2021 BRN Discussion, page-30659

My thought bubbleabout what can we as shareholders expect to see via ASX price sensitiveannouncements going forward.

Whether we are extremelypatient or very anxious about our investments we all want to see news orupdates as to how our investment is proceeding. As investors in Brainchip which has just commenced its commercialisationjourney we are particularly hungry for news of progress. Commercial deals arethe best evidence of this progress and future success and so this news cannotcome fast enough. Not even the mostpatient amongst us will complain about Brainchip announcing a new commercialdeal that proves our own individual investment thesis.

This desire to hearis certainly reasonable because it validates our decision to trust Brainchipwith our hard earned and also silences the negative voices that come to thisforum in most cases pursuing agenda’sother than reasoned debate.

The issue forinvestors in Brainchip that does not apply to the vast majority of investmentsis that it has disruptive technology. Indeedif it did not have disruptive technology it would be making something thatalready exists. If it was making a newkind of chocolate biscuit and Woolworths Ltd decided to stock it in every oneof its supermarkets the interests of both companies would be served by as muchpublicity as possible.

If Brainchip wasmining gold or any other mineral its interests would be best served byreleasing details of its discoveries of huge amounts the day before it did andthere would be no reason for any buyer to decide they need to keep theirpurchase a secret.

The problem we faceas investors in Brainchip is the very reason we invested and that is because itis not making chocolate biscuits or digging up minerals it is inventingdisruption. To disrupt it needed to befirst to market with its product and this required absolute intellectual secrecy. Now that it has produced its AKIDA technologyso that it can be taken to market its customers want to have the samedisruptive opportunity of being first to market so they can capture ‘First Mover’advantage. The customers interests aretherefore the exact opposite, to our investor desire to know as much aspossible to understand how successful our investment is and is going to be.

Indeed the ASXtells investors in ASX listed companies that they are entitled to ‘ContinuousDisclosure’ and if the company they are invested in fails to properly updatethem about the company’s commercial dealings they are very naughty and will bepotentially punished. Why well it islike most things some companies are run by people who are not to be trusted andthey lie and cheat. So over time astheir activities have been revealed and shareholders have lost money shareholdershave called for greater regulation and Governments have responded leading towhere we are now.

Where we are now isa very difficult place for new commercially disruptive companies like Brainchip. If Brainchip signs a commercial deal given itis only at the start of its journey it will clearly be material and willrequire compliance with the ‘Continuous Disclosure’ ASX rules. If however Brainchip was BHP (the big Australian)for example the same deal would not be a material event and would not have tobe disclosed because against its existing commercial agreements it would bejust involve a minor change to its bottom line.

So for BHP if itscustomer for some reason did not want anyone to know it was using its productit could without breaching ASX disclosure rules keep everything confidential.

Brainchip inexactly the same position would be stuck between a rock and a hard place andwould be in breach if it did not disclose.

So what is thisthing called ‘First Mover Advantage.’ Itis pretty simple really and probably speaks for itself however the following Investopediadefinition is worth including:

“First Mover Definition

By

EVAN TARVER

Updated September 28, 2020

What Is a First Mover?

A first mover is a service or product that gainsa competitive advantage by being the first to market with a product or service. Being first typically enables a company to establish strong brand recognition and customer loyalty before competitors enter the arena. Other advantages include additional time to perfect its product or service and setting the market price for the new item.

First movers in an industry are almost alwaysfollowed by competitors that attempt to capitalize on the first mover's success and gain market share. Most often, the first mover has established sufficient market share and a solid enough customer base that it maintains the majority of the market”

Based on this definition it seems perfectlyreasonable that a customer of Brainchip taking up its disruptive technologywould in the interests of its shareholders seek to take advantage of beingfirst to market and require Brainchip to maintain secrecy around their deal.

Just this week gone by we have had the ASX requireBrainchip to provide further information regarding the commercial deal itentered with MegaChips and of course Brainchip complied by suppling furtherinformation about the contract value. Atthis point I suspect you will be saying to yourself hang on this deal had beenannounced by both companies so MegaChips was not concerned about protectingfirst mover advantage so what was Brainchip’s issue and why did they need to gointo a trading halt?

Well once again it comes back to being so early inthe commercialisation phase. Using BHPagain as an example because of their existing size they could have not botheredwith an ASX announcement in the first place and simply issued a pressrelease. If they received a pleaseexplain from the ASX they would have simply answered it was not material andthey did not need to announce.

Brainchip does not have that luxury and had toannounce but at the same time Brainchip does not want to prejudice itsnegotiations with other customers going forward by disclosing details of whatthey have agreed with MegaChips. MegaChipsalso given they are going to be an on seller of Brainchip do not want the pricethey are paying to Brainchip to be disclosed for the purpose of their own discussionswith their customers for the same reasons.

This of course is a huge problem for Brainchipuntil they become huge.

What can they do in the interim to avoid these twoproblems well if you are obsessive about your research of Brainchip you will alreadyknow part of the answer and it was disclosed by Anil Mankar during the 2021 AiField Day presentation in his answer too the following two questions:

Audience: Are there any car manufacturersusing your chips today?

Anil: They are evaluating technologies,we are developing some Lidar data set applications for them, they willprobably, they may not use this current chip because this current chip is notASIL compatible and things like that but we expect that they will, oncethey are happy with our network that we are working with them they might ask usor they might ask one of their suppliers to develop a car certified ASIL abacertification and if we expect it to be embedded into the chip that are alreadygoing into the car, there are lots of companies selling camera chips into thecar, there is no reason why they can't take our IP and do it all ASILcompatible and all that but this current chip that we are developing toassist 28 nanometer is not certified for that but they are using this ortesting all the network evaluating power performance and once they are happy weexpect them, either them or their vendors, to be a IP customers for us.Audience: Okay so you're in development now but you're not yet certified, isthere a roadmap for that certification? Can you even ballpark a date or youdon't want to talk about it?

Anil: Actually we don't have plans to be, thecustomers we are working with are already ASIL certified to be in a car likecamera chip guys ultrasound, Lidar guys so we'll depend on them to because automotive certification all that will be long process and we're not trying to be a big manufacturer of IC's our focus is to enable AI into all of the applications by supplying the IP.

What Brainchip has been doing in developing its relationships withSocionext, Renesas and now MegaChips is to build a partner network which theyhave announced to market as required under the ASX Continuous Disclosure rulesand then as and when they finalise deals with Automotive manufacturers they canhand off to one of these companies to create the ASIL certified product and ineffect launder the deal through this already disclosed company. As the receipts come in they will come in fromthe account of one of these companies and shareholders and future customerswill be none the wiser.

So at the end of the day it is entirely possible that shareholdersmight wait some years to find out that Ford for example has become one of thebiggest customers for AKIDA technology products. It is interesting to note thefollowing about Ford and Renesas:

“The semiconductor shortage and itsimpact on auto production “will get worse before it gets better,” Ford MotorCEO Jim Farley said this week. He told investors that the second quarterwill be the low point for the year with a full recovery possibly stretchinginto 2022.

The comment was mostly mirrored byexecutives for Volkswagen and Mercedes-Benz who have weathered the past fewmonths of chip shortages only to be facing added supply problems from a fire atthe Naka 3 Renesas fab in Japan on March 19 and the Texas ice storm in Februarythat led to power outages for Austin fabs run by Samsung, NXP and Infineon Technologies.

A VW spokesman told The Wall Street Journal that the second quarter will be more demanding than the first because of the Texas power outage and the Renesas factory fire.

*Renesas has an important role insupplying chips for the auto sector. A spokesperson on Friday told FierceElectronics that Renesas accounts for about 30% of the global marketfor auto microcontroller units.

Farley had said Renesas suppliesabout two-thirds of all chips for the auto industry, including chips for nineTier 1 suppliers to Ford, according to a transcript by The Motley Fool. Renesas clarified that its correct market share is about 30%.”

It is clear fromthis extract that Renesas could easily provide the necessary cover for a dealsuppling AKIDA technology disruption to Ford. (It also points out that a certain MF was once again inaccurate.)

Then what aboutthose engagements where this approach may not work. The one that springs to mind for my money isValeo so can we expect to know everything about a commercial deal with Valeo.Possibly but with a little thought and planning Brainchip and Valeo could usingtried and true legal drafting techniques delay for a very long time thedisclosure of the deal.

One that springs tomind and I have mentioned before is the Heads of Agreement approach. What is a Heads of Agreement. The following is a tidy explanation:

“Updated onNovember 17, 2020

Reading time: 3minutes

Before signing contracts andentering into formal legal relationships, many businesses first choose to enterinto a heads of agreement (HOA). An HOA outlines the key commercial terms of the arrangement and can be used as a tool for negotiations. When entering into an HOA, it is important to consider whether it is legally binding, so you understand any risks involved. This article explains when you should use an HOA and when it will be legally enforceable.

When Should You Usean HOA?

You will use an HOA to set outthe key commercial terms of a legal arrangement before entering a bindingcontract. You can use it as a negotiating tool and demonstrate a strongintent to collaborate.

Some example scenarios where youmight need to use an HOA include if you are:

• selling your business and wish to negotiate the terms of the sale before agreeing to the legal terms in a formal contract;
• planning to enter a collaborative arrangement with another business to conduct research where each party provides funding and resources; or
• in discussions to form a new business which relies on the skill set of another party.

What Does an HOAInclude?

Because an HOA intends to coverthe key commercial terms of a legal relationship, it can include anythingrelevant to what you have agreed to with the other party. Generally, you canexpect it to outline:

• some background that contextualises the parties’ relationship so far and their intent to enter a formal relationship;
• what each party will bring to the table;
• what information must be kept confidential;
• conditions that need to be met for the transaction to occur;
• that each party has received advice and will pay for its own legal expenses;
• some standard clauses, such as the applicable law and how to change the terms of the document.

Importantly, the HOA will alsoinclude a clause relating to whether the document is binding or non-binding.

When Is an HOAEnforceable?

An HOA is rarely legallyenforceable because parties often agree that it will be a non-binding document.This means that if the other chooses to pull out of the transaction, you willnot be able to hold them accountable for this.

If you would like it to bebinding, you must include a clause within the document stating that it islegally binding.”

Using Heads of Agreement’s (HOA’s)as I will suggest below is more nuanced and involved than I am presenting in thefollowing explanation but it is hoped this broad general statement of how theycould be used will be easily understood.

What I envisage arebinding Heads of Agreement to agree to two alternative sets of commercial termswhere both sets of commercial terms are slightly different one from the otherboth of which are favourable to the parties but where one must be chosen. Until the customer in this case Valeo chooseswhich one this commercial relationship would meet the definition of anincomplete negotiation not requiring it be disclosed via the ASX under theContinuous Disclosure rules.

Clever some may saydevious lawyers perhaps could extend the time by which such a selection is madefor a very long time perhaps even to a point where a certain number of unitshave been produced and sold to customers. It could be that the agreement would require until that number has beenreached that the funds that would otherwise be paid would be held in trust tobe released to Brainchip upon that number being reached. In legal drafting all things are possiblewith the good will of both parties.

So the bottom lineis that with disruptive technology such as AKIDA there are good commercialreasons for Brainchip and its customers to keep secrets to maximise theirmarket success. These commercial reasonsare in the best end interests of shareholders in Brainchip and the customercompanies and in the end the dollars that appear in the balance sheet will bethe end reward.

My opinion only DYOR
FF

AKIDA BALLISTA