------------------------------------------------------------------------
<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)
-------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 17,400,000 17,400 1,039,271 (58,800) (1,006,716)
Loss for the period - - - - (748,310)
-------------------------------------------------------------------------------------------------------------------------
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)
-------------------------------------------------------------------------------------------------------------------------
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)
-------------------------------------------------------------------------------------------------------------------------
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)
-------------------------------------------------------------------------------------------------------------------------
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 $.15 per share 9,800,000 9,800 1,433,950 - -
Issued for cash at $.20 per share 157,000 157 31,243 - -
Issued for cash at $.60 per share 1,010,000 1,010 604,990 - -
Common stock subscriptions (notes 6(d)
and 11(b)) - - 110,270 - -
Subscriptions receivable - (110) (65,890) - -
Compensatory benefit of employee stock
options - - 2,000 - -
Loss for the period - - - - (1,236,074)
-------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 41,338,333 $ 41,228 $ 6,910,323 $ (58,800) $ (6,991,643)
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
BRAINTECH, INC.
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Period from
inception on
January 3, 1994 Years ended December 31,
to December 31, -------------------------------------------------
1999 1999 1998 1997
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Loss for the period $ (6,991,643) $ (1,236,074) $ (2,110,556) $ (930,042)
Items not involving cash:
Amortization 79,958 42,503 24,135 10,287
Bad debt 75,108 - - -
Loss on disposal of fixed assets 26,054 5,918 1,888 -
Write-down of investments 100,000 - 3,600 -
Write-down of intangible assets 17,189 - - -
Write-down of organization costs 17,431 - - -
Shares issued for services rendered 300,000 - - 60,000
Compensatory benefit of employee
stock options 1,129,800 2,000 927,800 200,000
Changes in non-cash operating working
capital:
Inventory (3,369) (3,369) - -
Accounts receivable (16,189) 6,244 (971) (21,462)
Prepaid expenses (7,392) 4,952 (10,636) (1,708)
Accounts payable and accrued liabilities 74,178 3,709 45,197 (36,942)
Deferred revenue 21,506 21,506 - -
----------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (5,177,369) (1,152,611) (1,119,543) (719,867)
Cash flows from investing activities:
Purchase of marketable securities (100,000) - - -
Purchase of fixed assets (239,163) (107,394) (87,988) (23,559)
Proceeds from notes receivable (130,181) - - -
Proceeds from disposal of real estate 306,752 - - -
----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (162,592) (107,394) (87,988) (23,559)
Cash flows from financing activities:
Notes receivable 55,073 - - -
Borrowings from directors and officers (2,826) - 18,304 (39,881)
Due to (from) related companies (25,270) (456,504) 231,418 267,882
Mortgages payable (207,739) - - -
Share subscriptions received 110,270 110,270 - -
Subscriptions receivable (66,000) (66,000) - -
Common shares issued, net of issue costs 5,663,731 2,081,150 837,600 548,270
----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 5,527,239 1,668,916 1,087,322 776,271
-------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 187,278 408,911 (120,209) 32,845
Cash and cash equivalents, beginning of period 244,112 22,479 142,688 109,843
-------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 431,390 $ 431,390 $ 22,479 $ 142,688
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
Supplemental information:
Cash paid for interest $ 3,797 $ 895 $ 2,155 $ 747
Cash paid for taxes $ - $ - $ - $ -
Non-cash financing activities:
Shares issued for services rendered $ 300,000 $ - $ - $ 60,000
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
BRAINTECH, INC.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
Years ended December 31, 1999, 1998 and 1997
Period from inception on January 3, 1994 to December 31, 1999
--------------------------------------------------------------------------------
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 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 products and services are made in this industry segment.
2. FUTURE OPERATIONS:
During the year ended December 31, 1999, the Company incurred a loss of
$1,236,074 and used cash in operating activities of $1,152,611. From
inception of the business on January 3, 1994, the Company has incurred
cumulative losses of $6,991,643 and used cash for operating activities of
$5,177,369.
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.
The Company has not generated significant revenues and is continuing to
develop its business. Operations to date have been primarily financed by
equity transactions. The Company's future operations and its continuation
as a going concern are dependent upon its ability to obtain market
acceptance of its vision systems, to increase sales of its product by
developing strategic sales alliances with major suppliers of robotic
systems, generating positive cash flows from operations and ultimately
attaining profitability.
It is the Company's intention to focus on developing alliances with
companies with established sales and marketing groups with the intention
of becoming their principal supplier of vision systems. Subsequent to
year end, an alliance was developed with a major supplier of robotic
systems.
Depending on the Company's ability to develop sales through alliances or
other means and related cash flows, the Company may need to raise
additional capital through public or private financings which may not be
available on reasonable terms. 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
December 31, 1999, for United States accounting and reporting purposes,
the Company is considered to be in a development stage as it was
devoting substantial efforts to developing its business operations.
Commencement of the development stage is considered to have occurred on
January 3, 1994 when the Company began operations as a high-technology
development company.
<PAGE>
BRAINTECH, INC.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, page 2
(Expressed in U.S. Dollars)
Years ended December 31, 1999, 1998 and 1997
Period from inception on January 3, 1994 to December 31, 1999
--------------------------------------------------------------------------------
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(b) Cash and cash equivalents:
Cash and cash equivalents include highly liquid investments, such as
term deposits, having terms to maturity of three months or less at the
date of acquisition and that are readily convertible to contracted
amounts of cash.
(c) Research and development costs:
Research and development costs are expensed as incurred.
(d) Inventory:
Inventory is valued at the lower of cost and net realizable value with
cost being determined on a first-in-first-out basis. Cost includes
laid-down cost which is the cost of materials and other applicable
direct costs.
(e) 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.
Cash received in advance of meeting the revenue recognition criteria
is recorded as deferred revenue.
(f) Fixed assets:
Fixed assets are carried at cost less accumulated amortization.
Amortization is calculated annually as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
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 amounts of revenues
and expenses during the reporting period. Actual amounts may differ
from these estimates.
<PAGE>
BRAINTECH, INC.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, page 3
(Expressed in U.S. Dollars)
Years ended December 31, 1999, 1998 and 1997
Period from inception on January 3, 1994 to December 31, 1999
--------------------------------------------------------------------------------
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(h) Foreign currency:
The Company's functional currency is the United States dollar.
Monetary assets and liabilities denominated in a foreign currency have
been translated to the functional currency at rates of exchange in
effect at the balance sheet date. Non-monetary assets and liabilities,
and revenue and expense items are translated at rates prevailing when
they were acquired or incurred. Exchange gains and losses arising on
translation of assets and liabilities denominated in foreign currencies
are included in operations.
The Company's subsidiary, Brainware Systems Inc., is treated as an
integrated operation and the related accounts are translated into
United States dollars using the temporal method as follows:
(i) Revenue and expenses at average exchange rates for the year;
(ii) Monetary items at the rates of exchange prevailing at the balance
sheet dates;
(iii) Non-monetary items at historical exchange rates; and
(iv) Exchange gains and losses arising from translation are included
in the determination of net earnings for the year.
(i) Stock-based compensation:
The Company has elected to apply the provision of 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. When the likelihood of realization of a deferred tax
asset is not considered to be more likely than not, a valuation
allowance is provided.
<PAGE>
BRAINTECH, INC.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, page 4
(Expressed in U.S. Dollars)
Years ended December 31, 1999, 1998 and 1997
Period from inception on January 3, 1994 to December 31, 1999
--------------------------------------------------------------------------------
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(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.
As the effect of outstanding options is anti-dilutive, diluted loss per
share does not differ from basic loss per share.
(m) Comprehensive income:
Net income for the Company is the same as comprehensive income.
4. RELATED PARTY BALANCES AND TRANSACTIONS:
(a) Due to (from) related companies:
The Company has had several transactions with Sideware Systems Inc.
("Sideware"). Sideware is under the control of common directors and
principal shareholders. However, the Companies businesses are
separate. The Companies raise their financing separately and do not
share the proceeds from their separate issuances of securities. The
Companies also own separate technology.
Transactions with Sideware during our last three fiscal years have
been as follows:
(1) Cost sharing agreement:
The Company shares office premises and some personnel with
Sideware. Prior to 1999, costs were shared equally with Sideware.
In October 1999, a new agreement was made to reallocate common
costs 80% to Sideware and 20% to the Company retroactive to
January 1, 1999.
TechWest Management Inc. ("TechWest"), which is under the
control of common directors, is responsible for making regular
payments to suppliers on behalf of the Company and Sideware.
Cash is advanced to TechWest by the Company and Sideware to
cover these expenses. TechWest then allocates the expenses 80% to
Sideware and 20% to Braintech. Amounts due to (from) related
companies result from these intercompany expense allocations and
cash advances. The amounts due to (from) related companies are as
follows:
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------------------------------------------------------
<S> <C> <C>
TechWest Management Inc. $(11,848) $364,700
Sideware Systems Inc. -- 85,314
Other related companies (1,796) (7,154)
------------------------------------------------------------
$(13,644) $442,860
------------------------------------------------------------
------------------------------------------------------------
</TABLE>
(2) Purchase of computer equipment:
The Company purchases most of its computer equipment through
Sideware because of favorable pricing on IBM equipment available
to Sideware. No mark-up is charged. During the year ended
December 31, 1999, the Company's purchases were $21,000
(1998 - $26,000).
(3) Wizmaster
The Company entered into a software development and license
agreement in September 1999 with Sideware. The Company developed
a program named the "Wizmaster" for incorporation into Sideware's
software. Sideware paid a total of $11,200 to the Company.
(b) Due from directors and officers:
The amounts due from directors and officers represent cash advances
provided to current directors and officers of the Company.
(c) Transactions with directors and officers:
During the year, the Company was charged $68,735 (1998 - $129,538; 1997
- $nil) for management and consulting services provided by directors
and officers. These charges are included in selling, general and
administrative expenses.
<PAGE>
BRAINTECH, INC.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, page 5
(Expressed in U.S. Dollars)
Years ended December 31, 1999, 1998 and 1997
Period from inception on January 3, 1994 to December 31, 1999
--------------------------------------------------------------------------------
5. FIXED ASSETS:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Accumulated Net book
DECEMBER 31, 1999 Cost amortization value
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Furniture and fixtures $ 22,945 $ 5,320 $ 17,625
Computer equipment 80,745 23,771 56,974
Trade show assets 13,307 2,851 10,456
Computer software 50,795 36,898 13,897
Leasehold improvements 41,992 6,734 35,258
-------------------------------------------------------------------------------------------------------------------
$ 209,784 $ 75,574 $ 134,210
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Accumulated Net book
DECEMBER 31, 1998 Cost amortization value
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Furniture and fixtures $ 16,419 $ 1,790 $ 14,629
Computer equipment 47,046 8,612 38,434
Trade show assets 8,446 845 7,601
Computer software 23,740 21,648 2,092
Leasehold improvements 14,008 1,527 12,481
-------------------------------------------------------------------------------------------------------------------
$ 109,659 $ 34,422 $ 75,237
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
</TABLE>
6. COMMON STOCK:
(a) Of the shares issued at December 31, 1999, 12,595,000 shares (1998 -
5,280,000; 1997 - 6,830,000) are subject to trading restrictions. These
include the 1,500,000 shares retained by the Company, as described in
note 6(b).
(b) 5,500,000 shares were issued for technology in 1993 and recorded at a
par value of $5,500. 1,500,000 shares have been retained by the Company
because the development of the technology has not been completed.
(c) Additional paid-in capital arises on the issuance of common shares at a
price in excess of par value.
(d) Subscriptions for shares:
As at December 31, 1999, the Company had received subscriptions for
285,000 common shares of common stock for aggregate proceeds of
$110,270.
<PAGE>
BRAINTECH, INC.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, page 6
(Expressed in U.S. Dollars)
Years ended December 31, 1999, 1998 and 1997
Period from inception on January 3, 1994 to December 31, 1999
--------------------------------------------------------------------------------
6. COMMON STOCK (CONTINUED):
(e) 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 year ended December 31, 1999 is as
follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
Weighted
average Weighted Outstanding Outstanding
exercise average December 31, Forfeited/ December 31,
Expiry 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 - 85,000 - 4,012,000
November 28, 2002 $0.20 $0.76 1,210,000 - 72,000 35,000 1,103,000
November 28, 2002 $0.20 $0.77 125,000 - - - 125,000
April 19, 2004 $0.20 $0.16 - 965,000 - - 965,000
November 25, 2004 $0.20 $0.18 - 200,000 - - 200,000
5,432,000 1,165,000 157,000 35,000 6,405,000
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
</TABLE>
Stock option activity during the year ended December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
Weighted
average Weighted Outstanding Outstanding
exercise average December 31, Forfeited/ December 31,
Expiry dates price fair value 1997 Granted Exercised expired 1998
<S> <C> <C> <C> <C> <C> <C> <C>
November 28, 2002 $0.20 $0.19 5,000,000 - 803,000 100,000 4,097,000
November 28, 2002 $0.20 $0.76 - 1,420,000 110,000 100,000 1,210,000
November 28, 2002 $0.20 $0.77 - 150,000 25,000 - 125,000
--------------------------------------------------------------------------------------------------------
5,000,000 1,570,000 938,000 200,000 5,432,000
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
</TABLE>
The weighted average fair value of options was calculated using the
Black-Scholes option pricing formula.
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 on optionee must pay
to acquire stock. Included in expenses for 1999 is $2,000 representing
a compensatory benefit (1998 - $927,800; 1997 - $200,000).
<PAGE>
BRAINTECH, INC.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, page 7
(Expressed in U.S. Dollars)
Years ended December 31, 1999, 1998 and 1997
Period from inception on January 3, 1994 to December 31, 1999
--------------------------------------------------------------------------------
6. COMMON STOCK (CONTINUED):
(e) Stock options (continued):
Had compensation cost been determined based on the 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 Years ended December 31,
to December 31, ---------------------------------------------------
1999 1999 1998 1997
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loss for the period, as reported $ (6,991,643) $ (1,236,074) $ (2,110,556) $ (930,042)
Estimated fair value of option grants (2,375,052) (189,829) (1,201,483) (983,740)
-------------------------------------------------------------------------------------------------------------------
(9,366,695) (1,425,903) (3,312,039) (1,913,782)
Less compensatory benefit included in
selling, general and administrative
expenses 1,129,800 2,000 927,800 200,000
-------------------------------------------------------------------------------------------------------------------
Pro forma loss $ (8,236,895) $ (1,423,903) $ (2,384,239) $ (1,713,782)
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
Loss per share $ (0.34) $ (0.04) $ (0.08) $ (0.07)
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
</TABLE>
The fair value of the stock option grants have been estimated using the
Black-Scholes Option-Pricing model with the following assumptions:
dividend yield - 0% (1998 - 0%; 1997 - 0%), risk-free interest rate -
5.88% (1998 - 6.0%; 1997 - 5.0%), expected option life - 5 years (1998
- 5 years; 1997 - 5 years); expected volatility - 120% (1998 - 156%;
1997 - 70%).
7. INCOME TAXES:
The Company has non-capital losses carried forward of approximately
$4,000,000 which may be deducted in the calculation of taxable income of
future periods to 2014.
The unrecorded benefit of these losses carried forward is approximately
$1,800,000. The benefit has been fully offset by a valuation allowance due
to the uncertainty of the realization of the benefits.
8. 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 an 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.
<PAGE>
BRAINTECH, INC.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, page 8
(Expressed in U.S. Dollars)
Years ended December 31, 1999, 1998 and 1997
Period from inception on January 3, 1994 to December 31, 1999
--------------------------------------------------------------------------------
8. CONTINGENCIES (CONTINUED):
(b) On March 16, 1999, three corporations commenced legal proceeding
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. As at December 31, 1999 and
1998, the Company has recorded the full amount of the $606,000 as a
liability.
9. COMMITMENTS:
The Company has obligations under operating lease arrangements which
require the following minimum annual payments:
<TABLE>
<S> <C>
----------------------------------------------------------------------------
2000 $ 216,500
2001 224,000
2002 197,000
2003 96,500
----------------------------------------------------------------------------
$ 734,000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
</TABLE>
Eighty percent of these amounts are recoverable pursuant to an agreement
with Sideware Systems Inc., a company with certain common shareholders and
directors as the Company.
10. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Selling, general and administrative expenses are comprised of the following
compensatory benefits:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Period from
inception on
January 3, 1994 Years ended December 31,
to December 31, -------------------------------------------------
1999 1999 1998 1997
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Selling, general and administrative
expenses:
Compensatory benefit of employee
stock options $ 1,129,800 $ 2,000 $ 927,800 $ 200,000
Salaries and benefits 866,001 143,865 298,430 215,014
Other 2,407,111 504,850 560,180 348,731
-------------------------------------------------------------------------------------------------------------------
$ 4,402,912 $ 650,715 $ 1,786,410 $ 763,745
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
BRAINTECH, INC.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, page 9
(Expressed in U.S. Dollars)
Years ended December 31, 1999, 1998 and 1997
Period from inception on January 3, 1994 to December 31, 1999
--------------------------------------------------------------------------------
11. SUBSEQUENT EVENTS:
(a) Stock options:
Subsequent to December 31, 1999 and up to February 21, 2000, 3,896,000
stock options were exercised and converted to common shares for total
cash proceeds of $779,200. Total stock options cancelled were 265,000.
(b) Private placements:
Subsequent to December 31, 1999, 285,000 common shares were issued
pursuant to share subscriptions received at December 31, 1999 in the
amount of $110,270.
12. YEAR 2000 ISSUE:
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize
the year 2000 as 1900 or some other date, resulting in errors when
information using year 2000 dates is processed. In addition, similar
problems may arise in some systems which use certain dates in 1999 to
represent something other than a date. Although the change in date has
occurred, it is not possible to conclude that all aspects of the Year 2000
Issue that may affect the entity, including those related to customers,
suppliers, or other third parties, have been fully resolved. However,
management does not believe additional costs will be incurred due to the
Year 2000 Issue.
<PAGE>
Consolidated Financial Statements of
BRAINTECH, INC.
(A Development Stage Enterprise)
(Expressed in U.S. Dollars)
Three months ended March 31, 2000 and 1999
Period from inception on January 3, 1994 to March 31, 2000
(Unaudited)
<PAGE>
BRAINTECH, INC.
(A Development Stage Enterprise)
Consolidated Balance Sheets
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
March 31, December 31,
2000 1999
---------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 930,861 $ 431,390
Accounts receivable 22,889 16,189
Inventory 3,369 3,369
Due from related companies (note 4(a)) - 13,644
Prepaid expenses 21,350 7,392
---------------------------------------------------------------------------------------------------------------
978,469 471,984
Due from directors and officers (note 4(b)) - 10,130
Fixed assets (note 5) 137,378 134,210
---------------------------------------------------------------------------------------------------------------
$ 1,115,847 $ 616,324
---------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable and accrued liabilities $ 78,025 $ 87,710
Due to related companies (note 4(a)) - 21,506
---------------------------------------------------------------------------------------------------------------
78,025 109,216
Amounts in dispute (note 8(b)) 606,000 606,000
---------------------------------------------------------------------------------------------------------------
684,025 715,216
Stockholders' deficit:
Common stock (note 6):
Authorized: 50,000,000 shares, with $0.001 par value
Issued: 45,589,333 shares (1999 - 41,338,333) 45,589 41,228
Additional paid-in capital (note 6(c)) 7,764,528 6,910,323
Accumulated deficit (58,800) (58,800)
Deficit accumulated during the development stage (7,319,495) (6,991,643)
---------------------------------------------------------------------------------------------------------------
431,822 (98,892)
Future operations (note 2)
Contingencies (note 8)
Commitments (note 9)
---------------------------------------------------------------------------------------------------------------
$ 1,115,847 $ 616,324
---------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
On behalf of the Board:
"Owen Jones" President "Grant Sutherland" Chairman
----------------------------- -----------------------------
<PAGE>
BRAINTECH, INC.
(A Development Stage Enterprise)
Consolidated Statements of Operations
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
Period from
inception on
January 3, 1994 Three Months Ended March 31,
to March 31, ----------------------------
2000 2000 1999
---------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Sales $ 127,396 $ 69,886 $ -
Cost of sales 61,204 31,199 -
---------------------------------------------------------------------------------------------------------------
Gross margin 66,192 38,687 -
Expenses:
Consulting and contractors 736,561 - 4,045
Research and development 1,870,028 151,027 123,492
Selling, general and administrative (note 10) 4,618,424 215,512 229,388
Non-operating expenses:
Loss on disposal of fixed assets 26,054 - -
Write-down of investments 100,000 - -
Write-down of intangible assets 17,189 - -
Write-down of organization costs 17,431 - -
---------------------------------------------------------------------------------------------------------------
7,385,687 366,539 356,925
---------------------------------------------------------------------------------------------------------------
Loss for the period $ (7,319,495) $ (327,852) $ (356,925)
---------------------------------------------------------------------------------------------------------------
Loss per share information:
Basic and diluted $ (0.29) $ (0.01) $ (0.01)
---------------------------------------------------------------------------------------------------------------
Weighted average number of common
shares outstanding 24,953,163 44,153,926 30,566,888
---------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
BRAINTECH, INC.
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Deficit
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
Deficit
accumulated
Additional during the
Common paid-in Accumulated development
Shares stock capital deficit stage
----------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
<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)
----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 17,400,000 17,400 1,039,271 (58,800) (1,006,716)
Loss for the period - - - - (748,310)
----------------------------------------------------------------------------------------------------------------------
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)
----------------------------------------------------------------------------------------------------------------------
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)
----------------------------------------------------------------------------------------------------------------------
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)
----------------------------------------------------------------------------------------------------------------------
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 $.15 per share 9,800,000 9,800 1,433,950 - -
Issued for cash at $.20 per share 157,000 157 31,243 - -
Issued for cash at $.60 per share 1,010,000 1,010 604,990 - -
Common stock subscriptions - - 110,270 - -
Subscriptions receivable - (110) (65,890) - -
Compensatory benefit of employee stock options - - 2,000 - -
Loss for the period - - - - (1,236,074)
----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 41,338,333 41,228 6,910,323 (58,800) (6,991,643)
Common stock transactions (net of issue costs):
Issued for cash at $.20 per share 3,966,000 3,966 788,315 - -
Subscriptions received - 110 65,890 - -
Stock issued on subscriptions 285,000 285 - - -
Loss for the period - - - - (327,852)
----------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2000 (Unaudited) 45,589,333 $ 45,589 $ 7,764,528 $ (58,800) $ (7,319,495)
----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
BRAINTECH, INC.
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
Period from
inception on
January 3, 1994 Three Months Ended March 31,
to March 31, ----------------------------
2000 2000 1999
---------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Loss for the period $ (7,319,495) $ (327,852) $ (356,925)
Items not involving cash:
Amortization 94,233 14,275 5,220
Bad debt 75,108 - -
Loss on disposal of fixed assets 26,054 - -
Write-down of investments 100,000 - -
Write-down of intangible assets 17,189 - -
Write-down of organization costs 17,431 - -
Shares issued for services rendered 300,000 - -
Compensatory benefit of employee
stock options 1,129,800 - -
Changes in non-cash operating working capital:
Inventory (3,369) - -
Accounts receivable (22,889) (6,700) (2,757)
Prepaid expenses (21,350) (13,958) (6,930)
Accounts payable and accrued liabilities 64,493 (9,685) (23,542)
Deferred revenue - (21,506) -
---------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (5,542,795) (365,426) (384,934)
Cash flows from investing activities:
Purchase of marketable securities (100,000) - -
Purchase of fixed assets (256,606) (17,443) (16,298)
Proceeds from notes receivable (130,181) - -
Proceeds from disposal of real estate 306,752 - -
---------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (180,035) (17,443) (16,298)
Cash flows from financing activities:
Notes receivable 55,073 10,130 -
Borrowings from directors and officers 7,304 - -
Due to (from) related companies (11,626) 13,644 (4,374)
Mortgages payable (207,739) - -
Share subscriptions received 110,270 - (285,000)
Subscriptions receivable - 66,000 -
Common shares issued, net of issue costs 6,456,297 792,566 660,000
---------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 6,409,579 882,340 379,374
---------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 686,749 499,471 (21,858)
Cash and cash equivalents, beginning of period 244,112 431,390 22,479
---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 930,861 $ 930,861 $ 621
---------------------------------------------------------------------------------------------------------------
Supplemental information:
Cash paid for interest $ 3,797 $ - $ -
Cash paid for taxes $ - $ - $ -
Non-cash financing activities:
Shares issued for services rendered $ 300,000 $ - $ -
---------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
BRAINTECH, INC.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(Unaudited)
(Expressed in U.S. Dollars)
Three months ended March 31, 2000 and 1999
Period from inception on January 3, 1994 to March 31, 2000
--------------------------------------------------------------------------------
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 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 products and services are made in this industry segment.
2. FUTURE OPERATIONS:
During the three months ended March 31, 2000, the Company incurred a
loss of $327,852 and used cash in operating activities of $365,426. From
inception of the development stage on January 3, 1994, the Company has
incurred cumulative losses of $7,319,495 and used cash for operating
activities of $5,542,795.
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.
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.
To December 31, 1999, for United States accounting and reporting
purposes, the Company is considered to be in a development stage as
it was devoting substantial efforts to developing its business
operations. Commencement of the development stage is considered to
have occurred on January 3, 1994 when the Company began operations
as a high-technology development company.
<PAGE>
BRAINTECH, INC.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, page 2
(Unaudited)
(Expressed in U.S. Dollars)
Three months ended March 31, 2000 and 1999
Period from inception on January 3, 1994 to March 31, 2000
--------------------------------------------------------------------------------
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(b) Cash and cash equivalents:
Cash and cash equivalents include highly liquid investments, such as
term deposits, having terms to maturity of three months or less at the
date of acquisition and that are readily convertible to contracted
amounts of cash.
(c) Research and development costs:
Research and development costs are expensed as incurred.
(d) Inventory:
Inventory is valued at the lower of cost and net realizable value
with cost being determined on a first-in-first-out basis. Cost is
defined as the cost paid to third parties for materials plus other
applicable direct costs.
(e) 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.
Cash received in advance of meeting the revenue recognition criteria is
recorded as deferred revenue.
(f) Fixed assets:
Fixed assets are carried at cost less accumulated amortization.
Amortization is calculated annually as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
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 amounts of revenues
and expenses during the reporting period. Actual amounts may differ
from these estimates.
<PAGE>
BRAINTECH, INC.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, page 3
(Unaudited)
(Expressed in U.S. Dollars)
Three months ended March 31, 2000 and 1999
Period from inception on January 3, 1994 to March 31, 2000
--------------------------------------------------------------------------------
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(h) Foreign currency:
The functional currency of the Company and all of its operations is
the United States dollar. Monetary assets and liabilities
denominated in a foreign currency have been translated into United
States dollars at rates of exchange in effect at the balance sheet
date. Non-monetary assets and liabilities, and revenue and expense
items are translated at rates prevailing when they were acquired or
incurred. Exchange gains and losses are included in operations.
(i) Stock-based compensation:
The Company has elected to apply the provision of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), and related interpretations in accounting for
its stock options granted to employees. 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"). If option grants are made to non-employees, compensation
expense will be recognized equal to its fair value over the vesting
period.
(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. When the likelihood of realization of a deferred tax
asset is not considered to be more likely than not, a valuation
allowance is provided.
<PAGE>
BRAINTECH, INC.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, page 4
(Unaudited)
(Expressed in U.S. Dollars)
Three months ended March 31, 2000 and 1999
Period from inception on January 3, 1994 to March 31, 2000
--------------------------------------------------------------------------------
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(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.
As the effect of outstanding options is anti-dilutive, diluted loss per
share does not differ from basic loss per share.
(m) Comprehensive income:
Net income for the Company is the same as comprehensive income.
(n) Unaudited interim financial information:
The financial information as at March 31, 2000 and for the three
months ended March 31, 2000 and 1999 is unaudited however, such
financial information reflects all adjustments (consisting of normal
recurring adjustments) which are necessary for a fair presentation
of the results for the periods presented.
4. RELATED PARTY BALANCES AND TRANSACTIONS:
(a) Due to (from) related companies:
TechWest Management Inc. ("TechWest"), which is under the control of
common directors, is responsible for making regular payments to
suppliers on behalf of the Company and Sideware Systems Inc.
("Sideware"), which is also under the control of common directors. Cash
is advanced to TechWest by the Company and Sideware to cover these
expenses. TechWest then allocates 80% of the expenses to Sideware and
20% to the Company. Amounts due to (from) related companies result from
these intercompany expense allocations and cash advances. The amounts
due to (from) related companies are as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
March 31, December 31,
2000 1999
---------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Netmedia Systems Inc. $ - $ (2,126)
TechWest Management Inc. - 23,632
---------------------------------------------------------------------------------------------------------------
$ - $ 21,506
---------------------------------------------------------------------------------------------------------------
</TABLE>
During the period, the Company recorded sales of $11,387 to Sideware.
(b) Due from directors and officers:
The amounts due from directors and officers represent cash advances
provided to current directors and officers of the Company.
<PAGE>
BRAINTECH, INC.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, page 5
(Unaudited)
(Expressed in U.S. Dollars)
Three months ended March 31, 2000 and 1999
Period from inception on January 3, 1994 to March 31, 2000
--------------------------------------------------------------------------------
4. RELATED PARTY BALANCES AND TRANSACTIONS (CONTINUED):
(c) Transactions with directors and officers:
During the three month period ended March 31, 2000, the Company was
charged $73,808 (March 31, 1999 - $52,849) for management and
consulting services provided by directors and officers. These charges
are included in selling, general and administrative expenses.
5. FIXED ASSETS:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
Accumulated Net book
MARCH 31, 2000 (Unaudited) Cost amortization value
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Furniture and fixtures $ 23,726 $ 6,495 $ 17,231
Computer equipment 85,345 30,025 55,320
Trade show assets 17,306 3,622 13,684
Computer software 51,196 40,457 10,739
Leasehold improvements 49,654 9,250 40,404
---------------------------------------------------------------------------------------------------------------
$ 227,227 $ 89,849 $ 137,378
---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
Accumulated Net book
DECEMBER 31, 1999 Cost amortization value
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Furniture and fixtures $ 22,945 $ 5,320 $ 17,625
Computer equipment 80,745 23,771 56,974
Trade show assets 13,307 2,851 10,456
Computer software 50,795 36,898 13,897
Leasehold improvements 41,992 6,734 35,258
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
$ 209,784 $ 75,574 $ 134,210
---------------------------------------------------------------------------------------------------------------
</TABLE>
6. COMMON STOCK:
(a) Of the shares issued at March 31, 2000, 6,595,000 shares (December 31,
1999 - 12,595,000) are subject to trading restrictions. These include
the 1,500,000 shares retained by the Company, as described in note
6(b).
(b) 5,500,000 shares were issued for technology in 1993 and recorded at a
par value of $5,500. 1,500,000 shares have been retained by the Company
because the development of the technology has not been completed.
The 1,500,000 shares are included in the total outstanding number of
shares of 45,589,333 disclosed in the statements of stockholders'
deficit.
<PAGE>
BRAINTECH, INC.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, page 6
(Unaudited)
(Expressed in U.S. Dollars)
Three months ended March 31, 2000 and 1999
Period from inception on January 3, 1994 to March 31, 2000
--------------------------------------------------------------------------------
6. COMMON STOCK (CONTINUED):
(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. The Company has also reserved an additional 7,500,000
common shares, subject to shareholder approval, pursuant to a new 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 months ended March 31, 2000 is
as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
Weighted
average Weighted Outstanding Outstanding
exercise average December 31, Forfeited/ March 31,
Expiry dates price fair value 1999 Granted Exercised expired 2000
--------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
December 16, 2002 $0.20 $0.19 4,012,000 - 2,529,000 - 1,483,000
May 13, 2003 $0.20 $0.76 1,103,000 - 802,000 - 301,000
July 2, 2003 $0.20 $0.77 125,000 - 125,000 - -
April 19, 2004 $0.20 $0.16 965,000 - 310,000 - 655,000
November 25, 2004 $0.20 $0.18 200,000 - 200,000 - -
--------------------------------------------------------------------------------------------------------
6,405,000 - 3,966,000 - 2,439,000
--------------------------------------------------------------------------------------------------------
</TABLE>
Stock option activity during the three month period ended March 31,
1999 is as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
Weighted
average Weighted Outstanding Outstanding
exercise average December 31, Forfeited/ March 31,
Expiry dates price fair value 1998 Granted Exercised expired 1999
--------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
December 16, 2002 $0.20 $0.19 4,097,000 - - - 4,097,000
May 13, 2003 $0.20 $0.76 1,210,000 - - 35,000 1,175,000
July 2, 2003 $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.
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 on optionee must pay
to acquire stock.
<PAGE>
BRAINTECH, INC.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, page 7
(Unaudited)
(Expressed in U.S. Dollars)
Three months ended March 31, 2000 and 1999
Period from inception on January 3, 1994 to March 31, 2000
--------------------------------------------------------------------------------
6. COMMON STOCK (CONTINUED):
(d) Stock options (continued):
Had compensation cost been determined based on the 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, ----------------------------
2000 2000 1999
---------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Loss for the period, as reported $ (7,319,498) $ (327,852) $ (292,486)
Estimated fair value of option grants (2,375,052) - -
---------------------------------------------------------------------------------------------------------------
(9,694,550) (327,852) (292,486)
Less compensatory benefit included in
selling, general and administrative
expenses 1,129,800 - -
---------------------------------------------------------------------------------------------------------------
Pro forma loss $ (8,564,750) $ (327,852) $ (292,486)
---------------------------------------------------------------------------------------------------------------
Loss per share $ (0.34) $ (0.01) $ 0.01
---------------------------------------------------------------------------------------------------------------
</TABLE>
The fair value of the stock option grants have been estimated using the
Black-Scholes Option-Pricing model with the following assumptions:
dividend yield - 0% (all periods), risk-free interest rate in 1999 -
5.88%; 1998 - 6.0%; 1997 - 5.0%, expected option life - 5 years (all
periods); expected volatility in 1999 - 120%; 1998 - 156%; 1997 - 70%.
7. INCOME TAXES:
The Company has non-capital loss carry forwards for income tax purposes of
approximately $4,725,000 which are available to reduce taxable income of
future years. The unrecorded benefit of these losses carried forward is
approximately $2,120,000. The benefit has been fully offset by a valuation
allowance due to the uncertainty of the realization of the benefits.
The unrealized benefits of the carry forward losses expire as follows:
<TABLE>
<S> <C>
2010 $ 25,000
2011 972,500
2012 2,134,700
2013 1,246,400
2014 346,400
------------------------------------------------------------------------------------------
$ 4,725,000
------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
BRAINTECH, INC.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, page 8
(Unaudited)
(Expressed in U.S. Dollars)
Three months ended March 31, 2000 and 1999
Period from inception on January 3, 1994 to March 31, 2000
--------------------------------------------------------------------------------
8. 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 an 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 proceeding
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. In the previous year, the
Company recorded the full amount of the $606,000 as a liability.
9. COMMITMENTS:
The Company has obligations under operating lease arrangements which
require the following minimum annual payments:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
<S> <C>
2000 $ 161,559
2001 222,812
2002 195,817
2003 95,605
---------------------------------------------------------------------------------------------------------------
$ 675,793
---------------------------------------------------------------------------------------------------------------
</TABLE>
Eighty percent of these amounts are recoverable pursuant to an agreement
with Sideware Systems Inc., a company with certain common shareholders and
directors as the Company.
10. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Selling, general and administrative expenses are comprised of the
following:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
Period from
inception on
January 3, 1994 Three Months Ended March 31,
to March 31, -----------------------------
2000 2000 1999
------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Compensatory benefit of employee stock options $ 1,129,800 $ - $ -
Salaries and benefits 919,454 53,453 58,721
Other 2,569,170 162,059 170,667
------------------------------------------------------------------------------------------------------------------
$ 4,618,424 $ 215,512 $ 229,388
------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
48
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements of filing on Form S-1 and has duly caused this
registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized in Vancouver, British Columbia, on June 21, 2000.
BRAINTECH, INC.
By: "Grant Sutherland"
----------------------------------
W. Grant Sutherland
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
"Grant Sutherland" Director, Chairman of June 21, 2000
------------------------ the Board of Directors,
W. Grant Sutherland Principal Financial Officer,
Principal Accounting Officer
*
------------------------ President, Chief Executive June 21, 2000
Owen L.J. Jones Officer and Director (Principal
Executive Officer)
*By: "Grant Sutherland"
-------------------
W. Grant Sutherland
Attorney in Fact
</TABLE>
