February 12, 2009      

Summary: With its acquisition of Shafi, as well as through its own organic growth, Braintech has greatly increased its number of product installations and customers.This has resulted in an increase in revenue, but also a concomitant rise in operating expenses. Braintech is expanding into a number of new markets, most notably the defense market, opening a new headquarters in the Washington area, as part of a major reorganization plan under CEO Rick Weidinger. Braintech also looks to assist industrial robotics manufacturer ABB, its key licensing partner, to diversify into the service robotics sector. In August 2008, Braintech Inc. (OTC BB: BRHI), to the surprise of some in the industrial robotics industry, announced its acquisition of Shafi, Inc. According to the terms revealed in the accompanying press release, Braintech acquired 100% ownership of Shafi, Inc. and 80% of Shafi Innovation Inc., the two companies that constituted Shafi’s operations. In return, Adil Shafi, the founder, president and sole owner of both Shafi companies, received Braintech stock, and became a Braintech employee, assuming the position of Chief of Operations (COO). He also became a member of the Braintech board of directors. Braintech’s rationale for this acquisition was that it obtained key intellectual property and additional customers and partners, all of which were fairly congruent with Braintech’s strategy to diversify its markets, specifically for “aerospace, consumer, food and beverage, government, medical, pharmaceutical, plastics, and semi–conductor.” Robotics Trends would agree. Shafi software and customer service have a well-earned reputation and although Shafi was roughly half the size of Braintech, its customer base was more diverse. The two companies’ software is both compatible and complementary. Both have been focused on industrial robotics. New CEO
About a year ago, Braintech hired a new Chief Executive Officer (CEO), Rick Weidinger. Having earlier been a Braintech board member, Weidinger immediately set to work to take the company in a new direction. In February, the company announced ambitious plans to reorganize and expand its operations. This included a move to increase its visibility in the defense market by setting up a new headquarters near the nation’s capital. Braintech, a U.S. corporation, had its headquarters in Vancouver, British Columbia. Braintech planned to set up its technology, support, training and USA engineering offices in the Detroit area and leave its research operations in Vancouver. It has been implementing these plans during 2008. Reorganization
The new organization structure also created three business units, referred to as wholly-owned operating companies: Braintech Industrial Inc., Braintech Consumer & Service, Inc., and Braintech Government & Defense, Inc. (emphasis on defense). The purpose of this was to focus on other vertical markets beyond industrial robotics. According to Weidinger, “The acquisition will help us achieve our goal to diversify into new markets in a much shorter period of time because of Shafi’s proven ‘in-the-field’ commercial solutions and robotic integrated communications.” Weidenger is referring to Shafi’s Reliabot software products. Diversification is a priority with Braintech because of its reliance on an exclusive agreement with ABB, the industrial powerhouse based in Switzerland with an approximate market capitalization of $60 billion. ABB Licensing Agreement
In a move with profound strategic importance to Braintech, it entered into an technology licensing agreement in 2006 with ABB to incorporate its vision technology and software into ABB’s product line, specifically, TrueView (TrueView is a trademark of ABB in connection with Braintech, Inc.), targeting the industrial robotics market. Braintech wants to help ABB diversify into the emerging services robotics market and the defense market. It also intends to diversify its own operations into these markets. Shafi will help them with the second objective. Up until the acquisition, ABB had been accounting for 99% of Braintech’s revenue. In the press release announcing the acquisition, Weidinger noted, “The combined Braintech has over 470 installations with over 125 different solutions representing software applications that depend and run every day on equipment worth over $500 million. These solutions are in 120 different locations and have been sold to over 60 customers. Through Shafi’s installations, Braintech has gained access to 15 robotic manufacturers, four major vision supplier platforms and an enhanced global distribution network of more than 100 integrators in the United States, Europe, Japan, India and China.” To put this into perspective, as of March 2008, Braintech had 170 product installations in 39 unique locations with 21 different end users. The difference between 470 and 170 is partly from the Shafi acquisition and partly from Braintech’s rapid growth during this year. Braintech has been cited for its innovative technology in the area of vision guided robotics. Its most recent development is a state-of-art random bin picking capability, part of its revolutionary new technology (patented SC3D), delivered on eVisionFactory, a software server platform to provide scalability for a range of applications. What stands out is the ability to select the piece in the bin that is the easiest to remove because it is the least obstructed by other parts surrounding it. There is a short video of this on the Braintech website (see www.braintech.com/videos-rbp.php). This is analogous to a game I remember playing in my youth called pick-up-sticks, in which you had to remove more sticks than your opponent, but lost your turn if you disturbed the other sticks in the random stack of sticks. In the industrial equivalent, it is OK to disturb the other parts, but the operations require less maintenance if you keep it to a minimum. Revenue Growth, But Challenges
Braintech has been a public company since 1994. As a result of the combination of its deal with ABB, its innovative products and its reorganization, including its acquisition of Shafi, Braintech’s revenue has been growing rapidly. Revenue went up 85% in fiscal 2007 and 2008 quarterly results show continued growth. However the growing pains are evident, as its operating expense went up even faster, at 195%. This puts a strain on cash flow and a premium on raising working capital, a common problem with smaller, high-tech companies. A quick reading of its financial filings reveals that this has been an ongoing problem for several years. Braintech has finessed this with creative use of stock shares both as collateral for loans (Royal Bank of Canada) and executive and employee compensation.

This is undoubtedly why Adil Shafi agreed to a stock swap in the acquisition of his company. Last summer, during the period leading up to the acquisition, the Braintech stock (a penny stock) was trading in the range of $.28 and $.43 per share. Since then it has dropped into a range of $.10 to $.14 per share. While this is obviously a result of the current crisis in the worldwide economy, it puts Braintech management is a serious situation. The credit crunch makes it difficult to obtain credit, and even if it could, Braintech would have to put up two to three times the amount of stock as collateral, proportionately, than for its previous loan from the Royal Bank of Canada. Bartering stock for employee salaries or other uses also comes at much less leverage. Adil Shafi probably could not have seen this coming, and we would assume he is currently wondering if he did the right thing. Braintech’s management clearly has a formidable challenge in the months ahead. Stay tuned.

— Steve McClure