UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549


Form 10-Q


(Mark One)


x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the QUARTERLY PERIOD ENDED June 30, 2009




or





 ̈
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______to




Commission File Number 000-24911


BRAINTECH, INC.
 (Name of small business issuer in its charter)


Nevada
(State or other jurisdiction of incorporation or organization)

98-0168932
(I.R.S. Employer Identification No.)


1750 Tysons Boulevard
 Suite 350
 McLean, VA 22102
 (Address of principal executive offices)
 (703) 637-9752
 (Issuer’s telephone number)


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





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.    YesxNo ̈




Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was
required to submit and post such files).    Yes    x    No     ̈




Indicate by check mark whether the registrant is a large accelerated files, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and smaller reporting company” in Rule 12b-2 of the Exchange Act.




Large accelerated filer     ̈                                                                                     Accelerated
filer     ̈




Non-accelerated filer ̈                                                                           Smaller
reporting companyx


(Do not check if a smaller reporting company)







Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     ̈




As of August 4, 2009, there were 60,412,245 shares of the registrant’s common stock, par value $.001 per share, outstanding.







Braintech, Inc.


Form 10-Q


TABLE OF CONTENTS


PART I      FINANCIAL INFORMATION
1Item 1.       Financial Statements
1Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations
2Item 3.       Quantitative and Qualitative Disclosures About Market Risk
6Item 4.       Controls and Procedures
6PART II      OTHER INFORMATION
7Item 1.       Legal Proceedings
7Item 1A.    Risk Factors
8Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds
12Item 3.       Defaults Upon Senior Securities
12Item 4.       Submission of Matters to a Vote of Security Holders
12Item 5.       Other Information
12Item 6.       Exhibits
13







i


PART I - FINANCIAL INFORMATION




Item 1.   Financial Statements




Each of the following items is contained in our Condensed Consolidated Financial Statements and form part of this quarterly report.




(i)
Condensed Consolidated Balance Sheets (unaudited) as of June 30, 2009 and December 31, 2008;




(ii)
Condensed Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2009 and 2008;




(iii)
Condensed Consolidated Statement of Stockholders’ Deficiency (unaudited) for the six months ended June 30, 2009;




(iv)
Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2009 and 2008; and




(v)
Notes to Condensed Consolidated Financial Statements (unaudited) for the six months ended June 30, 2009 and 2008.




1





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

Three and Six months ended June 30, 2009 and 2008
(Unaudited – Prepared by Management)











F-1








BRAINTECH, INC.Condensed Consolidated Balance Sheets(Unaudited – Prepared by Management)(Expressed in United States dollars)June 30,
2009
December 31,
2008Assets (note 5)Current assets:Cash and cash equivalents
$
747,712
$
2,446,538Accounts receivable
142,650
1,317,798Inventory
2,570
13,705Prepaid expenses
33,713
23,556926,645
3,801,597Intangible assets and goodwill (note 3)
-
-Fixed assets
61,186
50,743$
987,831
$
3,852,340Liabilities and Stockholders’ DeficiencyCurrent liabilities:Accounts payable
$
1,026,411
$
1,048,205Accrued liabilities
1,686,042
1,184,583Deferred revenue (note 4)
1,225,331
1,260,510Bank loan (note 5)
1,499,988
2,104,3765,437,772
5,597,674Stockholders’ deficiency:Common stock (note 6):Authorized: 200,000,000 shares, with $0.001 par valueIssued: 60,412,245 shares
60,412
56,502(December 31, 2008 – 56,502,245)Additional paid-in capital
36,007,147
35,627,161Accumulated deficit
(40,517,500)
(37,428,997)(4,449,941)
(1,745,334)$
987,831
$
3,852,340





Description of Business and Future Operations (note 1)


Commitments
and Contingencies (notes 9 and 10)




See
accompanying notes to condensed consolidated financial statements.





F-2








BRAINTECH, INC.Condensed Consolidated Statements of Operations(Unaudited – Prepared by Management)(Expressed in United States dollars)Six Months Ended June 30,
Three Months Ended June 30,2009
2008
2009
2008Sales

$
94,089
$
2,206,370
$
68,176
$
1,100,406Cost of sales
5,222
220,313
5,222
103,115Gross margin
88,867
1,986,057
62,954
997,291Operating expenses:Research and development
321,118
313,099
160,116
137,967Selling, general and administration
2,809,027
2,967,853
1,785,149
2,150,3003,130,145
3,280,952
1,945,265
2,288,267Operating loss
(3,041,278)
(1,294,895)
(1,882,311)
(1,290,976)Non-operating:Interest income
1,238
463
1,184
243Loss on disposition of fixed assets
(2,316)
-
-
-Gain on settlement of debt
-
25,750
-
-Interest and financing expensesInterest on bank loan
(40,605)
(41,967)
(19,516)
(16,065)Other financing expenses
(2,003)
-
(49)
-Bank loan guarantee expenses
(3,539)
(11,538)
(3,539)
(5,584)(47,225)
(27,292)
(21,920)
(21,406)Net loss and comprehensive loss for the period
$
(3,088,503)
$
(1,322,187)
$
(1,904,231)
$
(1,312,382)Loss per share information:Basic and diluted
$
(0.06)
$
(0.03)
$
(0.04)
$
(0.03)Weighted average number ofCommon shares outstanding
50,255,008
39,078,827
50,461,146
39,406,676





See accompanying notes to condensed consolidated financial statements.








F-3





BRAINTECH, INC.Condensed Consolidated Statements of Stockholders’ Deficiency(Unaudited – Prepared by Management)(Expressed in United States dollars)Common stock


TotalNumber

Additional
Accumulated
stockholdersof shares
Amount
paid-in capital
deficit
deficiencyBalance, December 31, 2008
56,502,245
$
56,502
$
35,627,161
$
(37,428,997)
$
(1,745,334)Common stock transactions(net of share issue costs)Shares issued at $0.01 pursuant toBonus Stock Plan
1,750,000
1,750
15,750
-
17,500Shares purchased for cancellationpursuant to non-achievementof performance milestones
(250,000)
(250)
(2,250)

(2,500)Shares issued for services rendered
910,000
910
85,090
-
86,000Shares issued and held in escrowas security for payment
1,500,000
1,500
(1,500)

-Forgiveness of promissory note forsubscription of common stock


100,000

100,000Fair value of stock options expensed
-
-
182,896
-
182,896Loss for the period
-
-
-
(3,088,503)
(3,088,503)Balance, June 30, 2009
60,412,245
$
60,412
$
36,007,147
$
(40,517,500)
$
(4,449,941)





See accompanying notes to condensed consolidated financial statements.





F-4








BRAINTECH, INC.Condensed Consolidated Statements of Cash Flows(Unaudited – Prepared by Management)(Expressed in United States dollars)Six months ended June 30,2009

2008Cash flows from operations:Loss for the period
$
(3,088,503)
$
(1,322,187)Items not involving cash:Amortization

17,071

17,022Loss on disposition of fixed assets

2,316

-Fair value of shares issued for services rendered

46,248

-Fair value of stock options expensed

182,896

188,319Fair Value of shares earned pursuant to bonus stock plan

-

1,290,000Forgiveness of promissory note for subscription of common stock

100,000

-Cancellation of shares pursuant to non-achievement of milestone

(2,500)

-Changes in non-cash operating working capital:Accounts receivable

1,175,148

(93,568)Inventory

11,135

(9,083)Prepaid expenses

(10,157)

29,917Accounts payable and accrued liabilities

519,417

351,984Due to related party

-

(2,491)Deferred leasehold inducements

-

(10,848)Deferred revenue

(35,179)

298,657Net cash (used in) provided by operations

(1,082,108)

737,722Cash flows from investments:Purchase of fixed assets

(29,830)

(18,594)Net cash used in investments

(29,830)

(18,594)Cash flows from financing:Common shares issued, net of issue costs

17,500

-Repayment of bank loan

(604,388)

(660,000)Net cash used in financing

(586,888)

(660,000)(Decrease)/increase in cash and cash equivalents

(1,698,826)

59,128Cash and cash equivalents, beginning of period

2,446,538

921,367Cash and cash equivalents, end of period
$
747,712
$
980,495Supplemental information:Non-cash financing:Shares issued for financing services and financing expenses
$
1,248

-Shares issued for compensation
$
45,000

-Forgiveness of promissory note for subscription of common stock
$
100,000

-Cancellation of shares pursuant to non-achievement of milestone
$
(2,500)

-Cash interest paid
$
36,507
$
41,967





See accompanying notes to condensed consolidated financial statements.





F-5











BRAINTECH, INC.Notes to Condensed Consolidated Financial Statements(Unaudited – Prepared by Management)(Expressed in United States dollars)Six months ended June 30, 2009 and 20081.
Description of business and future operations:Braintech, Inc. (the “Company”) together with its wholly owned subsidiaries develops advanced software for the vision guidance of robotic and other systems.These condensed consolidated financial statements have been prepared on the going concern basis under which an entity is considered to be able to realize its assets and satisfy its liabilities in the ordinary course of business.  The Company’s operations have resulted in losses of $3,088,503 for the six months ended June
30, 2009, an accumulated deficit of $40,517,500 at June 30, 2009 and a working capital deficiency of $4,511,127 at June 30, 2009.  Operations to date have been primarily financed by sales to one major customer and equity and debt transactions.  During the six months ended June 30, 2009, the Company has generated approximately 55% of its revenues from a new customer and approximately 45% from the recognition of previously deferred revenue pursuant to its Exclusive Global Channel Partner Agreement
with ABB Inc. (“ABB”) which expired in accordance with its terms on December 31, 2008.  For the six months ended June 30, 2008, 100% of sales revenue was generated from ABB.  The Company estimates that without further funding or new revenue, it will be unable to repay its loan from the Royal Bank of Canada on its maturity date of September 9, 2009.  The Company has signed a non-binding term sheet with Silicon Valley Bank (“SVB”) for a new $3,000,000 credit
facility, but there is no guarantee that the Company will be able to negotiate and sign definitive credit agreements with SVB.  These factors raise substantial doubt about the Company’s ability to continue as a going concern.The Company’s future operations and its continuation as a going concern are dependent upon its ability to raise additional capital and to sell its products and services to new customers, generate positive cash flows from operations and ultimately attain profitability.Financing transactions may include the issuance of equity securities, obtaining additional credit facilities, or other financing mechanisms.  However, the trading price of the Company’s common stock and the downturn in the U.S. stock markets could make it more difficult to obtain financing through the issuance of equity
securities.The Company is currently in negotiations with SVB, other banks have offered term sheets to the Company, and the Company is actively pursuing new sales contracts. However, there can be no assurances that appropriate financing with favorable economic terms will be available as required or that the Company will be able to sell its products
and services to new customers on terms satisfactory to the Company.If none of these events occur, there is a risk that the business will fail.  The consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.





F-6








BRAINTECH, INC.Notes to Condensed Consolidated Financial Statements(Unaudited – Prepared by Management)(Expressed in United States dollars)Six months ended June 30, 2009 and 20082.
Basis of presentation:(a)
Unaudited financial information:These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and reflect all adjustments (all of which are normal and recurring in nature) that, in the opinion of management, are necessary for fair presentation of the interim financial information.  The
results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year ending December 31, 2009. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These unaudited condensed consolidated financial statements and notes included herein have been prepared on a basis consistent
with and should be read in conjunction with the Company’s audited consolidated financial statements and notes for the year ended December 31, 2008, as filed in its annual report on Form 10-K.(b)
Principles of consolidation:These condensed consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiaries Braintech Canada, Inc., Braintech Government & Defense, Inc., Braintech Consumer & Service, Inc., Braintech Industrial, Inc., and Shafi Inc.  All material inter-company balances and transactions have
been eliminated.(c)
Use of estimates:The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting period.  Significant areas requiring the use of estimates relate to the collectability of accounts receivable, the impairment of assets and rates for amortization, amount of income tax balances, the assumptions used in the determination of the fair value of stock-based compensation, the valuation of accrued liabilities, and the valuation of intangible assets and goodwill.  The Company has recorded liabilities under dispute
which are subject to measurement uncertainty.  Any adjustment may have a material effect on net loss and will be recognized in the consolidated financial statements as they become known.  Actual amounts may differ from these estimates.





F-7








BRAINTECH, INC.Notes to Condensed Consolidated Financial Statements(Unaudited – Prepared by Management)(Expressed in United States dollars)Six months ended June 30, 2009 and 20082.
Basis of presentation (continued):(d)
Stock based compensation:
The Company follows Statement of Financial Accounting Standards No. 123R, “Share Based Payment” (“SFAS 123R”).  SFAS 123R requires companies to estimate the fair value of share-based payment awards on the date of grant using an option pricing model.  The value of the portion of the award that is
ultimately expected to vest is recognized as an expense over the requisite service period in the Company’s financial statements.  Stock-based compensation recognized during the period is based on the value of the portion of the stock-based payment awards that are ultimately expected to vest during the period.  The Company estimates the fair value of stock options using the Black-Scholes valuation model, consistent with the provisions of SFAS 123R.  The Black-Scholes valuation
model requires the input of highly subjective assumptions, including the option’s expected life and the price volatility of the underlying stock.  The expected stock price volatility assumption was determined using historical volatility of the Company’s common stock.(e)
Loss per share:Loss per share is calculated based on the weighted average number of common shares outstanding.As the effect of all outstanding stock options (note 7) and share purchase warrants (note 8) is anti-dilutive, diluted loss per share equals basic loss per share.The number of shares used to calculate loss per share for the six month periods ended June 30, 2009 and 2008 was reduced by 300,000 shares in each year for shares issued and held by the Company.  The number of shares used to calculate loss per share for the three month and six month periods ended June 30, 2009 was reduced by 9,250,000
shares (2008 – 6,750,000 shares) for shares issued and held in escrow pending completion of performance milestones (note 6(b)) or other escrow restrictions.(f)
Revenue recognition:The Company recognizes revenue when there is persuasive evidence of an arrangement, the fee is fixed or determinable, collectibility is reasonably assured, and there are no substantive performance obligations remaining.  The Company’s revenue recognition policies are in conformity with the AICPA’s Statement of Position
No. 97-2 (“SOP 97-2”), “Software Revenue Recognition”.Cash received or accounts receivable recorded in advance of meeting the revenue recognition criteria are recorded as deferred revenue and the costs related to that revenue are recorded as deferred costs.(g)
Business combinations and intangible assets including goodwill:The Company accounts for business combinations using the purchase method of accounting and, accordingly, the assets and liabilities of the acquired entities are recorded at their estimated fair values at the date of acquisition.  Goodwill represents the excess of the purchase price over the fair value of the net assets, including
the amount assigned to identifiable intangible assets.Identifiable intangible assets with finite lives are amortized over their estimated useful lives.  They are generally amortized on a non-straight line approach based on the associated projected cash flows in order to match the amortization pattern to the pattern in which the economic benefits of the asset are expected to be consumed.  They
are reviewed for impairment if indicators of potential impairment exist.  Goodwill and indefinite lived intangible assets are tested for impairment on an annual basis, or sooner if an indicator impairment occurs.





F-8





BRAINTECH, INC.Notes to Condensed Consolidated Financial Statements(Unaudited – Prepared by Management)(Expressed in United States dollars)Six months ended June 30, 2009 and 20082.
Basis of presentation (continued):(h)
Recent accounting pronouncements:Effective April 1, we adopted Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 165, Subsequent Events(“SFAS 165”). This Statement establishes general standards of accounting for and disclosures
of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In general, these events will be recognized if the condition existed at the date of the balance sheet, and will not be recognized if the condition did not exist at the balance sheet date. Disclosure is required for non-recognized events if required to keep the financial statements from being misleading. The guidance in this Statement is very similar to current guidance provided in auditing
literature and, therefore, will not result in significant changes in practice. Subsequent events have been evaluated through the date our interim financial statements were issued - August 12, 2009 the filing time and date of our second-quarter 2009 Quarterly Report on Form 10-Q.
In April 2009, the FASB issued three FASB Staff Positions (FSP’s) that are intended to provide additional application guidance and enhance disclosures about fair value measurements and impairments of securities. FSP No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly” (FSP 157-4), clarifies the objective and method of fair value measurement even when there has been a significant decrease in market activity for the asset being measured. FSP No. 115-2 and FSP No. 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”, (FSP 115-2 and FSP 124-2), establish a new model for measuring other-than-temporary impairments for debt securities, including criteria for when to recognize a write-down
through earnings versus other comprehensive income. FSP No. 107-1 and APB 28-1, “Interim Disclosures About Fair Value of Financial Instruments”, expand the fair value disclosures required for all financial instruments within the scope of SFAS, No. 107, “Disclosures about Fair Value of Financial Instruments” (FSP 107-1 and APB 28-1) to interim periods. All of these FSP’s are effective for interim and annual periods ending after June 15, 2009, our quarter ended June 30, 2009.  The
adoption of these FSP’s will not have a material impact on our consolidated results of operations and financial condition. However, adoption of FSP 107-1 and APB 28-1 during the quarter ended June 30, 2009 resulted in increased disclosures in our consolidated financial statements.

In June 2009, the FASB issued SFAS No. 168, “The ‘FASB Accounting Standards Codification’ and the Hierarchy of Generally Accepted Accounting Principles” (“SFAS 168”).  SFAS 168 establishes the “FASB Accounting Standards Codification” (“Codification”), which officially
launched July 1, 2009, to become the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities.  Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants.  The subsequent issuances of new standards will be in the form of Accounting Standards Updates that
will be included in the Codification.  Generally, the Codification is not expected to change U.S. GAAP.  All other accounting literature excluded from the Codification will be considered non-authoritative.  SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  The Company is currently evaluating the impact of adoption of SFAS 168 but does not expect adoption to have a material impact on results of operations,
cash flows or financial position.





F-9





BRAINTECH, INC.Notes to Condensed Consolidated Financial Statements(Unaudited – Prepared by Management)(Expressed in United States dollars)Six months ended June 30, 2009 and 20083.
Shafi acquisition:On August 12, 2008, in a stock for stock transaction, the Company acquired 100% of the outstanding shares of Shafi, Inc. and 80% of the shares of Shafi Innovation, Inc. (together “SI”) from Adil Shafi.  Consideration for the purchase was 3,000,000 shares of the common stock of Braintech, Inc. at a fair value of $0.33
per share (the “Closing Purchase Shares”) issued at the closing of the acquisition and 1,000,000 shares of Braintech, Inc. common stock to be issued quarterly over the next 12 months upon the achievement of specific performance criteria.Prior to the completion of the purchase transaction, on June 5, 2008, the Company advanced $100,000 to SI to meet its working capital needs.  This advance was secured by all of the assets of SI, and was documented and secured at the SI closing by a demand promissory note bearing an annual interest rate of 2.54%.In order to finance the $100,000 advance, the Company’s Chief Executive Officer and former Chief Executive Officer each advanced to the Company $50,000 against delivery by the Company of promissory notes.  The promissory notes provide for interest at 6% per annum.  The promissory notes also provide that, each of
the promissory note holders will be issued 50,000 common share purchase warrants as additional compensation.  On September 26, 2008, the promissory notes plus accrued interest were repaid in full and the Company issued a total of 100,000 common share purchase warrants to the Chief Executive Officer and former Chief Executive officer.  Each common share purchase warrant entitles the holder to purchase one share for three years at a price of $0.36 per share.  The fair value of the
warrants ($17,082) was recorded as stock-based compensation in financing expenses.  The fair value was calculated using the Black-Scholes valuation model and the following assumptions: dividend yield 0%, expected volatility 190%, risk-free interest rate 2.11%, and an expected term of two years.The acquisition was accounted for under the purchase method.  The following table summarizes the preliminary estimated fair values of the assets and liabilities acquired net of the debt Adil Shafi personally assumed as of August 12, 2008.Intangible assets of Shafi Inc.
$
1,090,000Goodwill of Shafi Inc.

900,000Due to Braintech, Inc.

(100,000)Current liabilities of Shafi Inc.

(900,000)Net assets acquired of Shafi Inc.
$
990,000Consideration: 3,000,000 shares of common stock issued
$
990,000Of the $1,090,000 of acquired intangible assets, $500,000 was assigned to branding and the SI customer base and contacts and $590,000 was assigned to the purchased technology.  The $900,000 of goodwill was assigned to the estimated value of future net revenues.  At December 31, 2008, management believed that significant
uncertainty existed as to the value of the SI intangible assets and goodwill, and accordingly, an impairment charge of $1,990,000 was recorded.

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

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

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





F-10








BRAINTECH, INC.Notes to Condensed Consolidated Financial Statements(Unaudited – Prepared by Management)(Expressed in United States dollars)Six months ended June 30, 2009 and 20084.
Deferred revenue:Six Months Ended June 30,2009

2008Balance, beginning of period
$
1,260,510
$
622,971Revenue invoiced and deferred for future recognition

8,051

361,255Previously deferred revenue recognized in current period

(43,230)

(62,598)Balance, end of period
$
1,225,331
$
921,628


5.
Bank loan and loan guarantee:In October 2006 the Company obtained a $2,473,000 bank loan (“2006 RBC Loan Agreement”) from Royal Bank of Canada (“RBC”) and used the proceeds to redeem all of its previously outstanding secured convertible debentures.  RBC was granted a security interest in all of the Company’s personal and intangible
property, including intellectual property.  As additional security, RBC required standby letters of credit securing the full amount of the loan. Certain accredited investors (the “LC Providers”) provided the letters of credit as financing to the bank in order to enable the loan. Our CEO is the provider of the largest letter of credit and is the Managing Member of the LC Providers.  The LC Providers were granted a security interest in all of the Company’s personal and intangible
property, including intellectual property.  The LC Providers’ security interest is second only to RBC’s security interest.  In the event the Company defaults on the loan and the letters of credit are called by RBC, the Company will pay 10% annual interest to the LC Providers for the balance of the outstanding letters of credit.  In the event that the letters of credit are drawn down by RBC or upon any other specified default by the Company, the Company will then require
and accept the resignations of the then current directors of the Company and appoint the LC Providers as member of a new Board of Directors.  The Board of Directors will immediately decide upon and approve appropriate compensation for the Managing Member and decide upon the management of the Company.  In any case where the letters of credit are drawn by RBC to any level, the Company will immediately appoint the Managing Member as the manager of the Company’s assets with full power under
the LC Providers’ general security agreement with the Company to take such action as is necessary to recover the amounts due to the LC Providers and manage the business and affairs of the Company, in the best overall interests of the LC Providers.  In 2009, the Managing Member formed a committee of LC Providers (“LC Providers Committee”) to assist him in his role as Managing Member of the LC Providers.  Current members of the LC Provider Committee are Frederick Weidinger
(our CEO and largest shareholder), Kenneth Brooks (a shareholder) and David Baird (a shareholder).  The LC Provider Committee operates by unanimous vote.On September 17, 2008, the Company entered into a letter agreement with RBC dated July 29, 2008 (the “2008 RBC Loan Agreement”).  The 2008 RBC Loan Agreement provided for a $250,000 revolving demand facility and a $2,405,000 non-revolving term loan and superseded and canceled the 2006 RBC Loan Agreement.  The
term loan was repayable in equal monthly installments of $108,208 principal plus monthly accrued interest.  The maturity date of the term loan was July 11, 2009.  Interest is calculated at the floating 30 day LIBOR rate plus 1.50%.On July 29, 2009, the Company entered into a letter agreement with the Royal Bank of Canada dated July 11, 2009 (the “2009 RBC Loan Agreement”).  The 2009 RBC Loan Agreement provides for a $1,506,000 non-revolving term loan and supersedes and cancels the 2008 RBC Loan Agreement.  The term loan is repayable
in equal monthly installments of $50,000 principal plus monthly accrued interest.  The maturity date for the term loan is September 9, 2009.  The respective security interests of RBC and the LC Providers remain in place as described above.





F-11








BRAINTECH, INC.Notes to Consolidated Financial Statements(Expressed in United States dollars)Six months ended June 30, 2009 and 20086.
Common stock:(a)
During the six month period ended June 30, 2009, common shares were issued as follows:On January 26, 2009, as final compensation for advancing $255,000 in emergency financing in 2006, the Company issued 410,000 shares of common stock at a fair value of $0.10 per share to a single party in addition to 100,000 shares and 100,000 share purchase warrants previously issued to such party.  In conjunction with this final
compensation arrangement, such party returned to the Company for cancellation the 100,000 share purchase warrants, each entitling the holder to purchase one additional share of common stock exercisable at $0.30 per share.  Although this compensation arrangement was settled in January 2009, the arrangement was made in December 2008.  Accordingly, the Company had accrued the fair value of the financing expense ($39,752) as of December 31, 2008.On March 12, 2009, the Company issued 1,750,000 shares of Bonus Stock (note 6(b)) at a purchase price of $0.01 per shares in accordance with the terms of an employment agreement with an officer of the Company. These shares are being held in escrow pending completion of five individual performance milestones. When management determines that
it is likely that the milestones will be met, the corresponding shares will be released from escrow and the Company will record an expense equal to $0.09 per share being the excess of the fair value of the common stock over the purchase price. If the milestones are not completed, the Company will repurchase the shares for the purchase price of $0.01 per share.On April 27, 2009, the Company issued 1,500,000 shares of Bonus Stock and placed those shares in escrow with the Company’s transfer agent.  The shares were issued as security for monthly payments of $5,000 each totaling $150,000 over a 30 month period due under the terms of a Consultancy Agreement.  The shares
will be returned to the Company in 50,000 share increments as the monthly payments are made.  If the Company fails to make a monthly payment, 100,000 will be released from escrow to the Consultant.On May 4, 2009, 250,000 shares of Bonus Stock were returned to the Company and cancelled in accordance with the terms of a retainer agreement for legal services dated May 4, 2009.On June 12, 2009, the Company issued 500,000 shares of Bonus Stock as compensation pursuant to the terms of a retainer agreement for legal services dated May 4, 2009.  The Company recorded the fair value of the shares ($45,000) as consulting fees.On June 16, 2009, effective as of January 1, 2009, the Company entered into a new Employment and Retention Agreement (the “Agreement”) with the Company’s CEO, Frederick Weidinger.  The Agreement provides for the issuance of up to 13,000,000 shares of restricted common stock upon the achievement of certain identifiable
milestones.(b)
Bonus stock and bonus stock option incentive plan:At a meeting of the Board of Directors held October 22, 2007, the Company approved the Bonus Stock and Bonus Stock Option Plan (the “Bonus Plan”). The Bonus Plan provides for the issuance of common stock of the Company (“Bonus Stock”) and options to acquire common stock of the Company (“Bonus Stock Options”)
to the participants upon the Company reaching certain identifiable milestones in its business plan. The aggregate amount of shares that may be issued under the Bonus Plan shall not exceed 30 million shares. The aggregate amount of shares to be issued as Bonus Stock shall not exceed 20 million shares and the aggregate amount of shares to be issued pursuant to the exercise of Bonus Stock Options shall not exceed 10 million shares.As of June 30, 2009, 15,250,000 shares of Bonus Stock (December 31, 2008 – 11,750,000 shares) have been issued, of which 5,750,000 shares (December 31, 2008 – 5,250,000 shares) have been released from escrow upon the achievement of performance milestones and 9,500,000 shares (December 31, 2008 – 6,500,000 shares) remain
in escrow pending the completion of performance milestones.By letter dated August 5, 2009, the Company informed its CEO, Frederick Weidinger, that certain identifiable milestones documented in the Executive Employment Agreement dated as of October 22, 2007 had not been achieved and, as such, 3,000,000 shares of Bonus Stock were being returned to the Transfer Agent for cancellation.





F-12








BRAINTECH, INC.Notes to Consolidated Financial Statements(Expressed in United States dollars)Six months ended June 30, 2009 and 20087.
Stock options:The Company reserved 1,500,000 common shares pursuant to the 2000 Stock Option Plan, 2,500,000 common shares pursuant to the 2003 Stock Option Plan, and 10,000,000 common shares pursuant to the 2007 Stock Option Plan.  As of June 30, 2009, 724,000 stock options are unallocated and remain available pursuant to the 2000 Stock Option
Plan, 1,523,000 stock options are unallocated and remain available pursuant to the 2003 Stock option Plan, and 5,415,000 stock options are unallocated and remain available pursuant to the 2007 Stock Option Plan.  The Company’s board of directors has discretion to set the price, term, vesting schedules, and other terms and conditions for options granted under the 2000 plan and the Company’s Compensation Committee has discretion to set the price, terms, vesting schedules, and other terms and
conditions for options granted under the 2003 and 2007 plans.  The Company’s board of directors has granted the CEO authority to grant awards pursuant to the 2000 Stock Option Plan, 2003 Stock Option Plan and 2007 Stock Option Plan.


The Company also reserved 10,000,000 common shares pursuant to the Bonus Plan (note 6(b)).  As of June 30, 2009 3,785,000 stock options are unallocated and remain available pursuant to the Bonus Plan.  The Company’s Board of Directors and CEO have discretion to set the price, term, vesting schedules, and other
terms and conditions for options granted under the Bonus Plan.The weighted average fair value of stock options granted during the six months ended June 30, 2009 was $0.10 per option (2008 - $0.29 per option).  The fair value of each option grant is estimated on the date of grant using the Black-Sholes valuation model and the straight-line amortization approach with the following weighted
average assumptions:Six Months EndedJune 30, 2009
June 30, 2008Expected life (years)
2.33
2.00Risk free interest rate
1.02%
1.80%Expected volatility
247%
179%Dividend yield
0%
0%Expected forfeitures
0%
0%The Company recorded stock-based compensation related to stock options of $182,896 for the six months ended June 30, 2009 (2008 - $188,319).  As of June 30, 2009, the unrecorded deferred stock-based compensation balance related to stock options was $178,680 (2008 - $599,591) and will be recognized over an estimated weighted average
amortization period of 1.09 years (2008 – 1.19 years).A summary of the Company’s stock option activity is as follows:WeightedNumber
averageof shares
exercise priceBalance, December 31, 2008
14,267,000
$0.40Options granted
1,140,000
$0.11Options exercised
-
-Vested options expired
(2,960,000)
$0.46Unvested options forfeited
-
-Balance, June 30, 2009
12,447,000
$0.36Of those outstanding at June 30, 2009, 10,347,000 are exercisable (December 31, 2008 – 12,092,000), having a weighted average exercise price of $0.40 per share (December 31, 2008 - $0.43 per share).The outstanding options as of June 30, 2009 have a weighted average remaining contractual life of 3.31 years (December 31, 2008 – 3.55 years).





F-13








BRAINTECH, INC.Notes to Consolidated Financial Statements(Expressed in United States dollars)Six months ended June 30, 2009 and 20088.
Share purchase warrants:On January 26, 2009, as final compensation for advancing $255,000 in emergency financing in 2006, the Company issued 410,000 shares of common stock at a fair value of $0.10 per share to a single party in addition to 100,000 shares and 100,000 share purchase warrants previously issued to such party.  In conjunction with this final
compensation arrangement, such party returned to the Company for cancellation the 100,000 share purchase warrants, each entitling the holder to purchase one additional share of common stock exercisable at $0.30 per share.  Although this compensation arrangement was settled in January 2009, the arrangement was made in December 2008.  Accordingly, the Company accrued the fair value of the financing expense ($39,752) as of December 31, 2008.A summary of the Company’s share purchase warrant activity is as follows:Number
of shares
Weighted
average
exercise price
Weighted
average remaining
contractual life
(years)Balance, December 31, 2008
35,521,179
$   0.33
3.56Warrants granted
-
-
-Warrants expired
(602,693)
0.29
-Warrants exercised
-
-
-Warrants cancelled (note 6)
(100,000)
0.30
-Balance, June 30, 2009
34,818,486
$   0.33
2.64Of the warrants outstanding as of June 30, 2009, 8,011,324 are held by the Company’s former CEO and 7,411,250 are held by the Company’s current CEO.9.
Commitments:The Company has obligations under operating lease arrangements that require the following minimum annual payments:Year ending December 31:2009
88,2792010
140,8342011
81,7342012
62,3102013
54,9252014
33,687$
461,769





F-14








BRAINTECH, INC.Notes to Consolidated Financial Statements(Expressed in United States dollars)Six months ended June 30, 2009 and 20089.
Commitments (continued):Effective April 1, 2009, the Company vacated its North Vancouver leased office premises and ceased making the monthly rent payments.  The Company has been in communications with the landlord and the landlord has informed the Company that it reserves the right to seek remedies that are available under the lease.  The
lease expires in November 2012, with the remaining amounts payable under the terms of the lease agreement aggregating approximately $495,000.  The discounted present value of these payments, estimated to be $420,000, is recorded as a lease termination expense during the quarter ended June 30, 2009.10.
Contingencies:On February 13, 2009 two former employees, released as part of a reduction in work force by Braintech Canada, Inc., after receiving full salary pay, statutory severancepayments, time-bank payments, accrued vacation payments and signing full releases, instituted claims in the
Provincial Court of British Columbia (small claims court) for common law entitlement.  Each claim is for $25,000 (Canadian).  The Company disputes the plaintiffs’ claims and believes that it has meritorious defenses and intends to vigorously defend these actions.  Management believes that any potential loss associated with these matters is neither probable nor reasonably estimable at this time and accordingly has not accrued any amounts for any potential loss.On July 16, 2009 a former employee, released as part of a reduction in work force by Braintech Canada, Inc., instituted a claim in the Provincial Court of British Columbia (small claims court) for common law entitlement.  The claim is for $25,000 (Canadian).  The Company disputes the plaintiff’s claims and believes
that it has meritorious defenses and intends to vigorously defend these actions.  Management believes that any potential loss associated with this matter is neither probable nor reasonably estimable at this time and accordingly has not accrued any amounts for any potential loss.11.
Financial instruments:Fair value of financial instrumentsThe Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and bank loan. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their respective fair values because of the short maturities
of those instruments. The Company’s bank loan consists of its revolving credit facility. The carrying value of the revolving credit facility approximates fair value as the interest rate fluctuates with market conditions.12.
Subsequent events:Subsequent events have been evaluated through August 12, 2009, the date these financial statements were issued. The events requiring disclosure have been described in notes 1, 5 and 10.








F-15






Item 2.                      Management’s Discussion and Analysis of Financial Conditions and Results of Operations




CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS




This Quarterly Report of Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act.  We intend that certain matters discussed in this report are “Forward-Looking Statements” intended to qualify for the safe harbor from liability
established by the Private Securities Litigation Reform Act of 1995.  Forward-looking statements deal with our current plans, intentions, beliefs and expectations and relate to future events or our future financial performance.  In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “intends”, “expects”, “plans”, “anticipates”, “believes”, “estimates”,
“predicts”, “potential” or “continues” or the negative of these terms or other comparable terminology.




Forward-looking statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our actual results in future periods to differ materially from what is currently anticipated.  We make cautionary statements throughout this report and the documents we have incorporated by reference.  You
should read these cautionary statements as being applicable to all related forward-looking statements wherever they appear in this report, the materials referred to in this report, and the materials incorporated by reference into this report.  Our independent registered public accounting firm has issued an opinion on our consolidated financial statements for the years ended December 31, 2008 and 2007 that states that the consolidated financial statements were prepared assuming we will continue as a
going concern and further states that our recurring losses from operations raise substantial doubt about our ability to continue as a going concern.  You are also urged to carefully review and consider the various disclosures made by us which attempt to advise interested parties of the factors which affect our business, particularly the risk of foreclosure as we approach the September 9, 2009 maturity date of our loan with Royal Bank of Canada, and other disclosures including without limitation the
disclosures made under the caption “Management Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements and related notes included in our annual report filed on Form 10-K for the year ended December 31, 2008 and the disclosures under the heading “Risk Factors” in this Quarterly Report and in the Form 10-K as well as other reports and filings we make with the Securities and Exchange Commission.




We cannot guarantee our future results, levels of activity, performance or achievements.  We are under no duty to update any of the forward-looking statements after the date of this report.




When used in this Quarterly Report on Form 10-Q, except as specifically noted otherwise, the term “Braintech” refers to Braintech, Inc. only, and the terms “Company,” “we,” “our,” “ours” and “us” refer to Braintech, Inc. and its wholly-owned subsidiaries.




Overview




The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and related notes and other financial information appearing elsewhere in this report and in our Form 10-K filed with the SEC on March 31, 2009.  Except for historical information, the following discussion contains
forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions and our current beliefs regarding revenues we might earn if we are successful in implementing our business strategies.






Our business consists of the research and development, supply, commercialization, training, maintenance and support of machine vision and vision guidance technologies, products and services for industrial robots and other types of machines and material handling in the industrial, and government markets. The field of machine vision and vision
guided robotics requires our vision software systems to incorporate advanced robotic engineering and programming technology for optimal integration with manufacturing automation systems.





During the first half of 2009 approximately 55% of our revenue was generated from new customers and approximately 45% from the recognition of deferred revenue associated with honoring warranty obligations pursuant to our contract with ABB.  Our long-term exclusive contract with ABB expired on December 31, 2008.  Since
his appointment in November 2007, our current CEO has developed and implemented a new business plan that redefines the Company’s markets, in order to better utilize its technology and to create operating leverage. His management has refocused the Company’s efforts from a pure research and development company in Vancouver, British Columbia with one customer in one niche market to an operating company driven by marketing, sales and business development in several vertical markets with a focus on the
commercialization of our technology among a broad spectrum of machine vision potential customers including the United States Government. Our new mission is to “touch the customer” by establishing relationships with potential customers in order to better understand their problems and solve them more efficiently. To that end, the Company recently opened new offices in McLean, Virginia  and Pontiac, Michigan to focus on developing new business in the government and industrial markets.  The
Company is also considering the transition to a recurring revenue license model and is seeking a robotics-oriented integrator or “OEM” for such purpose.




Throughout 2008 and 2009 we have been focused on finding new customers for our products and technology.  The progressively worsening economic environment during this time period, particularly in the auto industry, has created an extremely difficult environment.  Potential customers’ lack of capital budgets and
the extended sales cycle in both the industrial and government markets have negatively impacted the Company’s sales and associated cash flow.  In addition, new markets have been difficult to penetrate, particularly for a company with resources as limited as ours.
  We are beginning to see signs of customer acceptance for our products and technology.  For example, major automotive companies are expressing strong interest in our software, particularly our patented Random Bin Picking® technology, which we believe is revolutionary.  Our software, traditionally associated only
with ABB in the marketplace, now works with all major robot manufacturers.  The Company has successfully integrated its software into seven different robot controllers representing five different robot manufacturers.  We recently launched our Integrator Partner Program, and already 12 integrators have signed up.  In the first quarter, we received our first purchase order from one of these integrators, which although small, resulted in Honda Motors using our software.  The
Office of Naval Research has announced that Braintech is part of the winning team for its Automated Weapons Assembly project.  Our BAE-led team beat General Dynamics and Foster-Miller in that competition.  We expect to receive the subcontract for that work during the third quarter.
  In spite of these promising signs, the financial environment has been as difficult as the sales environment, and our loan with Royal Bank of Canada (“RBC”), which is payable in full on September 9, 2009, poses an enormous risk to investors.  This loan has an outstanding balance of approximately $1.5 million as of August
4, 2009.  While we are in good standing and have made all payments to date under this loan, we do not have the resources to pay this loan in full on September 9, 2009.  As we approach this September 9, 2009 maturity date for our RBC loan, we are continuing our relentless sales efforts, we implemented a cost reduction program, we have downsized our personnel through layoffs and reduction of consultants, we obtained an extension of the maturity date of the RBC loan to September 9, 2009, and
we are exploring other sources of financing, but there is no guarantee that we will be successful.  Unless RBC agrees to extend the maturity date or refinance the loan, or we obtain debt or equity financing from another source sufficient to pay this loan, RBC and/or the LC Providers may foreclose and investors will lose their entire investment.
  On July 27, 2009 we signed a non-binding term sheet with the Silicon Valley Bank for a new $3,000,000 credit facility.  If completed, the term facility will consist of two parts.  The first part is a $2,200,000 term loan which will be interest only for 18 months from closing, and will then convert to an 18 month term
loan, with final maturity 36 months from closing.  The term loan will be secured by $2,200,000 in certificates of deposit or letters of credit supplied by up to six parties.  The second part of the credit facility will be an $800,000 credit line to be secured by our accounts receivable.  The credit line will mature 18 months from closing.  We intend to negotiate and sign definitive agreements with the Silicon Valley Bank over the next four weeks to close the credit facility,
but there is no guarantee that we will be able to do so.




2




Critical Accounting Policies and Estimates




There have been no material changes in our critical accounting policies and estimates for the six month period ended June 30, 2009 from our disclosure in our Annual Report on Form 10-K for the year ended December 31, 2008.  For a discussion of our critical accounting policies, please see our Annual Report on Form 10-K for the
fiscal year ended December 31, 2008.




Results of Operations






Three Months Ended June 30, 2009 Compared to the Three Months Ended June 30, 2008







Sales
Three Months EndedJune 30

June 30

%2009

2008

Change$68,176

$1,100,406

(91.4%)




Our decrease in sales year over year is attributable to the expiration of the ABB Exclusive Global Channel Partner Agreement.  During the three month period ended June 30, 2008, we invoiced $1,251,243 for software licenses delivered for installation in manufacturing plants.  Of this amount, we deferred $184,690 for future
recognition in accordance with SOP 97-2.  We also recorded $1,503 for engineering and other services and $32,349 of previously deferred revenue.  During the three month period ended June 30, 2009, we invoiced $58,910 for software licenses delivered for installation in manufacturing plants.  Of this amount, we deferred $8,051 for future recognition.  We also recorded $17,317 of previously deferred revenue.








Research and Development Expenses
Three Months EndedJune 30

June 30

%2009

2008

Change$160,116

$137,967

16.1%





Effective April 1, 2009, we vacated our North Vancouver research and development facility and transferred all of our research and development activities to our offices in McLean, Virginia and Pontiac, Michigan.  Research and development expenditures increased $22,149, or 16.1%, from $137,967 for the three month period ended June
30, 2008, to $160,116 for the three month period ended June 30, 2009.  We accrued a Precarn funding grant of $69,963 during the three month period ended June 30, 2008 compared to nil for the three month period ended June 30, 2009.  Adding back these amounts indicates that actual expenditures on research and development decreased $44,814 from $204,930 for the three month period ended June 30, 2008 to $160,116 for the three month period ended June 30, 2009.  The decrease was mainly
due to a reduction of research and development personnel on the closing of the North Vancouver office and the opening of the Pontiac, Michigan and McLean, Virginia offices.  A reduction in stock option expense also contributed to the decrease in research and development expenditures.  During the three month period ended June 30, 2008 we incurred $9,792 in stock option expense compared to nil for the three month period ended June 30, 2009.








Selling, General and Administrative Expenses
Three Months EndedJune 30

June 30

%2009

2008

Change$1,755,149

$2,150,300

(18.4)%





Selling, general and administrative (SG&A) expenses decreased $395,151, or 18.4%, from $2,150,300 for the three month period ended June 30, 2008, to $1,755,149 for the three month period ended June 30, 2009.  A stock based compensation expense of $1,290,000 arising from the issuance of our common stock upon the achievement
of certain milestones was recorded during the three month period ended June 30, 2008.  No similar expense was recorded in the three month period ended June 30, 2009.  Stock option expense decreased $12,432 from $90,480 for the three month period ended June 30, 2008 to $78,048 for the three month period ended June 30, 2009.  Wages and benefits increased $491,972 from $361,924 to $853,896 resulting from an increase in our administration and sales staff from the opening of our offices
in McLean, Virginia and Pontiac, Michigan and from accruing a bonus of $90,300 payable to our CEO, payment of which he has voluntarily postponed.  Professional fees increased $53,483 from $169,968 for the three month period ended June 30, 2008 to $223,451 for the three month period ended June 30, 2009.  The increase in professional fees resulted from an increase in litigation and legal fees of $70,954, an increase in accounting fees of $11,459 and a decrease in patent fees of $28,930.  Trade
show and marketing expenses decreased $39,799 from $83,040 to $43,241, and office and miscellaneous expenses decreased $18,375 from $154,888 to $136,513.  During the three month period ended June 30, 2009, we recorded a lease termination expense of $420,000; calculated as the discounted presented value of the remaining lease payments due under the North Vancouver office lease.








Interest and Financing Expenses
Three Months EndedJune 30

June 30

%2009

2008

Change$23,104

$21,649

6.7%





Interest and financing expenses increased $1,455, or 6.7% from $21,649 for the three month period ended June 30, 2008, to $23,104 for the three month period ended June 30, 2009.  The interest on the bank loan increased $3,451 from $16,065 for the three month period ended June 30, 2008, to $19,516 for the three month period ended
June 30, 2009.  The increase was mainly due to the increase in the principal amount of the bank loan as a result of an advance of $1,207,163 received on July 29, 2008 and due to a slight reduction in the interest rate.


3




Six Months Ended June 30, 2009 Compared to the Six Months Ended June 30, 2008







Sales
Six Months EndedJune 30

June 30

%2009

2008

Change$94,089

$2,206,370

(95.7%)





Our decrease in sales year over year is attributable to the expiration of the ABB Exclusive Global Channel Partner Agreement.  During the six month period ended June 30, 2008, we invoiced $2,498,243 for software licenses delivered for installation in manufacturing plants.  Of this amount, we deferred $361,255 for future
recognition in accordance with SOP 97-2.  We also recorded $6,785 for engineering and other services and $62,597 of previously deferred revenue.  During the six month period ended June 30, 2009, we invoiced $58,910 for software licenses delivered for installation in manufacturing plants.  Of this amount, we deferred $8,051 for future recognition.  We also recorded $43,230 of previously deferred revenue.








Research and Development Expenses
Six Months EndedJune 30

June 30

%2009

2008

Change$321,118

$313,099

2.6%





Effective April 1, 2009, we vacated our North Vancouver research and development facility and transferred all of our research and development activities to our offices in McLean, Virginia and Pontiac, Michigan.  Research and development expenditures increased $8,019, or 2.6%, from $313,099 for the six month period ended June 30,
2008, to $321,118 for the six month period ended June 30, 2009.  We accrued a Precarn funding grant of $108,486 during the six month period ended June 30, 2008 compared to a grant of $17,471 accrued during the six month period ended June 30, 2009.  Adding back these amounts indicates that actual expenditures on research and development decreased $82,996 from $421,585 for the six month period ended June 30, 2008 to $338,589 for the six month period ended June 30, 2009.  The decrease
was mainly due to a reduction of research and development personnel on the closing of the North Vancouver office and the opening of the Pontiac, Michigan and McLean, Virginia offices.  A reduction in stock option expense also contributed to the decrease in research and development expenditures.  During the six month period ended June 30, 2008 we incurred $19,583 in stock option expense compared to nil for the six month period ended June 30, 2009.








Selling, General and Administrative Expenses
Six Months EndedJune 30

June 30

%2009

2008

Change$2,779,027

$2,967,853

(6.4%)





Selling, general and administrative (SG&A) expenses decreased $188,826, or 6.4%, from $2,967,853 for the six month period ended June 30, 2008, to $2,779,027 for the six month period ended June 30, 2009.  A stock based compensation expense of $1,290,000 arising from the issuance of shares of our common stock upon the achievement
of certain milestones was recorded in the six month period ended June 30, 2008.  No similar expense was recorded in the three month period ended June 30, 2009.  Stock option expense increased $14,160 from $168,736 for the six month period ended June 30, 2008 to $182,896 for the six month period ended June 30, 2009.  Wages and benefits increased $670,670 from $732,128 to $1,402,798 resulting from an increase in our administration and sales staff from the opening of our offices in
McLean, Virginia and Pontiac, Michigan and from accruing a bonus of $90,300 payable to our CEO, payment of which he has voluntarily postponed.  Professional fees increased $52,005 from $271,513 for the six month period ended June 30, 2008 to $323,518 for the six month period ended June 30, 2009.  The increase in professional fees resulted from an increase in litigation and legal fees of $84,489, an increase in accounting fees of $5,456 and a decrease in Patent fees of $37,940.  Trade
show and marketing expenses decreased $78,571 from $198,422 to $119,851, and office and miscellaneous expenses increased $22,910 from $307,054 to $329,964.  During the six month period ended June 30, 2009, we recorded a lease termination expense of $420,000; calculated as the discounted present value of the remaining lease payments due under the North Vancouver office lease.




Interest and Financing Expenses
Six Months EndedJune 30

June 30

%2009

2008

Change$46,147

$53,505

(13.8%)
 
 Interest and financing expenses decreased $7,358, or 6.7% from $53,505 for the six month period ended June 30, 2008, to $46,147 for the six month period ended June 30, 2009.  The interest on the bank loan decreased $1,362 from $41,967 for the six month period ended June 30, 2008, to $40,605 for the six month period ended June
30, 2009.  The decrease was mainly due to the increase in the principal amount of the bank loan as a result of an advance of $1,207,163 received on July 29, 2008 and due to a reduction in the interest rate.


4







Liquidity and Capital Resources




Cash Flows




During the six month period ended June 30, 2009 we financed our research and development activities, our selling, general and administrative activities, our investment in fixed assets, and the repayment of our bank loan using cash provided from cash reserves.  At June 30, 2009 we had cash and cash equivalents of $747,712, a decrease
of $1,698,826 from cash and cash equivalents of $2,446,538 at December 31, 2008.




Operating activities used cash of $1,082,108 for the six month period ended June 30, 2009 and provided cash of $737,722 for the six month period ended June 30, 2008.  Cash used by operating activities during the six month period ended June 30, 2009 resulted from a net loss of $3,088,503, a decrease in deferred revenue of $35,179,
offset by non-cash amortization expenses of $17,071, non-cash loss on disposition of fixed assets of $2,316, non-cash stock option expenses of $182,896, non-cash compensation for services rendered of $46,248, a decrease in current assets of $1,176,126, and an increase in current liabilities of $519,417.




Investing activities used cash of $29,830 during the six month period ended June 30, 2009 and $18,594 during the six month period ended June 30, 2008 for the purchase of fixed assets.




During the six month period ended June 30, 2009, financing activities provided cash of $17,500 as a result of capital stock transactions and used cash of $604,388 for repayment of the bank loan.  During the six month period ended June 30, 2008 financing activities used cash of $660,000 for repayment of the bank loan.




As previously stated, our loan with Royal Bank of Canada (“RBC”), which is payable in full on September 9, 2009, poses an enormous risk to investors.  This loan has an outstanding balance of approximately $1.5 million as of August 4, 2009.  We do not have the resources to pay off this loan.  As
we approach this September 9, 2009 maturity date for our RBC loan, we are continuing our relentless sales efforts while sharply cutting costs, and exploring other sources of financing, but there is no guarantee that we will be successful.  Unless we obtain debt or equity financing from another source sufficient to pay this loan, we will default on our loan, RBC and/or the LC Providers may foreclose, and investors will lose their entire investment.




Also as previously stated, on July 27, 2009 we signed a non-binding term sheet with the Silicon Valley Bank for a new $3,000,000 credit facility.  If completed, the term facility will consist of two parts.  The first part is a $2,200,000 term loan which will be interest only for 18 months from closing, and will then
convert to an 18 month term loan, with final maturity 36 months from closing.  The term loan will be secured by $2,200,000 in certificates of deposit or letters of credit supplied by up to six parties.  The second part of the credit facility will be an $800,000 credit line to be secured by our accounts receivable.  The credit line will mature 18 months from closing.  We intend to negotiate and sign definitive agreements with the Silicon Valley Bank over the next four weeks
to close the credit facility, but there is no guarantee that we will be able to do so.






Bank Loan and Loan Guarantee




In October 2006 the Company obtained a $2,473,000 bank loan (“2006 RBC Loan Agreement”) from Royal Bank of Canada (“RBC”) and used the proceeds to redeem all of its previously outstanding secured convertible debentures.  RBC was granted a security interest in all of the Company’s personal and intangible
property, including intellectual property.  As additional security, RBC required standby letters of credit securing the full amount of the loan. Certain accredited investors (the “LC Providers”) provided the letters of credit as financing to the bank in order to enable the loan. Our CEO is the provider of the largest letter of credit and is the Managing Member of the LC Providers.  The LC Providers were granted a security interest in all of the Company’s personal and intangible
property, including intellectual property.  The LC Providers’ security interest is second only to RBC’s security interest.  In the event the Company defaults on the loan and the letters of credit are called by RBC, the Company will pay 10% annual interest to the LC Providers for the balance of the outstanding letters of credit.  In the event that the letters of credit are drawn down by RBC or upon any other specified default by the Company, the Company will then require
and accept the resignations of the then current directors of the Company and appoint the LC Providers as member of a new Board of Directors.  The Board of Directors will immediately decide upon and approve appropriate compensation for the Managing Member and decide upon the management of the Company.  In any case where the letters of credit are drawn by RBC to any level, the Company will immediately appoint the Managing Member as the manager of the Company’s assets with full power under
the LC Providers’ general security agreement with the Company to take such action as is necessary to recover the amounts due to the LC Providers and manage the business and affairs of the Company, in the best overall interests of the LC Providers.  In 2009, the Managing Member formed a committee of LC Providers (“LC Providers Committee”) to assist him in his role as Managing Member of the LC Providers.  Current members of the LC Provider Committee are Frederick Weidinger
(our CEO and largest shareholder), Kenneth Brooks (a shareholder) and David Baird (a shareholder).  The LC Provider Committee operates by unanimous vote.




On September 17, 2008, the Company entered into a letter agreement with RBC dated July 29, 2008 (the “2008 RBC Loan Agreement”).  The 2008 RBC Loan Agreement provided for a $250,000 revolving demand facility and a $2,405,000 non-revolving term loan and superseded and canceled the 2006 RBC Loan Agreement.  The
term loan was repayable in equal monthly installments of $108,208 principal plus monthly accrued interest.  The maturity date of the term loan was July 11, 2009.  Interest is calculated at the floating 30 day LIBOR rate plus 1.50%.
  On July 29, 2009, the Company entered into a letter agreement with the Royal Bank of Canada dated July 11, 2009 (the “2009 RBC Loan Agreement”).  The 2009 RBC Loan Agreement provides for a $1,506,000 non-revolving term loan and supersedes and cancels the 2008 RBC Loan Agreement.  The term loan is repayable
in equal monthly installments of $50,000 principal plus monthly accrued interest.  The maturity date for the term loan is September 9, 2009.  The respective security interests of RBC and the LC Providers remain in place as described above.


5






Recent Accounting Pronouncements




In June 2009, the FASB issued SFAS No. 168, “The ‘FASB Accounting Standards Codification’ and the Hierarchy of Generally Accepted Accounting Principles” (“SFAS 168”).  SFAS 168 establishes the “FASB Accounting Standards Codification” (“Codification”), which officially
launched July 1, 2009, to become the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities.  Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants.  The subsequent issuances of new standards will be in the form of Accounting Standards Updates that
will be included in the Codification.  Generally, the Codification is not expected to change U.S. GAAP.  All other accounting literature excluded from the Codification will be considered non-authoritative.  SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  The Company is currently evaluating the impact of adoption of SFAS 168 but does not expect adoption to have a material impact on results of operations,
cash flows or financial position.







During the first two quarters of fiscal 2009, we adopted the following accounting standards:




Effective April 1, we adopted Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 165, Subsequent Events(“SFAS 165”). This Statement establishes general standards of accounting for and disclosures
of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In general, these events will be recognized if the condition existed at the date of the balance sheet, and will not be recognized if the condition did not exist at the balance sheet date. Disclosure is required for non-recognized events if required to keep the financial statements from being misleading. The guidance in this Statement is very similar to current guidance provided in auditing
literature and, therefore, will not result in significant changes in practice. Subsequent events have been evaluated through the date our interim financial statements were issued - the filing time and date of our second-quarter 2009 Quarterly Report on Form 10-Q.




In April 2009, the FASB issued three FASB Staff Positions (FSP’s) that are intended to provide additional application guidance and enhance disclosures about fair value measurements and impairments of securities. FSP No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly” (FSP 157-4), clarifies the objective and method of fair value measurement even when there has been a significant decrease in market activity for the asset being measured. FSP No. 115-2 and FSP No. 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”, (FSP 115-2 and FSP 124-2), establish a new model for measuring other-than-temporary impairments for debt securities, including criteria for when to recognize a write-down
through earnings versus other comprehensive income. FSP No. 107-1 and APB 28-1, “Interim Disclosures About Fair Value of Financial Instruments”, expand the fair value disclosures required for all financial instruments within the scope of SFAS, No. 107, “Disclosures about Fair Value of Financial Instruments” (FSP 107-1 and APB 28-1) to interim periods. All of these FSP’s are effective for interim and annual periods ending after June 15, 2009, our quarter ended June 30, 2009.  The
adoption of these FSP’s will not have a material impact on our consolidated results of operations and financial condition. However, adoption of FSP 107-1 and APB 28-1 during the quarter ended June 30, 2009 resulted in increased disclosures in our consolidated financial statements.


6




Item 3.    Quantitative and Qualitative Disclosures about Market Risk




Not applicable.  The Company is a smaller reporting company, and smaller reporting companies are not required to file the quantitative and qualitative disclosures about market risk.









Item 4T.   Controls and Procedures




Evaluation of Disclosure Controls and Procedures




As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the end of the period covered by this Quarterly Report on Form 10-Q, June 30, 2009, we have carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures.  This evaluation was carried
out under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial and accounting officer. Based upon that evaluation, the Company’s principal executive officer and the Company’s principal financial and accounting officer concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this report.




Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time period specified in the Securities and Exchange Commission’s
rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to management, including our president and chief executive officer as appropriate, to allow timely decisions regarding required disclosure.




Changes in Internal Control over Financial Reporting




Management is responsible for establishing and maintaining adequate control over financial reporting for the Company.  Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles.  Internal controls over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.




Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.




Our management identified no changes in our internal controls over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.  7





PART II – OTHER INFORMATION




Item 1.    Legal Proceedings






The Company may, from time to time, be subject to claims and legal proceedings brought against it in the normal course of business. Such matters are subject to many uncertainties. Management believes that adequate provisions have been made in the accounts where required and the ultimate resolution of such contingencies will not have a material
adverse effect on the financial position of the Company. However, we are not able to predict the outcome of the pending legal proceedings listed below, or other legal proceedings, to which we may become subject in the normal course of business or estimate the amount or range of any possible loss we might incur if we do not prevail in the final, non-appealable determinations of such matters. Therefore, the Company has no current accruals for these potential contingencies. The Company cannot provide assurance that
the legal proceedings listed here, or other legal proceedings not listed here, will not have a material adverse impact on our financial condition or results of operations.




As previously reported in the Company’s Form 10-Q for the quarter ended March 31, 2009, the Babak Habibi lawsuit was settled.




On February 13, 2009 two former employees, released as part of a reduction in work force by Braintech Canada, Inc., after receiving full salary pay, statutory severance payments, time-bank payments, accrued vacation payments and signing full releases, instituted claims in the Provincial Court of British Columbia (small claims court) for
common law entitlement.  Each claim is for $25,000 (Canadian).  The Company disputes the plaintiffs’ claims and believes that it has meritorious defenses and intends to vigorously defend these actions.  Management believes that any potential loss associated with the above matters is neither probable nor reasonably estimable at this time and accordingly has not accrued any amounts for any potential loss.




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




On July 16, 2009 a former employee, released as part of a reduction in work force by Braintech Canada, Inc., instituted a claim in the Provincial Court of British Columbia (small claims court) for common law entitlement.  The claim is for $25,000 (Canadian).  The Company disputes the plaintiff’s claims and believes
that it has meritorious defenses and intends to vigorously defend these actions.  Management believes that any potential loss associated with this matter is neither probable nor reasonably estimable at this time and accordingly has not accrued any amounts for any potential loss.





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








8




Item 1A.    Risk Factors
   We operate in a rapidly changing environment that involves a number of risks and uncertainties, some of which are beyond our control. Before deciding to purchase, hold or sell our common stock, you should carefully consider the risks described below in addition to the other cautionary statements and risks described elsewhere and the other
information contained in this Quarterly Report on Form 10-Q and our other filings with the SEC, including our subsequent reports on Forms 10-Q and 8-K. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial or which are similar to those faced by other companies in our industry or business in general may also affect
our business operations.  If any of these known or unknown risks or uncertainties actually occurs with material adverse effects on us, our business, financial condition, results of operations and/or liquidity could be seriously harmed. In that event, the market price for our common stock will likely decline and you may lose all or part of your investment.






There is substantial doubt about our ability to continue as a going concern.






Our independent registered public accounting firm has issued an opinion on our consolidated financial statements for the years ended December 31, 2008 and 2007 that states that the consolidated financial statements were prepared assuming we will continue as a going concern and further states that our recurring losses from operations raise
substantial doubt about our ability to continue as a going concern.  Our plans concerning these matters are addressed in this Form 10-Q and in Note 1 to the accompanying unaudited condensed consolidated financial statements.  Our future is dependent on our ability to address these matters.  If we fail to do so for any reason, we may not be able to continue as a going concern, our business may fail and investors may lose their entire investment.






We may not be able to renew our Bank Loan with the Royal Bank of Canada (“RBC”), which is payable in full on September 9, 2009.  Our inability to renew our loan with RBC or someone else will trigger a default under the RBC Loan Agreement.




As of June 30, 2009 the Company had a balance of $1,499,988 outstanding on a bank loan of $2,473,000 dated July 29, 2008 and maturing July 11, 2009 from RBC (the “RBC Loan”).  By agreement effective July 11, 2009, the RBC Loan was extended to September 9, 2009.  A general security agreement covering all of
the Company’s personal and intangible property, including intellectual property, has been pledged as collateral. Standby letters of credit securing the full amount of the RBC Loan provided by certain accredited investors (the “LC Providers”) were required by the bank in order to enable the RBC Loan, and the LC Providers also have a general security agreement covering all of the Company’s assets.  If we are unable to renew the RBC Loan or refinance the loan with another institution,
investors will lose their entire investment.




If we are not able to renew the RBC Loan or refinance it elsewhere, RBC may call on certain standby letters of credit securing the loan triggering a default under the LC Providers’ security agreement with the Company which could result in investors losing their entire investment in the Company.




A security agreement, which is subordinate to the security agreement of RBC, covering all of the Company’s personal and intangible property, including intellectual property, was pledged as security to the LC Providers.  In the event the Company defaults on the RBC Loan and the standby letters of credit are called by RBC,
the Managing Member of the LC Provider group has full power to take such action as is necessary to recover the amounts due to the LC Providers and manage the business and affairs of the Company, in the best overall interests of the LC Providers.  Our CEO, who is our largest shareholder, is also the provider of the largest letter of credit and is the Managing Member of the LC Providers.  His interests and the interests of the other LC Providers may conflict with the interests of the other holders
of Braintech’s common stock. The Managing Member has formed a committee of LC Providers (“LC Providers Committee”) to assist him in his role as Managing Member of the LC Providers.  Current members of the LC Provider Committee are Frederick Weidinger (our CEO and largest shareholder), Kenneth Brooks (a shareholder) and David Baird (a shareholder).  The LC Provider Committee operates by unanimous vote.  Investors may lose their entire investment if RBC draws on the
standby letters of credit.




We have almost exclusively relied on a single channel partner, ABB, to distribute and generate sales of our products.  Our agreement with ABB expired on December 31, 2008. If we are unable to promptly enter into relationships with new customers or new channel partners, our business may fail
and investors may lose their entire investment.






We historically relied almost exclusively on the Robotics Division of ABB Inc. to purchase our products and to sell and distribute them to end users pursuant to an Exclusive Global Channel Partner Agreement entered into in May 2006.  This Channel Partner Agreement expired in accordance with its terms on December 31, 2008.  Under
this agreement, ABB accumulated approximately $8 million of unsold inventory of vision licenses which we have agreed they may continue selling notwithstanding the agreement’s expiration on December 31, 2008.  We will receive no further revenue under this agreement.  If we are unable to promptly enter into relationships with new customer or new channel partners, our business may fail and investors may lose their entire investment.






We require additional funds to survive as a company. Our inability to obtain such financing could result in foreclosure.




We may need to raise additional funds through public or private debt or sale of equity. The financing we need may not be available when needed. Even if this financing is available, it may be on terms that are materially adverse to your interests with respect to dilution of book value, dividend preferences, liquidation preferences, or other
terms. Our inability to obtain financing could require us to cease our operations, which could result in investors losing their entire investment.


9






We have a history of losses and have a significant deficit, which raises substantial doubt about our ability to continue as a going concern.




We have generated only approximately $12.7 million in revenues since the inception of our current operations January 3, 1994 and we expect to incur operating losses in the future. Our net loss from inception of our current operations in 1994 to June 30, 2009 was approximately $40.5 million. We had cash in the amount of $747,712 as of June
30, 2009. We estimate that without further funding or new revenue, our cash resources will be insufficient to repay our RBC loan on its maturity date of September 9, 2009. These circumstances raise substantial doubt about our ability to continue as a going concern as described in an explanatory paragraph to our independent auditors’ report dated March 26, 2009 on our audited financial statements for the years ended December 31, 2008 and 2007.  If we are unable to continue as a going concern, investors
may lose all of their investments in our Company.




A portion of our assets, one of our directors and one of our officers are located outside the United States, which may make it difficult for investors to enforce any judgments obtained against us or any of our directors or officers in the United States.




A portion of our assets are located outside the United States. In addition, one of our directors and one of our officers are nationals and/or residents of countries other than the United States, and all or a substantial portion of such persons’ assets are located outside the United States. As a result, it may be difficult for investors
to enforce within the United States any judgments obtained against the Company or our officers or directors, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state thereof. Consequently, you may be effectively prevented from pursuing remedies under U.S. federal securities laws against them.




Because we can issue additional common shares, purchasers of our common stock may incur immediate dilution and may experience further dilution.




The Board of Directors is authorized to issue up to 200,000,000 common shares, of which 60,412,245 are issued and outstanding as of August 4, 2009. Our board of directors has the authority to cause our Company to issue additional shares of common stock without the consent of any of our shareholders. Consequently, our shareholders may experience
significant dilution in their ownership of our Company in the future.




We may lose our competitiveness if we are not able to protect our proprietary technology and intellectual property rights against infringement, and any related litigation may be time-consuming and costly.




Our success and ability to compete depends to a significant degree on our proprietary technology. If any of our competitors copy or otherwise gain access to our proprietary technology or develop similar products independently, we may not be able to compete as effectively. The measures we have implemented to protect our proprietary technology
and other intellectual property rights are currently based upon a combination of provisional patent applications, patents, trademarks and trade secrets. These measures, however, may not be adequate to prevent the unauthorized use of our proprietary technology and our other intellectual property rights. Further, the laws of foreign countries may provide inadequate protection of such intellectual property rights. We may need to bring legal claims to enforce or protect such intellectual property rights. Any litigation,
whether successful or unsuccessful, may result in substantial costs and a diversion of our Company’s resources. In addition, notwithstanding our rights to our intellectual property, other persons may bring claims against us alleging that we have infringed on their intellectual property rights or claims that our intellectual property rights are not valid. Any claims against us, with or without merit, could be time consuming and costly to defend or litigate, divert our attention and resources, result in the
loss of goodwill associated with our business or require us to make changes to our products.






We have revised our business strategy to include new employees, new markets, new technologies, and new products. If we are unsuccessful in penetrating new markets, developing new technologies and products, our business may fail and investors may lose their entire investment.




We have no operating history in these new markets and our new technologies and products are new to these markets. As a result, it is difficult for us to accurately forecast our future operating performance and the performance of our new technologies and products and the revenues it will generate. Our prospects must be considered in light
of the risks, delays, expenses and difficulties frequently encountered by companies embarking into new markets with new technologies and products. Currently we are finding that it is very difficult to introduce our products into these new sales markets and that we have a significantly longer than normal sales cycle.  Many of these factors are beyond our control, including unanticipated operational, research and business development expenses, employment costs, administrative expenses, legal expenses
and technology costs. In addition, as a result of the current economic situation, we are finding that our potential industrial assembly customers do not have available capital budgets.  We cannot assure our investors that our revised business strategy will materialize or prove successful. Furthermore, we may need to raise additional funds through public or private debt or sale of equity to execute our revised business strategy. There can be no assurance that any additional financing will be available
to us or that adequate funds will be available when needed or on terms that are acceptable to us. The inability to secure additional financing would prevent us from succeeding with our new business strategy which would result in the loss of your investment.


10





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








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


·
issue additional equity securities that would dilute the ownership of our stockholders;


·
use cash that we may need in the future to operate our business;
  ·
incur or assume debt on terms unfavorable to us or that we are unable to repay;
  ·
incur large charges or substantial liabilities;
  ·
encounter difficulties retaining key employees of an acquired company or integrating diverse business cultures;
  ·
become involved in legal disputes; and
  ·
become subject to adverse tax consequences, substantial depreciation or deferred compensation charges.











For example, in our acquisition of Shafi, the consideration we paid consisted of shares of our common stock, which diluted the ownership of our existing stockholders.  Moreover, we are currently in litigation to rescind the Shafi acquisition. See Item 1 of Part II of this Form 10-Q (“Legal Proceedings”) and note 3
to our financial statements.




A decline in the price of our common stock could affect our ability to raise further working capital and adversely impact our ability to continue operations.




A prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise capital. Because a portion of our continued operations will be financed through the sale of equity securities, a decline in the price of our common stock could be especially detrimental
to our liquidity and our operations. Such reductions may force us to reallocate funds from other planned uses and may have a significant negative effect on our business plan and operations, including our ability to develop new products and continue our current operations. If our stock price declines, we can offer no assurance that we will be able to raise additional capital or generate funds from operations sufficient to meet our obligations. If we are unable to raise sufficient capital in the future, we may
not be able to have the resources to continue our normal operations.




The market price for our common stock may also be affected by our ability to meet or exceed expectations of analysts or investors. Any failure to meet these expectations, even if minor, may have a material adverse effect on the market price of our common stock.




Our common stock is illiquid and the price of our common stock may be negatively impacted by factors which are unrelated to our operations.




Our common stock currently trades on a limited basis on the OTC Bulletin Board. Trading of our stock through the OTC Bulletin Board is frequently thin and highly volatile. There is no assurance that a sufficient market will develop in our stock, in which case it could be difficult for shareholders to sell their stock. The market price of
our common stock could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve our planned growth, quarterly operating results of our competitors, trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting our competitors or us. In addition, the stock market is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities
issued by many companies for reasons unrelated to their operating performance and could have the same effect on our common stock.




11




We operate in a highly competitive industry. Many of our competitors have greater financial, technical, sales and marketing resources, better name recognition and a larger customer base than ours. Our failure to compete effectively in the areas of hiring qualified personnel, product line and price
may adversely affect our ability to generate revenue.




The market for vision guided robotics and vision guidance is subject to frequent product introductions with improved price and/or performance characteristics. Even if we are able to introduce products which meet customer requirements in a timely manner, there can be no assurance that our existing and new products will gain enough market
acceptance to allow us to execute a timely sales contract with one or more new customers. Many of our competitors have greater financial, technical, sales and marketing resources, better name recognition and a larger customer base than ours. They may be better able to attract qualified personnel than we will. In addition, many of our large competitors may offer customers a broader product line, which may provide a more comprehensive solution than our current solutions. Competitors’ products may add features,
increase performance or sell at lower prices. We cannot predict whether our products will compete successfully with such new or existing competing products. Increased competition in the industry could result in significant price competition, reduced profit margins or loss of market share, any of which could have a material adverse effect on our ability to generate revenues and successfully operate our business. If we go out of business, investors will lose their entire investment.




The sale of a substantial number of shares of our common stock into the public market may result in significant downward pressure on the price of our common stock and could affect the ability of our stockholders to realize the current trading price of our common stock.




The sale of a substantial number of shares of our common stock in the public market could cause a reduction in the market price of our common stock. We had 60,412,245 shares of common stock issued and outstanding as of August 4, 2009. On April 20, 2007 we filed a registration statement under the Securities Act of 1933. This registration
statement, declared effective on May 11, 2007, relates to the resale by certain selling stockholders of up to 13,977,494 shares of common stock and 23,694,259 shares of common stock issuable to security holders upon exercise of share purchase warrants. The 13,977,494 shares registered by this registration statement are included in the number of our issued and outstanding common shares as of August 4, 2009, shown above. Upon the exercise of the outstanding warrants an additional 23,694,259 shares will also
be outstanding and further dilute your interest as a shareholder. Furthermore, in connection with the acquisition of Shafi, we issued shares of our common stock.  Any significant downward pressure on the price of our common stock as the selling stockholders under one or more registration statements sell the shares of our common stock could encourage short sales by the selling stockholders or others. Any such short sales could place further downward pressure on the price of our common stock. If the price
of our common stock goes down, investors could lose most of the value of their investments.




Rapid technological changes in the machine vision and vision guided robotics industry could render our products non-competitive or obsolete and consequently affect our ability to generate revenues, causing us to go out of business and investors to lose their entire investment.




The machine vision and vision guided robotics industry is characterized by rapidly changing technology and evolving industry standards. We believe that our success will depend in part on our ability to develop our products or enhance our current products and to introduce improved products promptly into the market. We can make no assurance
that our technology will not become obsolete due to the introduction of alternative technologies by competitors. If we are unable to continue to develop and introduce new products to meet technological changes and changes in market demands, our business and operating results, including our ability to generate revenues, could be adversely affected. If we go out of business, investors will lose their entire investment.




We do not intend to pay dividends and there will be less ways in which you can make a gain on any investment in Braintech Inc.




We have never paid any cash dividends and currently do not intend to pay any dividends for the foreseeable future. Because we do not intend to declare dividends, any gain on an investment in our Company will need to come through appreciation of the price of our common stock. There can be no assurance that the price of our common stock will
increase.




Trading of our stock may be restricted by the SEC’s penny stock regulations, which may limit a stockholder’s ability to buy and sell our stock.




The Securities and Exchange Commission has adopted regulations which generally define “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which
impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer,
prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each
penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that
the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our
common stock.

NASD sales practice requirements may also limit a stockholder’s ability to buy and sell our stock.

In addition to the “penny stock” rules described above, the National Association of Securities Dealers (NASD) has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative
low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, the NASD believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The NASD requirements make it more difficult for broker-dealers to recommend that their customers buy our common
stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.


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Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds




Not applicable









Item 3.    Defaults upon Senior Securities




Not applicable









Item 4.    Submission of Matters to a Vote of Security Holders




Not applicable









Item 5.    Other Information




Not applicable




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Item 6.    Exhibits




The following is an index of the exhibits included in this report or incorporated herein by reference.




Exhibits


Number
Exhibit10.1(1)
Settlement Agreement between the Company and Babak Habibi dated as of April 18, 200910.2(2)
Consultancy Agreement between the Company and Babak Habibi dated as of April 18, 200910.3*
Credit Agreement between the Company and Royal Bank of Canada dated as of July 11, 2009.10.4(3)
Security Agreement between the Company and Royal Bank of Canada dated as of March 27, 200910.5*
Security Agreement between the Company and providers of letters of credit dated as of June 22, 200910.6(4)
Employment and Retention Agreement between the Company and Rick Weidinger effective as of January 1, 2009.10.7(5)
Amendment to Employment Agreement between the Company and Jerry Osborn dated as of July 1, 2009.10.8(6)
Employment Agreement dated as of January 28, 2009 between the Company and Jerry Osborn31.1*
Certificate of the Principal Executive Officer pursuant to Sec 302 of the Sarbanes-Oxley Act of 200231.2*
Certificate of Principal Financial and Accounting Officer pursuant to Sec 302 of the Sarbanes-Oxley Act of 200232.1*
Certificate of Principal Executive Officer pursuant to Sec 906 of the Sarbanes-Oxley Act of 200232.2*
Certificate of Principal Financial and Accounting Officer pursuant to Sec 906 of the Sarbanes-Oxley Act of 2002


Exhibits filed herewith are designated with an asterisk (*)





(1)
Exhibit incorporated by reference to Exhibit 10.1 of Form 8-K filed on April 23, 2009.


(2)
Exhibit incorporated by reference to Exhibit 10.2 of Form 8-K filed on April 23, 2009.


(3)
Exhibit incorporated by reference to Exhibit 10.9 of Form 10-Q filed on May 15, 2009.


(4)
Exhibit incorporated by reference to Exhibit 10.1 of Form 8-K filed on June 24, 2009.


(5)
Exhibit incorporated by reference to Exhibit 10.1 of Form 8-K filed on July 31, 2009.


(6)
Exhibit incorporated by reference to Exhibit 10.1 of Form 8-K filed on February 4, 2009.





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SIGNATURES




In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





BRAINTECH, INC. (the Registrant)





Signature                                                                     Title                                                                                                 
Date





/s/ Frederick Weidinger                                           
Chief Executive Officer,                                                                August 12, 2009


Frederick Weidinger                                                 (Principal Executive Officer)








/s/ Edward A. White                                                
Treasurer,                                                                                        August
12, 2009


Edward A. White                                                      (Principal
Financial and Accounting Officer)





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