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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
|_| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended July 31, 2007
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
|_| SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Date of event requiring this shell company report ______________
Commission file number : 0-14884
SAND TECHNOLOGY INC.
(FORMERLY SAND TECHNOLOGY SYSTEMS INTERNATIONAL INC.)
(Exact name of the registrant as specified in its charter)
CANADA
(Jurisdiction of Incorporation)
215 REDFERN AVENUE, SUITE 410
WESTMOUNT, QUEBEC, CANADA H3Z 3L5
(Address of principal executive offices)
TELEPHONE (514) 939-3477
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
CLASS A COMMON SHARES
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
NONE
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
CLASS A COMMON SHARES - 14,318,189
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act
Yes |_| No |X|
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If this report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934.
Yes |_| No |X|
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.
Yes |_| No |X|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.
Large accelerated filer Accelerated filer Non-accelerated filer |X|
Indicate by check mark which financial statement item the registrant has
selected to follow.
Item 17 Item 18 |X|
If this report is an annual report, indicate by check mark whether the
registrant is a shell company.
Yes |_| No |X|
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TABLE OF CONTENTS
<Table>
PART I 4
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 4
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 4
ITEM 3. KEY INFORMATION 4
ITEM 4. INFORMATION ON THE COMPANY 17
ITEM 4 A. UNRESOLVED STAFF COMMENTS 23
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 23
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 32
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 43
ITEM 8. FINANCIAL INFORMATION 45
ITEM 9. THE OFFER AND LISTING 46
ITEM 10. ADDITIONAL INFORMATION 47
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 58
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 59
PART II 59
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 59
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 59
ITEM 15. CONTROLS AND PROCEDURES 62
ITEM 16 A. AUDIT COMMITTEE FINANCIAL EXPERT 63
ITEM 16 B. CODE OF ETHICS 63
ITEM 16 C. PRINCIPAL ACCOUNTANT FEES AND SERVICES 63
ITEM 16 D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 64
ITEM 16 E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS 64
PART III 64
ITEM 17. FINANCIAL STATEMENTS 64
ITEM 18. FINANCIAL STATEMENTS 64
ITEM 19. EXHIBITS 94
</Table>
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report on Form 20-F are
"forward-looking statements" within the meaning of the United States Securities
Act of 1933 and of the United States Securities Exchange Act of 1934. The
forward-looking statements are intended to be subject to the safe harbour
protection provided by these Acts. We have based these forward-looking
statements on our current expectations and projections about future results,
levels of activity, events, trends or plans. Such forward-looking statements are
not guarantees and are subject to known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
Sand Technology Inc. (hereinafter "SAND" or the "Company" or the "Corporation")
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. In some cases, you can
identify forward-looking statements by terminology such as "guidance", "may",
"will", "should", "could", "would", "expect", "plan", "anticipate", "believe",
"estimate", "continue", or the negative of such terms or other similar
expressions. All forward-looking statements included in this discussion are
based on current expectations and on information available to us on January 18,
2008. For a more detailed discussion of these risks and uncertainties and other
business risks, see Item 3 - "Risk Factors" and Item 5 - "Trend Information".
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date made. Except as required by
applicable laws, we do not intend to publicly release the result of any revision
of these forward-looking statements to reflect events or circumstances after the
date they are made or to reflect the occurrence of unanticipated events.
* * *
SAND Technology, N-Vector, Sandonline and Nucleus are registered
trademarks, and SAND/DNA, SAND/DNA Access, SAND DNA Analytics, SAND Dynamic
Nearline Access, SAND Dynamic Nearline Analytics, SAND Dynamic Nearline
Architecture, SAND Analytic Server, SAND Searchable Archive and all related SAND
- - and Nucleus-based marks and designs are trademarks of Sand Technology Inc. All
other trademarks are the property of their respective owners. All other product
and service names mentioned are the trademarks of their respective companies.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable
ITEM 3. KEY INFORMATION
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A. SELECTED FINANCIAL DATA
Our audited consolidated financial statements for the 2007 fiscal year and
the notes relating to them (the "Financial Statements"), which are included at
Item 18 are presented in accordance with Canadian generally accepted accounting
principles ("Canadian GAAP"). The monetary figures throughout this Annual Report
on Form 20-F are presented consistent with Canadian GAAP except where otherwise
indicated.
The following data expressed in Canadian dollars are derived from the
Financial Statements that have been audited by our auditors Raymond Chabot Grant
Thornton LLP for the fiscal years ended July 31, 2007 and July 31, 2006 and
Deloitte & Touche LLP for the fiscal years ended July 31, 2005, July 31, 2004
and July 31, 2003. The information set forth below is not necessarily indicative
of the results of future operations and should be read in conjunction with, and
is qualified in its entirety by, the Financial Statements found elsewhere in
this Annual Report on Form 20-F.
<Table>
<Caption>
(in thousands of dollars (000's)
except for Per Share Data and Rates of Exchange)
FISCAL YEAR ENDED
--------------------------------------------------------
7/31/07 7/31/06 7/31/05 7/31/04 7/31/03
-------- -------- -------- -------- --------
CA CA CA CA CA
Rates of exchange
At period end -- US$ $1.07 $1.13 $1.22 $1.33 $1.40
Average for the period $1.13 $1.15 $1.24 $1.34 $1.50
Results of Operations
Revenue $6,729 $5,477 $6,096 $5,349 $31,683
Research and Development Costs ($2,215) ($2,442) ($3,272) ($3,309) ($3,311)
Selling, General and Administrative Expenses ($5,100) ($5,221) ($8,318) ($7,605) ($16,582)
Amortization ($201) ($248) ($277) ($242) ($1,077)
Cost of Sales and Product Support ($1,667) ($1,554) ($1,754) ($1,652) ($12,510)
Operating Income (loss) ($2,454) ($3,988) ($7,525) ($7,459) ($1,797)
Other Income (expense) ($72) $61 $162 $329 ($167)
Equity and Gain on Sale of Subsidiaries $11,757
Net Income (Loss) ($2,526) ($3,927) ($7,363) ($7,130) $9,793
Financial Position
Working Capital ($1,174) $484 $4,205 $11,523 $19,133
Total Assets $2,357 $3,445 $7,935 $15,991 $24,026
Total Liabilities $3,239 $2,508 $3,100 $3,632 $4,344
Shareholders' Equity ($882) $937 $4,835 $12,359 $19,682
Income (Loss) per Share ($0.19) ($0.31) ($0.57) ($0.55) $0.74
Weighted Average Number of Shares outstanding
during each period (000's) 13,094 12,818 12,860 13,080 13,189
</Table>
The same data, presented in conformity with US GAAP, is shown on the next page.
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<Table>
<Caption>
(in thousands of dollars (000's)
except for Per Share Data and Rates of Exchange)
FISCAL YEAR ENDED
--------------------------------------------------------
7/31/07 7/31/06 7/31/05 7/31/04 7/31/03
-------- -------- -------- -------- --------
CA CA CA CA CA
Rates of exchange
At period end -- US$ $1.07 $1.13 $1.22 $1.33 $1.40
Average for the period $1.13 $1.15 $1.24 $1.34 $1.50
Results of Operations
Revenue $6,729 $5,477 $6,096 $5,349 $31,683
Research and Development Costs ($2,215) ($2,442) ($3,272) ($3,309) ($3,311)
Selling, General and Administrative Expenses ($5,498) ($5,419) ($8,318) ($7,605) ($16,582)
Amortization ($201) ($248) ($277) ($242) ($1,077)
Cost of Sales and Product Support ($1,667) ($1,554) ($1,754) ($1,652) ($12,510)
Operating income (loss) ($2,852) ($4,186) ($7,525) ($7,459) ($1,797)
Other Income (expense) ($72) $61 $162 $329 ($167)
Equity and Gain on Sale of Subsidiaries $11,757
Net Income (Loss) ($2,924) ($4,125) ($7,363) ($7,130) $9,793
Financial Position
Working Capital ($1,174) $484 $4,205 $11,523 $19,133
Total Assets $2,357 $3,445 $7,935 $15,991 $24,026
Total Liabilities $3,550 $2,508 $3,100 $3,632 $4,344
Shareholders' Equity ($1,193) $937 $4,835 $12,359 $19,682
Income (Loss) per Share ($0.22) ($0.32) ($0.57) ($0.55) $0.74
Weighted Average Numbers of Shares
outstanding during each period (000's) 13,094 12,818 12,860 13,080 13,189
</Table>
Canadian Equivalent of U.S. $1.00
MONTH ENDED HIGH LOW
- ------------------ ------- -------
December 31, 2007 $1.020 $0.9805
November 30, 2007 $1.000 $0.9215
October 31, 2007 $0.9984 $0.9447
September 30, 2007 $1.0562 $0.9914
August 31, 2007 $1.0778 $1.0487
July 31, 2007 $1.0684 $1.0378
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YEAR ENDED JULY 31
-------------------------------------
2007 2006 2005 2004 2003
----- ----- ----- ----- -----
Average $1.13 $1.15 $1.24 $1.34 $1.50
On January 18, 2008, the exchange rate was CDN $1.0274 for U.S. $1.00.
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
D. RISK FACTORS
In addition to the other information in this Annual Report on Form 20-F,
the following factors should be considered in evaluating SAND and our business.
The risks and uncertainties described below are not the only ones facing us.
Additional risks and uncertainties of which we are not presently aware or that
we currently consider immaterial, may also impair our business, our operating
results and financial condition.
RISKS ASSOCIATED WITH OUR FINANCIAL RESULTS
WE HAVE NOT BEEN PROFITABLE IN FOUR OUT OF OUR LAST FIVE FISCAL YEARS AND WE
HAVE SOLD SOME LIQUID INVESTMENTS AND ASSETS TO FUND OUR OPERATIONS.
Because we have not been profitable in four out of our last five fiscal
years, we have had to fund our losses through a combination of sales of liquid
investments and assets. We incurred losses of $7,129,930 for the fiscal year
ended July 31, 2004, $7,363,054 for the fiscal year ended July 31, 2005,
$3,926,921 for the fiscal year ended July 31, 2006 and $2,526,524 for the fiscal
year end July 31, 2007. Although fiscal year 2003 was profitable, the profit was
due to the gain from the sale of ClarityBlue, which amounted to $11,757,280. Had
we not sold ClarityBlue, we would have shown a loss of $1,964,199. Although our
expenses materially decreased as a result of the sale of ClarityBlue, so did our
revenue base and additional efforts will have to be made to grow our sales force
and build our marketing efforts to address the North American and European
markets as well as other specific international markets in order to achieve
future sales growth.
We must, among other things, continue to develop market awareness and
acceptance of our products, increase the scope of our operations, respond to
competitive
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developments, continue to attract, retain and motivate qualified personnel, and
continue to commercialize products incorporating advanced technologies.
Our ability to achieve and maintain profitability and positive cash flow is
dependant upon our success in locating sufficient customers who will purchase
our products and use our services, and our capacity to generate sufficient
revenues.
If our revenue grows more slowly than anticipated or if our operating
expenses are higher than expected, we may not be able to achieve, sustain or
increase profitability, in which case our financial conditions will suffer. We
cannot assure you that we will be successful in addressing these risks, and the
failure to do so would have a material adverse effect on our business, operating
results and financial condition.
WE NEED ADDITIONAL CAPITAL TO FUND OUR OPERATIONS
We need to raise additional capital to fund our operating expenses. Our
ability to obtain financing will depend, among other things, on the
Corporation's development efforts, business plan, operating performance and the
condition of the capital markets at the time we seek financing. There can be no
assurance that additional financing will be available on favourable terms when
required, or at all. In the event we raise additional funds through the issuance
of equity, equity-linked or debt securities, those securities may have rights
preferences or privileges senior to the rights of the Class A Common Shares, and
our current shareholders may experience dilution of their ownership interest in
SAND.
OUR DIFFICULTY IN ACCURATELY FORECASTING OUR RESULTS FROM QUARTER TO QUARTER MAY
AFFECT OUR CASH RESOURCES AND RESULT IN WIDE FLUCTUATIONS IN THE MARKET PRICE OF
OUR STOCK.
Our operating results have varied on a quarterly basis in the past and may
fluctuate significantly in the future as a result of a variety of factors
outside of our control. As a result, we may not be able to accurately predict
our necessary cash expenditures during each quarter or obtain timely financing
to cover any shortfalls. We also believe that period-to-period comparisons of
our operating results are not meaningful and that one should not rely on any
such comparisons as an indication of our future performance. In addition, it is
likely that in one or more future quarters, our operating results will fall
below the expectations of securities analysts and investors. In such event, the
trading price of our Class A common shares could be materially harmed. When the
market price of a company's stock drops significantly, shareholders often
institute securities class action lawsuits against that company. A lawsuit
against us could cause us to incur substantial costs and could divert the time
and attention of our management and other resources.
RISKS ASSOCIATED WITH OUR BUSINESS AND OPERATIONS
BECAUSE WE ARE NOW SEEKING TO SECURE EFFECTIVE PARTNERSHIPS WITH SYSTEMS
INTEGRATORS AND APPLICATION VENDORS, IT MAY BE DIFFICULT FOR YOU TO EVALUATE OUR
BUSINESS AND ITS PROSPECTS.
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Your evaluation of our business is more difficult because we are moving to
secure effective partnerships with systems integrators and application vendors
which may take some time to mature into predictable revenue producers. Our
prospects are difficult to predict and may change rapidly. You should consider
the risks, expenses and difficulties that we may encounter or incur as a company
now operating in a rapidly evolving market, including our substantial dependence
on a single line of products and our need to manage expanding operations. Our
business strategy may not be successful, and we may not successfully address
these risks.
WE PLAN TO FURTHER DEVELOP OUR DIRECT SALES FORCE.
Though we plan to continue to sell our products through a distribution
network of value-added resellers, resellers and distributors located in the
United States, Canada, the United Kingdom and Germany, direct sales will still
play an important role in developing important reference accounts in new
markets. Competition for sales personnel qualified for these positions is
intense. Many of our competitors have substantially greater resources than we do
or have dedicated greater resources to hiring qualified sales personnel. In
addition, turnover among our sales force tends to slow sales efforts until
replacement personnel are recruited and trained. We may not be able to attract
and retain the sales and marketing personnel we desire, even after spending
significant resources to do so, and the failure to do so could have a material
adverse effect on our business, operating results and financial condition.
WE DEPEND ON KEY PERSONNEL.
Our success depends to a significant degree upon the continued
contributions of our key management, engineering, sales and marketing personnel,
many of whom would be difficult to replace. During 2006, we suffered the loss of
a key executive Jerome Shattner, our former Executive Vice President and
director. We believe that our future success will depend in large part upon our
ability to attract and retain highly skilled managerial, engineering, sales and
marketing, and finance personnel. Competition for qualified personnel remains
intense, and there can be no assurance that we will be successful in attracting
and retaining such personnel. We have in the past experienced difficulties in
hiring highly qualified sales and engineering personnel. The loss of the
services of any of our other key personnel, the inability to attract or retain
qualified personnel in the future or delays in either hiring required personnel
or the rate at which new people become productive, particularly sales personnel
and engineers, could have a material adverse effect on our business, operating
results and financial condition.
OUR PRODUCT SALES CYCLE IS LENGTHY.
The purchase of our products often requires significant, executive-level
investment and system design decisions by our customers. Sales take a long time
to conclude because we must provide a significant level of education about the
use and benefits of our products. We believe that many companies are not yet
fully aware of the benefits of enterprise-wide business intelligence solutions,
nor have such companies yet deployed business intelligence solutions on an
enterprise-wide basis. Accordingly, the sales cycle associated with the
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purchase of our SAND/DNA Analytics products and our SAND/DNA Access products is
typically three to nine months in length. During this period, a potential sale
is subject to a number of significant risks over which we have little or no
control, including customers' budgeting constraints and internal acceptance
review procedures including, in some instances, approval by the board of
directors of the customer. Based in part upon, among other things, our lengthy
sales cycle, the timing of sales is difficult to predict and our earnings and
operating results could vary significantly from quarter to quarter during our
current fiscal year. As a result of the long sales cycle, it may take us a
substantial amount of time to generate revenue from our sales effort.
WE MUST CONTINUE TO MAINTAIN AND GROW OUR INDIRECT SALES CHANNELS.
Our success in maintaining our indirect channels, value-added resellers,
resellers and distributors is important to our ability to achieve revenue growth
and improved operating margins on product sales. Despite the fact that we
continue to invest significant resources to develop our indirect channels, we
may not be able to continue to attract and retain additional companies in our
indirect channels that will be able to market our SAND/DNA Analytics products
and SAND/DNA Access products effectively and will be qualified to provide timely
and cost-effective customer support and services. In addition, our agreements
with companies in our indirect channels do not restrict such companies from
distributing competing products, and in many cases, these agreements may be
terminated by either party without cause. We may not be able to successfully
expand our sales through indirect channels, and failure to do so could have a
material adverse effect on our business, operating results and financial
condition.
WE OPERATE IN A HIGHLY COMPETITIVE MARKET.
We compete in the highly competitive computer software industry as a result
of bringing our SAND/DNA Analytics products, SAND/DNA Access and more recently
our SAND/DNA for SAP BI products to market. The market in which we operate is
still developing and is intensively competitive, highly fragmented, and
characterized by rapidly changing technology and evolving standards. Our current
and potential competitors offer a variety of solutions and generally fall within
several categories:
- - vendors that offer data warehouse appliances which operate specifically
with their proprietary platform such as Netezza, NCR Teradata and
DATAllegro;
- - software vendors that offer products which focus on structured data
archiving such as FileTek and PBS;
- - other companies that may in the future announce offerings of enterprise
information management solutions.
Our competitive position in our market is uncertain and changing due
principally to the variety of current and potential competitors and the emerging
nature of the market. With the release of SAND/DNA Access and SAND/DNA for SAP
BI, we have been able to establish ourselves as complementary to many of the
vendors that were seen as
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competitors with respect to SAND/DNA Analytics. We now have offerings that
complement SAP, Oracle, IBM DB2 and Microsoft SQL warehouse. We expect
additional competition as other established and emerging companies enter into
the intelligent information management software market and new products and
technologies are introduced. Increased competition could result in price
reductions, fewer customer orders, reduced gross margins, longer sales cycles,
and loss of market share.
Current and potential competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with third parties,
thereby increasing the ability of their products to address the needs of our
prospective customers. Our current or future indirect channel partners including
systems integrators and application vendors may establish cooperative
relationships with our current or potential competitors and limit our ability to
sell products through particular distribution channels. Such competition could
have a material adverse effect on our ability to enter into new licensing
agreements, and maintenance and support renewals for existing licensing
agreements, with respect to our products. Competitive pressures could also
require us to reduce the price of our products.
We compete primarily on the basis of product features, lower Total Cost of
Ownership (TCO), Return on Investment (ROI), time to market, ease of use,
product performance, product quality, user scalability, open architecture,
customer support and price. While we believe we presently compete favourably
with respect to each of these factors, some potential customers may be reluctant
to work with us due to our stock price or our current overall financial
situation.
We cannot assure you that we will be able to compete successfully against
current and future competitors, and the failure to do so could have a material
adverse effect on our business, operating results and financial condition.
AS WE EXPAND BEYOND NORTH AMERICA, WE ARE EXPOSED TO CERTAIN RISKS INHERENT IN
DOING BUSINESS ON AN INTERNATIONAL LEVEL.
Revenues earned outside North America are expected to remain significant in
the future. Sales to customers outside of North America, including sales
generated by our U.K. subsidiary, represented 52%, 70% and 71% of our total
revenue for fiscal 2005, 2006 and 2007 respectively. We have sales offices in
the United Kingdom and Germany.
A key component of our strategy is our planned expansion into additional
international markets. To facilitate this international expansion, we need to
localize our products for the additional foreign markets. If the revenues
generated by these expanded international operations do not offset the expense
of establishing and maintaining these foreign operations, there could be a
material adverse effect on our business, operating results and financial
condition. To date, we have only limited experience in developing localized
versions of our products and marketing and distributing our products
internationally. We cannot assure you that we will be able to successfully
localize, market, sell and deliver our products in these markets.
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There are also additional risks in doing business on an international
level, such as increased difficulty in controlling operating expenses,
unexpected changes in regulatory requirements, tariffs and other trade barriers,
difficulties in staffing and managing foreign operations, longer payment cycles,
problems in collecting accounts receivable, political instability, fluctuations
in currency exchange rates, seasonal reductions in business activity, and
potentially adverse tax consequences. These risks could adversely impact the
success of our international operations. We cannot assure you that one or more
of these factors will not have a material adverse effect on our future
international operations and, consequently, on our business, operating results
and financial condition.
WE CURRENTLY DEPEND ON SALES OF SAND/DNA ANALYTICS PRODUCTS AND SAND/DNA ACCESS
PRODUCTS TO GENERATE MOST OF OUR REVENUE.
We expect sales of our SAND/DNA Analytics products and SAND/DNA Access
products to constitute most of our revenue for the foreseeable future. If
customers do not purchase these products, we do not currently offer any other
products or services that would enable us to become profitable.
The market for our products is characterized by rapidly changing
technology, evolving industry standards and customer requirements, emerging
competition, and frequent new product introductions. Our products incorporate a
number of advanced technologies, including a proprietary data analysis engine, a
distributed architecture, as well as Web access and delivery technology. We may
be required to change and improve our products in response to changes in
operating systems, applications, networking and connectivity software, computer
and communications hardware, programming tools and computer language technology.
As a result, the life cycle of our products is difficult to estimate. We attempt
to establish and maintain partner alliances with influential companies in a
variety of core technology areas to help us successfully respond to changing
technology, identify new product opportunities, or develop and bring new
products to market in a timely and cost-effective manner. Our failure to
establish such alliances could have a material adverse effect on our business,
operating results and financial condition.
We have in the past experienced delays in software development and there
can be no assurance that we will not experience delays in connection with our
current or future product development activities. In particular, development
efforts in the UNIX server environment are complex, and we have in the past
encountered delays in developing products for this environment. Our failure, for
technological or other reasons, to develop and introduce new products and
product enhancements on a timely basis could have a material adverse effect on
our business, operating results and financial condition.
In addition, we or our competitors may announce enhancements to existing
products, or new products that have the potential to supplant or provide lower
cost alternatives to our existing products. The introduction of such
enhancements or new products could render our existing products obsolete and
unmarketable. Furthermore, introduction by us of products with reliability,
quality or compatibility problems could result in reduced orders, delays in
collecting accounts receivable, and additional service costs. The failure to
introduce a new product or product enhancement on a timely basis could delay or
hinder market acceptance.
Research and development efforts may require us to expend significant capital
and other resources. Any such event could have a material adverse effect on our
business, operating results and financial condition.
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WE DEPEND ON THE MARKET FOR ENTERPRISE BUSINESS INTELLIGENCE.
We are focusing our selling efforts increasingly on larger, enterprise-wide
implementations of our SAND/DNA Analytics products, our SAND/DNA Access products
and our SAND/DNA Product Suite and we expect such sales to constitute an
increasing portion of any future revenue growth. To date, our selling efforts
have resulted in limited enterprise-wide implementations of our SAND/DNA
Analytics products, our SAND/DNA Access products and our SAND/DNA Product Suite.
While we have devoted resources to promoting market awareness of our products
and the needs our products address (including training our sales personnel and
demonstrating our products at industry conferences and trade shows), we cannot
assure you that these efforts will be sufficient to build market awareness of
the need for the enterprise-wide implementations for business intelligence or
acceptance of our products. Failure of a significant market for enterprise
business intelligence products to fully develop, or failure of enterprise-wide
implementations of our products to achieve broad market acceptance, could have a
material adverse effect on our business, operating results and financial
condition.
AS A RESULT OF THEIR COMPLEXITY, OUR PRODUCTS MAY CONTAIN UNDETECTED ERRORS,
FAILURES OR VIRUSES AND WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS FOR SUCH
DEFECTS.
Despite our testing of new products and their use by current and potential
customers when first introduced or when new enhancements are released, we cannot
assure you that there will be no defects or errors in new products or
enhancements in our commercial shipments. Although we have not experienced
material adverse effects resulting from any such defects and errors to date, we
cannot assure you that defects and errors will not be found in new products or
enhancements, resulting in loss of revenues, delay in market acceptance or
damage to our reputation, which could have a material adverse effect upon our
business, operating results and financial condition. While our license
agreements with our customers typically contain provisions designed to limit our
exposure for potential claims based on errors or malfunctions of our products,
it is possible, however, that these provisions may not be effective under the
laws of certain jurisdictions. Although we have not experienced any product
liability claims to date, the sale and support of our products entails the risk
of such claims. Although we carry insurance against product liability risks, we
cannot assure you that such insurance would be adequate to cover a potential
claim. A product liability claim brought against us could have a material
adverse effect on our business, operating results and financial condition.
THERE IS LIMITED PROTECTION OF OUR PROPRIETARY RIGHTS.
We currently rely primarily on a combination of copyright and trademark
laws, patents, trade secrets, confidentiality procedures and contractual
provisions to protect our proprietary rights. We seek to protect our software,
documentation and other written materials under trade secret and copyright laws,
which afford only limited protection. We currently have eight United States
patents and thirty-two foreign patents. We cannot assure you that our patents
will not be invalidated, circumvented or challenged, or that the rights granted
under our patents will provide competitive advantages to us. Others may develop
technologies that are similar or superior to our technology or design around any
patent that
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may be owned by us. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products or to obtain
and use information that we regard as proprietary. Policing unauthorized use of
our products is difficult, and while we are unable to determine the extent to
which piracy of our software products exists, we can expect software piracy to
be a persistent problem. In addition, the laws of some foreign countries do not
protect our proprietary rights as fully as do the laws of the United States and
Canada. There can be no assurance that our means of protecting our proprietary
rights in North America or abroad will be adequate. We have entered into source
code escrow agreements with a number of our customers and indirect channel
partners requiring release of source code under certain conditions. The
provision of source code escrows may increase the likelihood of misappropriation
by third parties. Although we are not currently aware of any claims asserted by
third parties that we infringe on their intellectual property, we expect that in
the future software product developers will increasingly be subject to
infringement claims as the number of products and competitors in our industry
segment grows and the functionality of products in different industry segments
overlaps. Any such claims, with or without merit, could be time consuming to
defend, result in costly litigation, divert management's attention and
resources, cause product shipment delays or require us to enter into royalty or
licensing agreements which may not be available on terms acceptable to us, if at
all. In the event of a successful claim of product infringement against us and
our failure or inability to license the infringed or similar technology, our
business, operating results and financial condition could be materially
adversely affected.
Finally, we may rely upon certain software that we license from third
parties, including software that may be integrated with our internally-developed
software and used in our products to perform key functions. We cannot assure you
that these third-party software licenses will be available to us on terms
acceptable to us or indeed that our suppliers will continue to support their
software or remain in business. Our inability to obtain or maintain any such
software licenses could result in shipment delays or reductions until equivalent
software could be developed, identified, licensed and integrated, which could
have a material adverse effect on our business, operating results and financial
condition.
IF WE DO NOT HAVE SUFFICIENT CAPITAL TO FUND OUR OPERATIONS, WE MAY BE FORCED TO
DISCONTINUE PRODUCT DEVELOPMENT, REDUCE OUR SALES AND MARKETING EFFORTS OR EVEN
GO OUT OF BUSINESS.
In order to help ensure that we would have sufficient capital to take
advantage of our core business opportunities, we have taken significant actions
to reduce our operating expenses. However, most of our operating expenses, such
as employee compensation and lease payments for facilities and equipment, are
relatively stable, and these expense levels are based in part on our
expectations regarding future revenues. As a result, any sustained shortfall in
our revenues relative to our expectations would negatively impact our financial
results. We then may not have sufficient capital to fund our operations.
Such outcome could adversely impact our ability to respond to competitive
pressures or could prevent us from conducting all or a portion of our planned
operations. We may need to undertake additional measures to reduce our operating
expenses in the future.
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Our consolidated financial statements have been prepared on the basis of
the going concern assumption, meaning that it is assumed that we will be able
to realize our assets and discharge our liabilities in the normal course of
operations.
In light of operating losses suffered in the current and past years, our
ability to realize our assets and discharge our liabilities depends on the
continued financial support of our shareholders and creditors and our ability
to obtain additional financing. We will continue to search for additional
sources of debt and equity financing, but additional financing may not be
available on acceptable terms, if at all. If we issue additional equity
securities to raise funds, the ownership percentage of existing shareholders
will be reduced. If we incur debt, the debt will rank senior to our common
shares, we will incur debt service costs and we will likely have to enter into
agreements that will restrict our operations in some respects and our ability to
declare dividends to the holders of our common shares.
As indicated in Note 1 to our Consolidated Financial Statements, there
can be no assurance that our activities will be successful and as a result
there is doubt regarding the "going concern" assumption. The Consolidated
Financial Statements do not reflect adjustments that would be necessary if the
"going concern" assumption was not appropriate. Adjustments to the carrying
values of the assets and liabilities, reported expenses and balance sheet
classifications, which could be material, may be necessary.
RISKS WHICH MAY AFFECT THE VALUE OF OUR CLASS A COMMON SHARES
SHARES ELIGIBLE FOR FUTURE SALE.
Sales of a substantial number of our Class A common shares in the public
market could adversely affect the market price for our Class A common shares.
We are authorized to issue an unlimited number of Class A common shares, of
which 14,318,189 shares are outstanding as of January 18, 2008, and we have
reserved an additional 937,000 Class A common shares for future issuance. We
have granted rights to purchase 1,144,000 Class A common shares to directors,
officers, employees and consultants upon the exercise of options at prices
ranging from US$0.69 to US$6.28 per share. In addition, we have reserved
another 652,500 Class A Common Shares for future issuance at an exercise price
of $0.001 per share. The issuance of these authorized or reserved shares could
substantially dilute the equity interest of our existing shareholders and could
result in a significant decrease to the market price of our Class A Common
Shares.
THE PRICE OF OUR CLASS A COMMON SHARES ON THE OTC BULLETIN BOARD IS LIKELY TO BE
VOLATILE.
Our Class A common shares are currently listed on the OTC Bulletin Board
("OTCBB") under the symbol SNDTF.OB. Our share price, which has ranged from a
low of US$0.31 to a high of US$0.65 during the past twelve months, could
continue to be subject to wide fluctuations. The volume of trading in our Class
A common shares on the OTCBB
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has not been substantial. As a result, even small dispositions or acquisitions
of our Class A common shares in the public market could cause the market price
to fall or increase substantially. Our share price could also be subject to wide
fluctuations in response to broad market and industry factors, actual or
anticipated variations in quarterly operating results, volatile economic
conditions, new products offered by us or our competitors, changes in financial
estimates by securities analysts and other events or factors that may be beyond
our control.
EXISTING STOCKHOLDERS WILL CONTINUE TO EXERCISE EFFECTIVE CONTROL OVER US
Our senior management and directors, together with entities affiliated with
those individuals, beneficially own approximately 34.5% of our Class A common
shares. Arthur G. Ritchie, our Chairman of the Board, President and Chief
Executive Officer and a director of SAND, beneficially owns approximately 25.1%
of SAND's Class A common shares. The Estate of Jerome Shattner (Jerome Shattner
was Executive Vice President of the Company), beneficially owns 7.3% of our
Class A common shares, while George Wicker, a director of SAND, beneficially
owns 1.9% of our Class A common shares. Other senior management or directors own
approximately 0.2% of our Class A common shares. These shareholders may, as a
practical matter, continue to be able to control the election of a majority of
the directors of SAND and the determination of many corporate actions. This
concentration of ownership could have the effect of delaying or preventing a
change in control of SAND.
OUR ABILITY TO ISSUE CLASS B SHARES COULD MAKE IT MORE DIFFICULT FOR A THIRD
PARTY TO ACQUIRE US TO THE DETRIMENT OF HOLDERS OF CLASS A COMMON SHARES.
Our articles of incorporation provide for an unlimited number of Class B
shares which, if ever they are issued, may make it difficult for a third party
to acquire control of us, even if a change in control would be beneficial to our
shareholders. Our board has the authority to attach special rights, including
voting or dividend rights, to the Class B shares. However, the voting rights of
a Class B share cannot exceed those of a Class A common share. Class B
shareholders who possess these rights could make it more difficult for a third
party to acquire our company. There are no Class B shares issued and
outstanding as of January 29, 2008.
THE RIGHTS THAT MAY HAVE BEEN AND MAY IN FUTURE BE GRANTED TO OUR SHAREHOLDERS
MAY ALLOW OUR BOARD AND MANAGEMENT TO DETER A POTENTIAL ACQUISITION OF OUR
COMPANY
Our Board of Directors adopted a shareholder rights plan which was ratified
by our shareholders on December 16, 2003. The approval of the renewal and
confirmation of the shareholder rights plan by the directors on November 21,
2005 was ratified, confirmed and approved by the shareholders at the Annual and
Special Meeting of Shareholders on December 15, 2005. Under the plan, rights to
purchase Class A common shares have been issued to holders of Class A common
shares. The rights become exercisable under certain circumstances in which
someone acquires 20% or more of our outstanding Class A common shares. As a
result of the plan, anyone wishing to take-over the Company may be forced under
certain circumstances to negotiate a transaction with our Board of Directors and
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management or comply with certain bid criteria in order not to trigger the
exercise of rights. This could prolong the take-over process and, arguably,
deter a potential bidder.
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
SAND was incorporated on December 10, 1982 under the Canada Business
Corporations Act and carried on business under the name Sand Technology Systems
(Canada) Inc. until 1988. From 1988 until 1999, we used the name Sand Technology
Systems International Inc. On January 1, 2000, we changed our name to Sand
Technology Inc.
Some years ago, an important part of our business was the sale and service
of mainframe peripheral products manufactured by Hitachi, Ltd. of Japan, through
Hitachi Data Systems Inc. ("HDS Canada"). HDS Canada marketed a broad range of
information processing solutions, including enterprise servers, storage
subsystems, peripheral products and professional services. SAND was the legal
and beneficial owner of 40% of the issued and outstanding shares of HDS Canada;
Hitachi Data Systems Corporation ("HDSC") of Santa Clara, California was the
legal and beneficial owner of the remaining 60%. In August 1999, SAND sold its
interest in HDS Canada to HDSC and withdrew from the mainframe computer market
and the peripheral hardware market.
We then fully shifted our focus to the design, development, marketing and
support of software products that enable users to retrieve usable business
information from large amounts of data and to providing specialized systems
integration services related to those products. Our software products,
collectively known as the SAND/DNA Product Suite, are designed to provide an
efficient and cost-effective way for business users to make fast easy inquiries
of large databases without the intervention of Information Technology
professionals, and to store that data with orders of magnitude greater and more
efficiently than what is generally possible using more traditional database
products. The SAND/DNA Analytics product, which incorporates SAND's
patent-protected Nucleus database engine and other Nucleus derived products,
facilitates the use of data mining, query, reporting and other classes of
on-line analytical applications, thereby enabling more effective management of
customer relationships, supply chains and other critical business processes. Our
products permit more timely and accurate decisions across the extended
enterprise, making "business intelligence" a key component of operational
excellence. Customers in Europe and North America now use SAND's solutions for
both analytical and operational purposes, including, amongst others, market
segmentation CRM analytics, Web analytics, Business Performance Management and
strategic planning. The addition in late 2004 of the SAND/DNA Access product to
our portfolio, itself incorporating a number of patents, enhances our ability to
deliver in these areas and adds capability in the efficient storage and
retrieval of large amounts of historic data, facilitating regulatory and
compliance applications.
Initially SAND offered products primarily as part of a systems integration
model. At the end of the 2002 fiscal year, we consolidated the systems
integration portion of our business which had been growing in importance and
subsequently re-branded it with the
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name ClarityBlue. ClarityBlue concentrated on developing a strong competitive
practice utilizing the SAND/DNA Analytics precursor product as an engine for its
Customer Analytic offering, and was able to attract high profile customers
particularly in the Telecommunications and Financial Services markets in the
United Kingdom.
ClarityBlue was sold on July 31, 2003 to a group of investors which
included members of the senior management of ClarityBlue.
SAND now focuses its resources around the SAND/DNA Analytics products and
the SAND/DNA Access products.
B. BUSINESS OVERVIEW
We should be viewed as a company which has established its commitment to a
rapidly evolving industry which seeks to improve the business professional's
ability to make timely, fact-based business decisions and to help large
enterprises maintain cost-effective and timely access to enormous amounts of
data.
Our revenues will continue to consist of license fees for software products
and fees for a range of associated services, including software maintenance and
support, training and system implementation consulting. Our plans to achieve
profitability in the future will continue to require us to devote substantial
financial resources to grow our work force, improve our infrastructure, continue
the development, the marketing and the distribution of our products, and
generally support our expanding operations.
Products and Services
We have developed a unique data storage and manipulation architecture now
known as the SAND/DNA platform, which allows user-driven queries on large
amounts of data to be performed efficiently and cost-effectively. This patented
breakthrough in the storage and integration of data, and in the speed and
flexibility at which data can be analyzed by business users, represents the
"next step" in the drive to empower managers across an organization by providing
them with the data they need when they need it and in the manner they need it to
perform business operations more effectively at a lower cost.
Our SAND/DNA Analytics Product Suite, based on our patented tokenized
database engine, can best be viewed as an enterprise platform technology that
enables organizations to maximize the business value of corporate information by
supporting better business decisions through intuitive interactive data access
and keeping more data available for analysis. The SAND/DNA Analytics Product
Suite or the Nucleus products upon which they are based, are already being used
to provide fast measurable business benefits in the retail, finance, healthcare,
transportation, telecommunication, manufacturing, government and insurance
sectors. These customers, often at the recommendation of systems integrators or
platform partners, are using our products in support of strategic corporate
initiatives including e-business, customer relationship management, reporting,
supply chain management, risk analysis and management, product trend and
profitability analysis, fraud
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detection, emerging markets, information lifecycle management, competitive
analysis and quality control. Increasingly as organizations shift the
competitive landscape from operations to intelligence, these information
intensive decisions are not stand-alone, but a core part of an integrated
information management infrastructure.
Our SAND/DNA Analytics Product Suite incorporates a number of advanced
technologies. Its development has already required and will continue to require
substantial investment in research and development. For example, during fiscal
2002, important advancements were made in the ability to quickly and efficiently
load even larger volumes of data into the SAND/DNA Analytics Product Suite and
in the ability of the SAND/DNA Analytics Product Suite to support an even wider
variety of applications by more efficient interfacing with industry-standard
applications and data extraction tools.
In 2004, we made available Release 3.2 of our high-performance SAND
Analytic Server. Release 3.2 augmented the proven scalability and query speed of
previous versions of the Nucleus data management technology on which it is
based, by significantly enhancing the speed of loading and updating data for
analysis as well as adding further support for open industry-standard business
intelligence tools through more flexible open database connectivity. This was
followed in 2005 by a significant update to Version 4 (currently Release 4.2)
incorporating many features to allow high-performance scalability for multiple
users and huge amounts of data.
In 2004, we introduced a second patent protected product, the SAND
Searchable Archive now known as the SAND/DNA Access product. This product builds
on SAND's strength in advanced data management to create a highly compressed
database for storing data that is not of immediate need to an organization but
that will be required over time for either historic analysis or regulatory or
compliance purposes, and to generally help manage the data explosion in industry
by maintaining rapid access to huge volumes of "nearline" data.
The SAND/DNA Access product is substantially smaller than a traditional
relational database but can be searched directly by business users using
standard "business intelligence" tools. This is a breakthrough product and
technology and has particular impact on the current information technology
environment where volumes of corporate data are growing at an exponential rate.
The SAND/DNA Access product works with data from any corporate database and
over time is suitable for version customization to support particular third
party vendors' products. During 2006, a SAND/DNA Access product received its
initial certification with the release of SAND/DNA for SAP BI.
Version 5 of SAND/DNA Analytics was brought into production in 2007.
SAND/DNA Analytics data repository does not require indexing or specialized
schemas. All the data, down to the most detailed level, is available for
querying immediately after it is loaded, permitting quick and easy access by
business users employing industry-standard Business
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Intelligence tools or methods. SAND/DNA Access is the lead product in our sales
opportunities and customer interest.
During 2007, SAND introduced several additional product components based on
the SAND/DNA Product Suite:
- SAND/DNA Compress provides data compression for organizations who need to
reduce the storage footprint for their data. It can be easily upgraded to
SAND/DNA Enhance to restructure and enrich the data for analytic use, or to
the full SAND/DNA Access product to allow direct querying of compressed
data without the need to decompress it first.
- SAND/DNA Enhance uses column-based data architecture and compression
technology. SAND/DNA Enhance restructures (denormalizes) and stores massive
volumes of log data so that it is easily usable for analysis, while
enriching it with appropriate information for maximum analytic power.
- SAND/DNA Advise allows users to search for information about products or
services using an unlimited number of search criteria.
Sales of the Company's products and services are not subject to seasonal
variations.
Other than government regulations of general application, no government
body has specific authority to regulate the business of the Company.
Marketing and Sales
Our corporate headquarters are located in Montreal, Canada, where we also
have development and sales resources. We have offices in Kenilworth, New Jersey
and San Mateo and Pasadena, California, through Sand Technology Corporation to
provide for the development, sales, marketing and distribution of the SAND/DNA
Product Suite in the United States.
Our offices in the United Kingdom are located in Camberley, southwest of
London. We have an office in Hamburg, Germany, through Sand Technology
Deutschland GmbH.
Sales to customers outside North America, including sales generated by our
U.K. subsidiary, represented 52%, 70% and 71% of our total revenue for fiscal
2005, 2006 and 2007, respectively.
We have alliances or commercial relationships with, among others, SAP, IBM,
Sun Microsystems, Total Tec, Accenture, Cap Gemini, HP, Inforte, Posetiv, Open
Text, Atos Origin, Oracle, DunnHumby, and FreeSat (formerly TopEnd Solutions).
The United States General Services Administration (GSA) has officially approved
the addition of the SAND Analytic Server and the SAND Searchable Archive to a
GSA Supply Schedule. In addition, we now have marketing, sales and technical
arrangements in place with a number of recognized systems integration partners
who have trained personnel in the marketing and deployment of our products.
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Our long term direction for our high performance analytical and intelligent
information management products is to ensure that these products become a
recognized platform for advanced analytical applications and managing large data
volumes through strategic systems integration assignments. While we will
continue to a limited degree to pioneer vertical and application markets through
our own direct sales efforts, our long term distribution strategy is to engage a
network of industry-leading solutions providers, both application vendors and
systems integrators, to incorporate the SAND/DNA Product Suite as a key part of
their offering.
Competition
We compete in the highly competitive computer software industry as a result
of bringing our SAND/DNA Analytics products, SAND/DNA Access and more recently
our SAND/DNA for SAP BI products to market. The market in which we operate is
still developing and is intensively competitive, highly fragmented, and
characterized by rapidly changing technology and evolving standards. Our current
and potential competitors offer a variety of solutions and generally fall within
several categories.
Our competitive position in our market is uncertain and changing due
principally to the variety of current and potential competitors and the emerging
nature of the market. With the release of SAND/DNA Access and SAND/DNA for SAP
BI, we have been able to establish ourselves as complementary to many of the
vendors that were seen as competitors with respect to SAND/DNA Analytics. We now
have offerings that complement SAP, Oracle, IBM DB2 and Microsoft SQL warehouse.
We expect additional competition as other established and emerging companies
enter into the intelligent information management software market and new
products and technologies are introduced. Increased competition could result in
price reductions, fewer customer orders, reduced gross margins, longer sales
cycles, and loss of market share.
We compete primarily on the basis of product features, lower Total Cost of
Ownership, Return on Investment, time to market, ease of use, product
performance, product quality, user scalability, open architecture, customer
support and price. While we believe we presently compete favourably with
respect to each of these factors, some potential customers may be reluctant to
work with us due to our stock price or our current overall financial situation.
Proprietary Rights
In 1994, SAND acquired all the rights, title and interest in the Nucleus
Database Engine Subsystem. In addition to trademarks, trade names and other
proprietary rights, these interests included patents related to bit vector
compression and boolean operation processing capability.
In October 1997, SAND acquired the Advanced Technology Group of XDB
Systems, Inc. as well as the rights to the source code of Quantum Leap. Quantum
Leap was designed
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to provide a more flexible architecture for customization and incorporation of
new technology quickly and effectively using small footprint engines.
The Company has been issued eight United States patents and thirty-two
foreign patents which provide protection for the SAND Analytic Server and the
SAND Searchable Archive which incorporate the Nucleus database engine and other
Nucleus derived products.
The Company has also filed applications in accordance with the Patent
Cooperation Treaty (the "PCT"). The PCT is a multilateral treaty that was
concluded in Washington in 1970 and entered into force in 1978. It is
administered by the International Bureau of the World Intellectual Property
Organization (the "WIPO"), headquartered in Geneva, Switzerland. The PCT
facilitates the obtaining of protection for inventions where such protection is
sought in any or all of the PCT contracting states. It provides for the filing
of one patent application (the "international application"), with effect in
several contracting states, instead of filing several separate national and/or
regional patent applications. At the present time, an international application
may include designation for regional patents in respect of contracting states
party to regional patent treaties. The PCT does not eliminate the necessity of
prosecuting the international application in the national phase of processing
before the national or regional offices, but it does facilitate such prosecution
in several important respects by virtue of the procedures carried out first on
all international applications during the international phase of processing
under the PCT. The formalities check, the international search and (optionally)
the international preliminary examination carried out during the international
phase, as well as the automatic deferral of national processing which is
entailed, give the applicant more time and a better basis for deciding whether
and in what countries to further pursue the application.
The Company holds registered trademarks and trademarks. SAND Technology and
Nucleus are registered trademarks, and Nucleus Server, N:VECTOR, Nucleus
Exploration Warehouse, Nucleus Exploration Mart, Nucleus Exploration Data
Warehouse, Nucleus Octopus, SAND Online and MPSO are registered trademarks of
Sand Technology Inc. and Nucleus Virtual Database (VDB), NUCLEUS POWERED!,
Nucleus Adviser, SAND Analytic Server, SAND Searchable Archive, SAND/DNA, SAND
Analytic Warehouse, SAND/DNA Access, SAND/DNA Analytics, SAND Dynamic Nearline
Access, SAND Dynamic Nearline Analytics, SAND Dynamic Nearline Architecture, See
what's on the Horizon, analytics @ the speed of business, and all related SAND
and Nucleus-based marks and designs are trademarks of Sand Technology Inc.
C. ORGANIZATIONAL STRUCTURE
The Company owns and controls the following active subsidiaries and Sand
Technology Ireland Limited owns 100% of the voting securities of Sand Technology
Deutschland GmbH, an entity existing under the laws of Germany, and of Sand
Technology Limited, a company existing under the laws of England:
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JURISDICTION PERCENTAGE OF VOTING
SUBSIDIARY OF INCORPORATION SECURITIES HELD
- ------------------------------- ---------------- --------------------
Sand Technology Corporation Delaware 100%
STSI Licensing, LLC New Jersey 100%
Sand Technology Ireland Limited Ireland 100%
D. PROPERTY, PLANT AND EQUIPMENT
As at July 31, 2007, we leased a total of approximately 14,073 square feet
of office space in 3 cities across North America, approximately 90 square feet
in the United Kingdom and 828 square feet in Germany. The weighted average
annualized cost per square foot of the space occupied is $25.22 including real
estate taxes and operating expenses. No lease extends beyond March 31, 2011.
ITEM 4 A. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. OPERATING RESULTS
The following discussion should be read in conjunction with the
consolidated financial statements beginning at page F-1, the "Cautionary
Statement Regarding Forward-Looking Statements" above and the "Risk Factors"
described in Item 3 above.
CRITICAL ACCOUNTING POLICIES
We periodically review our financial reporting and disclosure practices and
accounting policies to ensure that our financial reporting and disclosure system
provides accurate and transparent information relative to the current economic
and business environment. As part of the process, we have reviewed our
selection, application and communication of critical accounting policies and
financial disclosures. We note that we have determined that our critical
accounting policies relating to our core ongoing business activities are
primarily those that relate to revenue recognition. Other significant accounting
policies are described in Note 2 to our Consolidated Financial Statements.
Recent and future accounting pronouncements are described and discussed in Notes
2 and 14 of our Consolidated Financial Statements.
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REVENUE RECOGNITION
SOURCES OF REVENUE
In the fiscal year ended July 31, 2007, our revenue was primarily derived
from the licensing of our products, the provision of related services, including
installation, training and maintenance support. We recognize revenue from our
license agreements when all the following conditions are met:
- - We have an executed license agreement with the customer;
- - We have delivered the software product to the customer;
- - The amount of the fees to be paid by the customer is fixed and
determinable; and
- - Collection of these fees is deemed probable.
Often, software license agreements are multiple-element arrangements since
they include related maintenance and implementation fees. In those cases, where
implementation and maintenance fees are significant components, the entire
arrangement fee is allocated to each element based on the relative fair values
of license, maintenance and implementation.
PRODUCT REVENUE
Currently, product revenue consists of the following:
- Fixed License Fee - one-time license fee in exchange for a license
with a perpetual term or a time-limited term or for a fixed number of
copies. We typically recognize the license fees in the period during
which the contract is executed and delivered, provided that we have
vendor-specific objective evidence of fair value and all revenue
recognition criteria are met.
- Reseller Arrangements - the reseller generally pays a non-refundable
licensing fee for our software. We recognize revenue associated with a
non-refundable license fee when we have met our revenue recognition
criteria.
During fiscal 2007, there were no revenues for solution sales as opposed to
the software and services models. For all contracts we make a determination as
to whether the service element is essential to the functionality of the other
elements of the arrangement. We also make a determination, including the
contractual commitment to refund or pay penalties, related to the successful
delivery under each agreement. Where the service element is essential or where
the arrangement involves significant customization or modification of the
software, recognition of revenue is based on using the percentage of completion
method based on inputs or on outputs as dictated by the specific contracts. For
those contracts, there will likely be an increase in the time between when the
contract is signed and when we record the revenue.
SAND reports the revenue on a gross basis only if it acts as the principal
in the transaction and assumes the risks and rewards of ownership, such as the
risk of loss for
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collection, delivery, and returns. In cases where these conditions are not met,
we record the revenue based on the net amount retained.
Our customers have traditionally been and continue to be reluctant to make
large commitments in up-front license fees, especially in a tight capital budget
allocation process that our customers generally face internally. Therefore, our
revenues from license and maintenance arrangements have been and are expected to
be lower until our customers begin to increase their levels of capital
expenditures. The lack of a sufficient quantity of customer transactions may
make it difficult for us to allocate specific revenue amounts to license sales
of new products. As a result, we will be using the residual method to record
revenues for such new product sales. Under this method, for arrangements where
we have undelivered elements, which are typically services and maintenance, we
will record the remaining value of the contract as license revenue after
allocating full value to the undelivered elements.
SERVICE REVENUE
IMPLEMENTATION AND CUSTOMER SERVICE FEES
Revenue from implementation and customer services include fees for
implementation of our product offerings, consulting and training services. We
currently rely, and expect to continue to rely, upon a combination of our own
resources and third-party consulting organizations to deliver these services to
our customers. Customers are charged a fee based on time and expenses. Depending
on the circumstances of specific contracts, revenues from implementation and
customer service fees are recognized as the services are performed or as
contractual milestones and acceptance criteria are met.
MAINTENANCE FEES
We receive revenue from maintaining and servicing our products for
customers. The maintenance fee is typically equal to a specified percentage of
the customer's license fee. If associated with the fixed-fee license model, the
maintenance revenues received will be recorded as deferred revenue and
recognized on a straight-line basis over the contract period.
RESULTS OF OPERATIONS
FISCAL 2007 COMPARED WITH FISCAL 2006
Revenue
Our sales in fiscal 2007 were $6,728,540, an increase of 23% from sales of
$5,477,485 in fiscal 2006.
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Our sales in fiscal 2007 in North America were $1,941,034, an increase of
19% from sales of $1,634,977 in fiscal 2006. In Europe, sales in fiscal 2007
were $4,787,506, an increase of 25% from sales of $3,842,508 in fiscal 2006.
The increase in our revenues for fiscal 2007 is associated primarily with a
growing acceptance of our products as well as license upgrades from our existing
customer base.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include salaries, commissions
and other personnel-related costs, the impact of foreign exchange gains and
losses, travel expenses, advertising programs and other promotional activities
associated with the selling and marketing of our products. Selling, general and
administrative expenses decreased by 2% to $5,100,057 for the fiscal year ended
July 31, 2007 from $5,220,443 for the fiscal year ended July 31, 2006. During
fiscal 2008, we anticipate that selling, general and administrative expenses
will decline as a percentage of revenues.
Research and Development Expenses
Research and development expenses consist primarily of salaries and other
personnel-related costs of technical and engineering personnel associated with
our research and product development activities, including the enhancement and
localization of existing products, quality assurance, and testing. Research and
development expenses decreased by 9% to $2,215,146 for the fiscal year ended
July 31, 2007 compared to $2,441,950 for the fiscal year ended July 31, 2006.
This level of expenditures also reflects the current stage of development of the
SAND/DNA Analytics products and the SAND/DNA Access products. We believe that
significant investment for research and development is important to maintain
product and technical leadership and expect that we will continue to commit
significant resources to research and development in the future. For fiscal
2008, we expect that research and development expenditures will remain constant
in absolute dollars.
Cost of Sales
Cost of sales consists primarily of the costs related to the sale of
third-party software, including certain license fees and royalties, and costs
related to providing support services. Cost of sales increased by 7% to
$1,666,331 for the fiscal year ended July 31, 2007 from $1,554,313 for the
fiscal year ended July 31, 2006. This increase, which reflects the increase in
revenue, is primarily due to costs associated with software licenses and
salaries and other personnel-related expenses incurred in providing support and
maintenance services. Cost of sales may vary due to the mix of services provided
by SAND's personnel relative to those provided by outside consultants and to
varying levels of expenditures necessary to build the service sector.
Operations
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Losses from operations were lower for the fiscal year ended July 31, 2007,
reaching an amount of $2,454,268 as compared to a loss of $3,987,676 for the
fiscal year ended July 31, 2006. The Corporation continues to incur expenditures
in improving the SAND/DNA Product Suite, and bringing our SAND/DNA Access
products to market and in establishing the infrastructure associated with our
direct sales force in different industry segments. Once profitability is
reached, we will start reinvesting in commercial activities to a level that will
favour growth in revenues and profitability. Any sustained shortfall in our
revenues relative to our expectations would negatively impact our operating
results. Future operating results will depend on many factors, including the
demand for our products, the level of product and price competition, our success
in selling our products, namely the SAND/DNA Analytics products and the SAND/DNA
Access products, and establishing our direct sales force and distribution
channels, the state of the market for our products and general economic
conditions.
FISCAL 2006 COMPARED WITH FISCAL 2005
Revenue
Our sales in fiscal 2006 were $5,477,485, a decrease of 10% from sales of
$6,096,033 in fiscal 2005.
Our sales in fiscal 2006 in North America were $1,634,977, a decrease of
44% from sales of $2,899,252 in fiscal 2005. In Europe, sales in fiscal 2006
were $3,842,508, an increase of 20% from sales of $3,196,781 in fiscal 2005.
The decrease in our revenues for fiscal 2006 is associated primarily with a
longer than anticipated sales cycle with some key partners and customers in the
North American Market. In Europe, a growing acceptance of our products was shown
in the German Market.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include salaries, commissions
and other personnel-related costs, the impact of foreign exchange gains and
losses, travel expenses, advertising programs and other promotional activities
associated with the selling and marketing of our products. Selling, general and
administrative expenses decreased by 37% to $5,220,443 for the fiscal year ended
July 31, 2006 from $8,317,831 for the fiscal year ended July 31, 2005. The
decrease is primarily due to the impact of the cost reduction measures
implemented at the end of fiscal 2005.
Research and Development Expenses
Research and development expenses consist primarily of salaries and other
personnel-related costs of technical and engineering personnel associated with
our research and product development activities, including the enhancement and
localization of existing products, quality assurance, and testing. Research and
development expenses decreased by 25% to $2,441,950 for the fiscal year ended
July 31, 2006 compared to $3,272,102 for the fiscal year ended July 31, 2005.
This cost reduction reflects the cost reduction measures
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implemented at the end of fiscal 2005. This level of expenditures also reflects
the current stage of development of the SAND/DNA Analytics products and the
SAND/DNA Access products. We believe that significant investment for research
and development is important to maintain product and technical leadership and
expect that we will continue to commit significant resources to research and
development in the future.
Cost of Sales
Cost of sales consists primarily of the costs related to the sale of
third-party software, including certain license fees and royalties, and costs
related to providing support services. Cost of sales decreased by 11% to
$1,554,313 for the fiscal year ended July 31, 2006 from $1,754,138 for the
fiscal year ended July 31, 2005. This decrease, which reflects the decrease in
revenue, is primarily due to reduced costs associated with software licenses and
salaries and other personnel-related expenses incurred in providing support and
maintenance services. Cost of sales may vary due to the mix of services provided
by SAND's personnel relative to those provided by outside consultants and to
varying levels of expenditures necessary to build the service sector.
Operations
Losses from operations were lower for the fiscal year ended July 31, 2006,
reaching an amount of $3,987,676 as compared to a loss of $7,525,314 for the
fiscal year ended July 31, 2005. These results reflected the transitional
nature of the business and distribution model of SAND. At the end of fiscal
2005, we took measures to reduce our overall cost base to enable us to lower
the level at which we will be profitable. Also, the Company incurred
expenditures in improving the SAND/DNA Analytics products, and bringing our
SAND/DNA Access products to market and in establishing the infrastructure
associated with our direct sales force in different industry segments.
B. LIQUIDITY AND CAPITAL RESOURCES
Cash and investments at July 31, 2007 were $330,711 compared with
$1,412,548 at July 31, 2006. The decrease is mainly due to operating activities
which used cash in an amount of $2,008,248. Investing activities used cash in an
amount of $40,730 while financing activities compensated, in part, for the cash
usage by providing $967,141 as a result mainly of an issuance of additional
Class A Common Shares and borrowing from a significant shareholder. During
fiscal 2008, we will be seeking additional financing in order to successfully
execute our business plan and fund our operations. With adequate additional
financing in place, we estimate that we will have sufficient internal resources
available to fund our expected working capital requirements through fiscal
2008. There can be no assurance that additional financing will be available on
favourable terms when required, or at all.
We are not subject to material market risk exposures, except for risks
related to interest rate fluctuations and foreign currency exchange rates.
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We have not used derivative financial instruments. We do not make use of
a bank line of credit and do not have any long-term debt.
Our international sales are generally denominated and collected in foreign
currencies. We have not historically undertaken foreign exchange hedging
transactions to cover the potential foreign currency exposure. In fiscal 2007,
we incurred a loss on foreign currency translations from our foreign
subsidiaries in an amount of $20,667.
The impact of inflation has not been material to the business of the
Company over the past five years.
The Company has no material capital commitments for the current fiscal
year.
C. RESEARCH AND DEVELOPMENT
Our strategy emphasizes developing and introducing on a timely and
cost-effective basis products that offer functionality and performance equal to
or better than competitive product offerings. We believe that our future success
depends upon our ability to develop and market products which meet changing user
needs, and to successfully anticipate or respond to changes in technology and
standards on a cost-effective and timely basis.
Research and development expenses consist primarily of salaries and other
personnel-related costs of technical and engineering personnel associated with
our research and product development activities, including the enhancement and
localization of existing products, quality assurance, and testing. Research and
development expenses decreased by 9% to $2,215,146 for the fiscal year ended
July 31, 2007 compared to $2,441,950 for the fiscal year ended July 31, 2006
and decreased by 25% for the fiscal year ended July 31, 2006 compared to
$3,272,102 for the fiscal year ended July 31, 2005. The level of expenditures
reflects the current stage of development of the SAND/DNA Analytics products
and the SAND/DNA Access products. We believe that significant investment for
research and development is essential to maintain product and technical
leadership and expect that we will continue to commit substantial resources to
research and development in the future. For fiscal 2008, we expect that
research and development expenditures will remain constant in absolute dollars.
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D. TREND INFORMATION
At the end of the 2002 fiscal year and during the 2003 fiscal year, we
further consolidated the systems integration portion of our business, which had
been growing in importance over fiscal 2002. In order to actively pursue major
systems integration assignments in parallel with developing marketing
relationships with other major systems integrators whereby they would employ the
SAND Analytic Server (now known as the SAND/DNA Analytics product) in their
initiatives, and to do so in a manner that was not seen by potential systems
integration partners as direct competition, we rebranded our own systems
integration division under the operating name ClarityBlue. ClarityBlue
concentrated on developing a strong competitive practice and associated
intellectual property base on assignments utilizing the SAND Analytic Server
(now known as the SAND/DNA Analytics product). The product division, operating
as Sand Technology, continued to develop and market the SAND Analytic Server
(now known as the SAND/DNA Analytics product) and other Nucleus derived products
directly and through distribution undertakings. Thus, during fiscal 2003,
revenues included solution sales in addition to software and solution models.
We sold ClarityBlue on July 31, 2003 to a group of investors which included
members of senior management of ClarityBlue. SAND was then able to focus its
resources around the SAND/DNA Analytics products and the SAND/DNA Access
products set while considerably reducing its operational run-rate.
As a result of this shift in focus, we should be viewed as a company which
has redoubled its commitment to a rapidly evolving industry which seeks to
improve the business professional's ability to make timely, fact-based business
decisions. Our long term direction for our high performance analytical
infrastructure products is to insure that these products become a recognized
platform for advanced analytical applications and strategic systems integration
assignments. While we will continue to a limited degree to pioneer vertical and
application markets through our own direct sales efforts, our long term
distribution strategy is to engage a network of industry-leading analytical
solutions providers, both application vendors and systems integrators, to
incorporate the SAND/DNA Analytics products and the SAND/DNA Access products as
a key part of their offering. Our revenues will continue to consist of license
fees for software products and fees for a range of associated services,
including software maintenance and support, training and system implementation
consulting. It is anticipated that the proportion of revenue from service fees
will continue to expand more rapidly than that related to software licenses. The
state of the order book and costs and selling prices do not present any
significant trend since the latest financial year. Our plans to achieve
profitability in the future will continue to require us to devote substantial
financial resources to grow our work force, improve our infrastructure, continue
the development and the marketing and distribution of our products, and
generally support our operations.
The purchase of the SAND/DNA Analytics products and the SAND/DNA Access
products often requires significant executive-level investment and system design
decisions by our customers. Our product sales cycle is therefore lengthy and the
timing of sales is difficult to predict as well as by the analytical solution
providers, both application vendors and systems integrators, with whom we work.
This situation is expected to continue to
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prevail. We believe that quarterly period-to-period comparisons of our operating
results are not meaningful and one should not rely on such comparisons as an
indication of our future performance.
We are not aware of any other trends, uncertainties, demands, commitments
or events which are reasonably likely to have a material effect upon our net
sales or revenues, income from continuing operations, profitability, liquidity
or capital resources.
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E. OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements that have had,
or are reasonably likely to have, a current or future effect on the Company's
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that
is material to investors.
F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The Company is committed under operating leases for a total amount of
approximately $1,090,005. The minimum payments due in each of the following
years are as follows:
$
2008 407,498
2009 275,317
2010 244,314
2011 162,876
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
The following table sets forth information as of January 18, 2008
concerning the directors and senior management of the Company:
<Table>
<Caption>
CLASS A COMMON SHARES
BENEFICIALLY OWNED OR
OVER WHICH CONTROL OR % CLASS A COMMON SHARES OWNED,
NAME PRINCIPAL OCCUPATION DIRECTOR SINCE DIRECTION IS EXERCISED CONTROLLED OR DIRECTED
- -------------------- -------------------------------- -------------- ---------------------- ------------------------------
Arthur G. Ritchie Director, Chairman of the Board, 1983 3,598,388 25.1%
Westmount, Quebec President and Chief Executive
Canada Officer of Sand
Wayne Musselman Accountant and Business 2007 -- *
Toronto, Ontario Consultant
Canada
</Table>
32
<Page>
<Table>
<Caption>
CLASS A COMMON SHARES
BENEFICIALLY OWNED OR
OVER WHICH CONTROL OR % CLASS A COMMON SHARES OWNED,
NAME PRINCIPAL OCCUPATION DIRECTOR SINCE DIRECTION IS EXERCISED CONTROLLED OR DIRECTED
- -------------------- -------------------------------- -------------- ---------------------- ------------------------------
Douglas S. Pryde Director, Barrister and 2001 -- *
Town of Mount Royal, Solicitor
Quebec, Canada
Martin Shindler Director, Accountant and 1987 5,950 *
Sarasota, Florida Business Consultant
U.S.A.
George Wicker Director, Attorney and Business 1996 274,950 1.9%
Palm Beach Gardens, Consultant
Florida U.S.A.
Gilles Therrien Vice-President, Finance and --- 1,000 *
Saint Lambert, Administration and Chief
Quebec, Canada Financial Officer, Sand
Michael McCool Chief Scientist for Nucleus, Sand --- - *
Pasadena,
California, U.S.A.
Georges Dube Corporate Secretary, Sand --- 19,000 *
Westmount, Quebec,
Canada
</Table>
* Less than one percent
Arthur Ritchie has been a director and Chief Executive Officer of SAND
since he co-founded the Company in 1983. Prior to the inception of SAND, he was
one of four principals of LGS Data Processing Consultants Inc., a Canadian
information processing consulting firm. Prior to 1979, he was employed by IBM in
South Africa, Europe and Canada, in successive capacities as a systems
engineering professional and in a variety of management and marketing roles.
Wayne Musselman, BCom (Hon), FCA, retired as a partner of Deloitte & Touche
LLP in 2004 after a career of nearly thirty years during which he served clients
in the banking, securities, international trade and distribution industries. He
directed the Japanese Service Group of Deloitte's Global Japanese Services
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Group. He is currently a director of the Deloitte Retired Partner Council and of
Faith Life Financial.
Douglas Pryde was a member and a partner of the law firm of Lavery, de
Billy and its predecessor firms from 1965 to 2001.
Martin Shindler has since 1964 been the president of a firm of accountants
and business consultants located in Florida.
George Wicker held executive level positions in general management, program
management and finance with Lockheed Martin Corporation and its predecessor
corporations during a thirty-two year career. Mr. Wicker holds a B.A. in
Political Sciences, an MBA in Financial Management from the University of Santa
Clara and a Juris Doctor degree from Pepperdine University.
Gilles Therrien is the former Vice-President, Finance and Administration of
M3i Systems Inc., a software company formerly majority-owned by Hydro-Quebec.
Following the sale of M3i Systems Inc., Mr. Therrien held the position of
Treasurer of the purchaser, Cognicase Inc., in addition to his position at M3i
Systems Inc. Mr. Therrien is a member of the Canadian Institute of Chartered
Accountants and he served for many years as an Audit Professional with
accounting firms, including Deloitte & Touche, following his studies in
Management and Public Accountancy at McGill University in Montreal.
Michael McCool has been Chief Scientist of SAND since 1993 where he has
been charged with the successful commercialization of a software-only version of
Nucleus. From 1987 to 1992, he was a Senior Systems Architect with Nucleus
International Corporation. In prior years, he was a software engineer (SMTS)
with Teledyne Controls (1986-1987), a systems analyst/programmer with Optical
Research Associates (1984-1986) and an embedded systems programmer with Applied
Research Laboratories (1982-1984).
Georges Dube is currently and has been a Partner of Lavery, de Billy, a law
firm, for more than ten years. Mr. Dube served as a director of SAND from 1996
to 2001.
During the year and in the ordinary course of business, we consulted and
continue to consult with Lavery, de Billy.
There is no arrangement or understanding between any director or executive
officer and any other person pursuant to which the director was elected or the
executive officer was appointed.
B. COMPENSATION
For the fiscal year ended July 31, 2007, the aggregate cash remuneration
including salaries and bonuses earned by four (4) executive officers for
services rendered in all
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capacities to the Company and its subsidiaries during all or part of the fiscal
year as applicable, was $535,814.
At the end of fiscal year 2006, among the four (4) executive officers,
Michael McCool held options to purchase 160,000 Class A common shares at an
exercise price of US$0.69 per share which were granted on July 8, 1996 and
expire on July 7, 2016 and Gilles Therrien held options to purchase 20,000 Class
A common shares at an exercise price of US$1.00 per share which were granted on
January 6, 2003 and expire on January 5, 2023. No options were exercised by
either individual during fiscal year 2007 nor during the period August 1, 2007
to January 18, 2008.
During the fiscal year 2007, each director, other than those directors who
are salaried or otherwise compensated officers of SAND, is paid a basic annual
retainer of $15,000 for serving as a director. The Chairman of the Audit
Committee is paid an additional amount of $5,000 per year.
The aggregate value of other compensation did not exceed the lesser of
$10,000 times the number of executive officers or ten percent (10%) of the cash
compensation paid to such executive officers.
No amounts have been set aside or accrued by the Company or its
subsidiaries to provide pension, retirement or similar benefits to its directors
or executive officers.
The directors and officers of SAND, and their associates, were not indebted
to SAND or to any of its subsidiaries at any time since the beginning of the
last completed fiscal year of SAND.
Employment Agreement
Arthur G. Ritchie, Chairman of the Board, President and Chief Executive
Officer and a Director of SAND, entered into an employment agreement ("the
Agreement") with SAND upon the expiry of his previous employment agreement on
December 31, 1993. The Agreement, effective January 1, 1994 was for an initial
term of five (5) years and is automatically extended for additional periods of
twelve (12) months each unless SAND or Mr. Ritchie shall have given the other a
notice of termination of the Agreement not less than three (3) months prior to
the end of its term. The Agreement provides that Mr. Ritchie shall be paid an
annual base salary, such bonuses as may from time to time be payable pursuant to
any bonus program which is offered to senior officers or as may from time to
time be payable at the discretion of the Board of Directors and a fee of one
percent (1%) of the gross revenues resulting from the licensing, sale or other
disposition of the Nucleus Data Base System for so long as the System is
delivered as a stand-alone product of the Company. Mr. Ritchie was paid a base
salary of $150,000, $150,000 and $218,153 during each of the fiscal years ended
July 31, 2007, 2006 and 2005 respectively and the Board of Directors approved
the payment of a cash bonus of $395,973 to Mr. Ritchie for the fiscal year ended
July 31, 2003, of which $252,000 was paid during fiscal 2006. Mr. Ritchie does
not hold any outstanding stock options, which have not been exercised under the
1996 Stock Incentive Plan or the 1996 Stock Option Plan of the Company. No
payments have
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been made to date relative to the licensing, sale or other dispositions of the
Nucleus Data Base Systems. In the event the employment of Mr. Ritchie (i) is
terminated by SAND for any reason other than for Cause (as defined in the
Agreement) or death or (ii) is terminated by Mr. Ritchie for Good Reason (as
defined in the Agreement), Mr. Ritchie will be entitled to receive, among other
things, a lump sum payment equivalent to two (2) times the sum of his then
current annual base salary and the amount of the bonuses received by him in the
immediate past year and Mr. Ritchie shall continue for a period of two (2) years
to participate in all benefit plans and programs of SAND to the extent such
participation is possible, and, if such continued participation is barred, to
receive amounts equal to the out-of-pocket costs of participation in plans and
programs providing substantially similar benefits. On January 1, 2008, the
employment of Mr. Ritchie was automatically extended to January 1, 2009 on terms
similar to those in the Agreement.
Employee Compensation Plan
The Company compensates its officers on an annual salary basis. The Company
has an informal employee compensation plan, which also applies to management,
pursuant to which, if employees fulfil stated goals with respect to sales
revenue, new account penetration, profit contribution and other criteria, their
incomes will increase proportionately above the guaranteed base until the
specified target income is earned or exceeded. The informal employee
compensation plan is not based upon a mathematical formula in the case of
management, but is rather subject to individual negotiation.
1996 STOCK INCENTIVE PLAN
On July 8, 1996, the Board of Directors adopted the 1996 Stock Incentive
Plan (the "Incentive Plan") pursuant to which the beneficiaries selected by a
committee of the Board of Directors may be granted options to subscribe for
Common Shares. The Incentive Plan was confirmed, approved and ratified by the
shareholders of the Corporation at the Annual and Special Meeting of the
shareholders held on December 17, 1996. On November 9, 1999, by resolution, the
directors of the Corporation amended the Incentive Plan to increase the maximum
aggregate number of options to purchase Common Shares which may be granted under
the Incentive Plan. This resolution of the directors was confirmed, approved and
ratified by the shareholders of the Corporation at the Annual and Special
Meeting of the shareholders held on December 17, 1999. The total number of
Common Shares of the Corporation authorized for grants of options is 1,100,000
(as adjusted to reflect the share subdivision on a two-for-one basis on December
31, 1996) subject to adjustment to take into account changes in the capital
structure of the Corporation.
On November 21, 2005, the Board of Directors approved an amendment to the
1996 Stock Incentive Plan to extend the life of the 1996 Stock Incentive Plan
for an additional period of ten (10) years. This amendment was confirmed,
approved and ratified by the shareholders of the Corporation at the Annual and
Special Meeting of the Shareholders held on December 15, 2005. On October 3,
2006, the Board of Directors provided for the amendment of each Stock Incentive
Agreement between an Optionee and the Corporation so that all options which were
outstanding under the Incentive Plan on July 7, 2006 be
36
<Page>
exercisable during an additional period of ten (10) years from July 7, 2006 with
immediate vesting for all those outstanding options which had vested on or prior
to July 7, 2006.
Going forward, the Incentive Plan will be administered by the Governance,
Nomination, Human Resources and Compensation Committee of the Board of Directors
each of whose members is a "disinterested person" as defined under the UNITED
STATES SECURITIES AND EXCHANGE ACT OF 1934 and an "outside director" as defined
in the UNITED STATES INTERNAL REVENUE CODE. The Incentive Plan permits the
granting of incentive stock options on terms designed to gain certain
advantages under United States Federal income tax law. During fiscal year 2007,
the duties of the Governance, Nomination, Human Resources and Compensation
Committee were performed by the Board of Directors.
The term and number of Common Shares covered by each option, as well as the
permitted frequency of exercise of such options, are determined by the Committee
at the time the options are granted to the recipients. The number of Common
Shares which may be subject to option in favour of a single recipient may not
exceed 5% of the outstanding Common Shares of the Corporation. The exercise
price of each option for Common Shares is not less than the closing price of the
Common Shares on the trading day prior to the day the option is granted or, if
there was no transaction on that day, the average of the bid and ask prices on
that day, less any discount as decided by the Board of Directors within the
extent permitted by the applicable regulatory provisions. Options granted under
the Incentive Plan may not be assigned or pledged. No financial assistance is
available to recipients in connection with the exercise of an option. The
Corporation may terminate the Incentive Plan at any time, subject to vested
rights.
As at January 18, 2008, 332,500 options had been granted and remained
outstanding under the Incentive Plan and 743,500 options remained available for
grant.
During the fiscal year ended July 31, 2007, we granted options to purchase
an aggregate of 117,500 Common Shares to six (6) employees at an exercise price
of US$1.00 per share which was not less than the closing price of the Common
Shares on the OTC Bulletin Board on the trading day prior to each grant.
125,000 options were cancelled. No options were exercised.
During the period August 1, 2007 to January 18, 2008, no options were
granted, 227,000 were cancelled and no options were exercised.
1996 STOCK OPTION PLAN
On July 8, 1996, the Board of Directors adopted the 1996 Stock Option Plan
(the "Option Plan") pursuant to which the beneficiaries selected by a committee
of the Board of Directors may be granted options to subscribe for Common Shares.
The Option Plan was confirmed, approved and ratified by the shareholders of the
Corporation at the Annual and Special Meeting of the shareholders held on
December 17, 1996. On November 9, 1999, by resolution, the directors of the
Corporation amended the Option Plan to increase the maximum aggregate number of
options to purchase Common Shares, which may be
37
<Page>
granted under the Option Plan. This resolution of the directors was confirmed,
approved and ratified by the shareholders of the Corporation at the Annual and
Special Meeting of the shareholders held on December 17, 1999. The total number
of Common Shares of the Corporation authorized for grants of options is 900,000
(as adjusted to reflect the share subdivision on a two-for-one basis on December
31, 1996), subject to adjustment to take into account changes in the capital
structure of the Corporation.
On November 21, 2005, the Board of Directors approved an amendment to the
1996 Stock Option Plan to extend the life of the 1996 Stock Option Plan and of
the options granted and outstanding under the Stock option Plan for an
additional period of ten (10) years. This amendment was confirmed, approved and
ratified by the shareholders of the Corporation at the Annual and Special
Meeting of the Shareholders held on December 15, 2005. On October 3, 2006, the
Board of Directors provided for the amendment of each Stock Option Agreement
between an Optionee and the Corporation so that the options granted and which
were outstanding under the Option Plan on July 7, 2006 be exercisable during an
additional period of ten (10) years from their original date of grant with
immediate vesting for all those outstanding options which had vested on or prior
to July 7, 2006.
Going forward, the Option Plan will be administered by the Governance,
Nomination, Human Resources and Compensation Committee. During fiscal year
2007, the duties of the Governance, Nomination, Human Resources and
Compensation Committee were performed by the Board of Directors.
The term and number of Common Shares covered by each option, as well as the
permitted frequency of exercise of such options, are determined by the Committee
at the time the options are granted to the recipients. The number of Common
Shares which may be subject to option in favour of a single recipient may not
exceed 5% of the outstanding Common Shares of the Corporation. The exercise
price of each option for Common Shares is not less than the price of the Common
Shares as determined by the Board of Directors within the extent permitted by
the applicable regulatory provisions. Options granted under the Option Plan may
not be assigned or pledged. No financial assistance is available to recipients
in connection with the exercise of an option. Options which expire or are
terminated or surrendered or unexercised are thereafter available for the
granting of other options. The Corporation may terminate the Option Plan at any
time subject to vested rights.
As at January 18, 2008, 604,500 options had been granted and remained
outstanding under the Option Plan and 119,500 options remained available for
grant.
During the fiscal year ended July 31, 2007, we granted options to purchase
an aggregate of 170,000 Common Shares to nineteen (19) employees at an exercise
price of US$1.00 per share which was not less than the closing prices of the
Common Shares on the OTC Bulletin Board on the trading day prior to each grant.
35,000 options were cancelled. No options were exercised.
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During the period August 1, 2007 to January 18, 2008, no options were
granted, 5,000 options were cancelled and no options were exercised.
SHARE AWARD PLAN
On November 2, 2006, the Board of Directors of SAND established a Share
Award Plan pursuant to which up to 1,000,000 Common Shares of the Corporation
shall be issuable under the Share Award Program through direct and immediate
issuances without any intervening option grants. Each such share issuance shall
be evidenced by a Share Award Agreement that complies with the terms and
conditions of the Share Award Plan, and which states the number of Common Shares
being awarded, the restrictions imposed on the shares awarded under such Share
Award Agreement and such other representations, agreements, terms or conditions
as may be required or desirable by the Board of Directors of the Corporation.
The Award Recipient shall obtain the rights and obligations of a shareholder of
the Corporation with respect to the Common Shares of the Corporation awarded
under the Share Award Agreement only upon vesting of the Award.
On August 28, 2007, the Board of Directors of the Corporation authorized
the award of up to 665,000 Common Shares. Since then, the Corporation has
awarded 652,500 Common Shares including grants which are dependant on the Award
Recipients achieving certain defined objectives. Of the 652,500 Common Shares, a
Named Executive Officer, namely Gilles Therrien, could receive up to 40,000
Common Shares and 41 employees could receive the balance of 612,500 Common
Shares. Vested Common Shares shall be acquired by the Award Recipient upon
payment of $0.001 per Common Share by the Award Recipient to the Corporation in
the event the Award Recipient is in the employ of the Corporation on the vesting
date of September 30, 2010 or upon a change in control of the Corporation.
C. BOARD PRACTICES
Governance processes of the Company are subject to ongoing review and
assessment by the Board of Directors so as to maintain high standards of
corporate governance in a rapidly changing environment.
The Board of Directors and management believe that good corporate
governance practices are an important factor to insure the overall success of
the Company.
BOARD OF DIRECTORS
Pursuant to the CANADA BUSINESS CORPORATIONS ACT (the "CBCA"), directors of
the Company hold office until the close of the next annual meeting of
shareholders and until their successors are elected and qualified or until their
earlier resignation or removal. The CBCA requires that twenty-five percent (25%)
of the members of the Board of Directors must be resident Canadians. In
addition, the Board may not transact business at a meeting unless one-quarter of
the directors participating in the meeting are Canadian residents. Officers
serve at the pleasure of the Board of Directors, subject to the terms of
employment agreements, if any, and applicable employment laws.
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Pursuant to the CBCA, the Board of Directors is required to manage, or
supervise the management of, the affairs and business of the Company. The
principal responsibilities of the Board are to supervise and evaluate
management, to oversee the conduct of the business of the Company, to set
policies appropriate for the business of the Company and to approve corporate
strategies and goals. The Board is to carry out its mandate in a manner
consistent with the fundamental objective of enhancing shareholder value.
The Board of Directors has adopted a Charter which sets out the duties and
responsibilities of the Board of Directors.
The Board of Directors has also adopted Standards of Ethical Conduct which
apply to all directors and officers of the Company.
During fiscal 2007, the Board of Directors held thirteen (13) meetings.
In discharging its duty of stewardship over the Company, the Board has the
following specific duties and responsibilities: (i) adopting, supervising and
providing guidance on the strategic planning process of the Company and
approving a strategic plan which takes into account, among other things, the
opportunities and risks of the business of the Company; (ii) identifying the
principal risks of the business of the Company and ensuring the implementation
of appropriate risk management systems; (iii) ensuring that the Company has
management of the highest calibre and maintaining adequate and effective
succession planning for senior management; (iv) placing limits on authority of
management; (v) overseeing the integrity of the internal control and management
information systems of the Company; (vi) overseeing the communications policy of
the Company with its shareholders and with the public generally; (vii) providing
for the independent functioning of the Board; and (viii) adopting, monitoring
and, where appropriate, granting waivers from the Standards of Ethical Conduct
that governs the behaviour of directors, officers and employees of the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board has established two committees: the Audit Committee and the
Governance, Nomination, Human Resources and Compensation Committee, which is
empowered to carry out the duties of the former Options Committee which has been
dissolved. Committee members are appointed annually following the annual meeting
of the shareholders of the Company.
AUDIT COMMITTEE
Messrs. Musselman, Pryde and Shindler, all of whom are non-management and
unrelated directors, currently comprise the Audit Committee. Mr. Musselman is
Chairman of the Audit Committee. Messrs. Musselman, Pryde and Shindler satisfy
the current requirements of the Financial Industry Regulatory Authority relating
to the independence and the qualification of the members of the Audit Committee.
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The Audit Committee reviewed its Charter and adopted on June 14, 2005 an
amended and restated Charter that details its mandate.
During fiscal 2007, the Audit Committee held four (4) meetings.
The Audit Committee assists the Board in its oversight functions as they
relate to the accounting, financial reporting, auditing, risk management and
internal controls of the Company. The Audit Committee has the following duties
and responsibilities: (a) reviewing the audited financial statements of the
Company and recommending whether such statements should be approved by the
Board; (b) reviewing and approving the unaudited interim financial statements of
the Company; (c) recommending to the Board the firm of independent auditors to
be nominated for appointment by shareholders at each annual general meeting of
the Company and, where necessary, the removal of the independent auditors of the
Company; (d) reviewing the scope and adequacy of audits to be conducted by the
independent auditors of the Company; (e) adopting and annually reassessing
formal terms of reference for the independent auditors of the Company; (f)
monitoring and evaluating the independence and performance of the independent
auditors of the Company; (g) pre-approving all non-audit services to be provided
to the Company by its independent auditors prior to the commencement of such
services; (h) reviewing all post-audit management letters containing the
recommendations of the independent auditors of the Company and the response or
follow-up thereto from management; (i) reviewing and monitoring the integrity,
adequacy and timeliness of the financial reporting and disclosure practices of
the Company; (j) reviewing and, if deemed advisable, approving all related party
transactions as defined in the governing legislation of the Company; (k)
monitoring the compliance of the Company with legal and regulatory requirements
related to financial reporting and disclosure; (l) monitoring and evaluating the
adequacy of the internal accounting and audit procedures of the Company; (m)
reviewing and ensuring the acceptability of the accounting principles of the
Company; (n) identifying the principal financial risks of the Company; (o)
overseeing reporting on internal controls of management and ensuring that
management has designed and implemented an effective system of internal
controls; (p) annually reviewing and reassessing the adequacy of the duties and
responsibilities of the Audit Committee; and (q) any other matters that the
Audit Committee feels are important to its mandate or that the Board chooses to
delegate to it.
The Audit Committee has established procedures for the receipt, retention
and treatment of complaints regarding accounting, internal accounting controls
or auditing matters and the confidential, anonymous submission by employees of
complaints or concerns regarding questionable accounting or auditing matters.
Any employee of the Company or its affiliates may submit a good faith complaint
regarding accounting or auditing matters to the management of the Company
without fear of dismissal or retaliation of any kind.
It is the responsibility of the Audit Committee to maintain an open avenue
of communication between itself, the Auditor and Management of the Company. In
performing its role, the Audit Committee is empowered to investigate any matter
brought to its attention, with full access to all books, records, accounts,
facilities and personnel of the Company. The
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Audit Committee is also empowered to instruct and retain outside counsel or
other experts as necessary.
GOVERNANCE, NOMINATION, HUMAN RESOURCES AND COMPENSATION COMMITTEE
Messrs. Musselman, Pryde and Wicker, all of whom are non-management and
unrelated directors, currently comprise the Governance, Nomination, Human
Resources and Compensation Committee. Messrs. Musselman, Pryde and Wicker
satisfy the current requirements of the Financial Industry Regulatory Authority
relating to independence.
The Governance, Nomination, Human Resources and Compensation Committee is
governed by a formal Charter that details its mandate.
The Governance, Nomination, Human Resources and Compensation Committee has
the following duties and responsibilities: (a) developing, monitoring and
ensuring the effectiveness of the corporate governance policies and practices of
the Corporation; (b) identifying and selecting nominees for election of the
Board of Directors of the Corporation and identifying and proposing to the Board
of Directors candidates to fill in the vacancies on the Board of Directors; (c)
ensuring the independence of the Board of Directors; (d) evaluating the
effectiveness and performance of individual directors, the Board of Directors
and its committees; (e) assisting the Board in setting the objectives for the
Chief Executive Officer of the Corporation and evaluating his performance; (f)
establishing human resources policies and practices, including compensation and
recruitment policies and practices for senior management, as well as
establishing levels of salary, bonus, benefits and incentives provided to
executive officers of the Corporation and its affiliates; and (g) various other
matters related to the foregoing as set out in the Charter of the Committee.
During fiscal 2007 and thereafter, the Governance, Nomination, Human
Resources and Compensation Committee met to evaluate a potential nominee as a
director and to consider the financing alternatives available to the Corporation
going forward, and it was agreed that the Chairman and Chief Executive Officer
would continue to take the lead in this regard. The members of the Governance,
Nomination, Human Resources and Compensation Committee also initiated the
formation of a Special Committee of the Board of Directors composed of the
non-management directors, namely Messrs. Musselman, Pryde, Shindler and Wicker,
to receive a report from the Chairman and Chief Executive Officer on a weekly
basis so as to monitor the sales pipeline and the cash flow projections.
D. EMPLOYEES
On July 31, 2007, the Company had 47 employees, including 27 full-time
employees with SAND, 7 full-time employees with Sand Technology Corporation
("Sand USA"), 4 full-time employees with Sand Technology Limited ("Sand UK") and
9 full-time employees and 1 part-time employee with Sand Technology Deutschland
GmbH ("Sand Germany").
On July 31, 2006, the Company had 56 employees, including 29 full-time
employees with SAND, and 7 full-time employees with Sand Technology Corporation
("Sand USA), 4 full-time employees with Sand Technology Limited ("Sand UK") and
15 full-time employees
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with Sand Technology Deutschland GmbH ("Sand Germany"). Moreover, the Company
had 1 part-time employee with Sand Germany.
On July 31, 2005, the Company had 55 employees, including 36 full-time
employees with SAND, and 9 full-time employees with Sand Technology Corporation
("Sand USA), 4 full-time employees with Sand Technology Limited ("Sand UK") and
4 full-time employees with Sand Technology Deutschland GmbH ("Sand Germany").
Moreover, the Company had 3 part-time employees, 1 with Sand USA, 1 with Sand
UK, and 1 with Sand Germany.
No employee of the Company is represented by a labour union or is covered
by a collective bargaining agreement. Since inception, the Company has not
suffered any disruptions as a result of labour problems or employee disputes.
E. SHARE OWNERSHIP
Information as to the share ownership of the directors and executive
officers of the Company is found under Item 6 - "Directors, Senior Management
and Employees" under "Directors and Senior Management" under "Compensation" -
"1996 Stock Incentive Plan" and "1996 Stock Option Plan", and under Item 7 -
"Major Shareholders".
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The following are the only persons who, to our knowledge, beneficially own
or exercise control or direction over shares carrying more than five (5%)
percent of the votes attached to Class A Common Shares of the Company at January
18, 2008:
APPROXIMATE NUMBER OF CLASS PERCENTAGE OF CLASS A
A SHARES OWNED, CONTROLLED COMMON SHARES OWNED,
OR DIRECTED CONTROLLED OR DIRECTED
--------------------------- ----------------------
Arthur G. Ritchie 3,598,388 25.1%
Estate of Jerome Shattner 1,048,000 7.3%
The total number of Class A Common Shares owned, controlled or directed by
the senior management and directors of SAND as a group, to our knowledge, is
3,899,288, or approximately 27.2%, at January 18, 2008.
The voting rights of the Class A Common Shares held by the persons
identified or referred to above are the same as the voting rights of the Class A
Common Shares held by all other shareholders.
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To our knowledge, as of January 11, 2008, 9,509,042 Class A Common Shares
were held of record by 460 persons whose registered addresses were in the
United States. Many of our Class A Common Shares are held in the name of
intermediaries.
Except as set forth above, to our knowledge, the Company is not directly or
indirectly owned or controlled by another company, by any foreign government or
by any other national or legal person severally or jointly.
There are no known contractual arrangements which may result in a change of
control of the Company at a subsequent date.
B. RELATED PARTY TRANSACTIONS
On July 31, 2003, SAND sold its wholly-owned subsidiary, ClarityBlue
Limited (previously named Sand Technology (U.K.) Limited), for total proceeds of
approximately $20 million to a group of investors which included members of
senior management of the subsidiary and Duncan Painter who was a member of the
Board of Directors of SAND. The Company provided warranties for claims against
ClarityBlue Limited for matters existing prior to the sale. The warranties for
tax matters expire in calendar 2010 and expired in calendar 2005 for other
warranties.
SAND maintains directors' and officers' liability insurance which, subject
to the provisions and exclusions contained in the policy, protects the directors
and officers, as such, against any claims made during the term of their office
against any of them for a wrongful act, provided they acted honestly and in good
faith with a view to the best interests of SAND. The policy provides coverage
with a limit of US$5,000,000 per loss per policy period, subject to a deductible
of US$250,000 per securities claim and US$250,000 per other claim. The current
annual premium is paid entirely by SAND and amounts to approximately US$140,000.
To the extent permitted by law, SAND has entered into an indemnification
agreement with each of its directors and senior officers.
Following the fiscal year ended July 31, 2006, Arthur Ritchie, a director
and officer of the Corporation, advanced the sum of $200,000 to the Corporation
in December 2006 by way of return of his earnings received for the calendar year
2006 and made further advances of the sums of $401,150 to the Corporation in
January 2007. These advances, together with the amount owed to Mr. Ritchie on
July 31, 2006 amounted to $1,030,611. The Corporation entered into a loan
agreement relative to this amount with Arthur Ritchie on May 11, 2007 pursuant
to which the Corporation will pay interest at the rate of 15% per annum from
February 1, 2007 on the amount of the loan at any time outstanding and issued
one hundred and three thousand and sixty-one (103,061) warrants each entitling
Mr. Ritchie to purchase one Class A Common Share of the Corporation at a price
of US$0.44. The amount of the loan is repayable within ninety (90) days of
receipt of a written demand of payment from Arthur Ritchie or may be repaid at
any time by the Corporation, in whole or in part, without bonus or penalty. On
May 25, 2007, in lieu of the repayment of $401,150 of the amounts advanced by
Arthur Ritchie plus an additional investment of $167,685 by him were applied
to the issue to Arthur Ritchie of 625,000 units consisting of 1,250,000 Class
A Common Shares and 625,000 share purchase warrants entitling Arthur Ritchie
to purchase one additional Class A Common Share per warrant. During each of
the months of August, October, November and December 2007, Arthur Ritchie
made further advances to the Corporation totalling $334,607 of which $190,000
was cash and $144,607
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was by way of return of his cumulative earnings received. In addition, the
amount of the loan is incremented by the portion of entitled compensation never
paid to Arthur Ritchie in the amount of $168,952. At December 31, 2007, the
amount of capital and interest outstanding is $1,147,120.
C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
The Consolidated Financial Statements of the Company are included in this
Annual Report on Form 20-F beginning on page 65.
B. SIGNIFICANT CHANGES
No significant change has occurred since the date of the annual financial
statements.
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ITEM 9. THE OFFER AND LISTING
A. OFFER AND LISTING DETAILS
The following table presents the closing high and low sales prices of our
Class A Common Shares stated in United States dollars as reported by the OTC
Bulletin Board for the following periods:
MONTH ENDED U.S. $
- ------------------------- ------
HIGH LOW
----- -----
January 18, 2008 $0.40 $0.31
December 31, 2007 $0.40 $0.32
November 30, 2007 $0.50 $0.32
October 31, 2007 $0.50 $0.40
September 30, 2007 $0.49 $0.42
August 31, 2007 $0.55 $0.44
July 31, 2007 $0.58 $0.39
QUARTER ENDED U.S. $
- ------------------------- ------
HIGH LOW
----- -----
October 31, 2007 $0.55 $0.40
July 31, 2007 $0.58 $0.35
April 30, 2007 $0.65 $0.40
January 31, 2007 $0.70 $0.40
October 31, 2006 $0.48 $0.38
July 31, 2006 $0.82 $0.35
April 30, 2006 $0.85 $0.58
January 31, 2006 $0.72 $0.25
October 31, 2005 $0.55 $0.22
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FISCAL YEAR ENDED JULY 31 U.S. $
- ------------------------- ------
HIGH LOW
----- -----
2007 $0.70 $0.35
2006 $0.85 $0.22
2005 $1.08 $0.43
2004 $1.61 $0.75
2003 $1.35 $0.52
C. MARKETS
Our Class A Common Shares are listed on the OTC Bulletin Board and trade
under the symbol SNDTF. There is no non-United States trading market for our
Class A Common Shares.
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
SAND was incorporated on December 10, 1982 under the provisions of the
CANADA BUSINESS CORPORATION ACT (the "CBCA"). The Articles of the Company place
no restrictions upon the Company's objects and purposes.
DIRECTORS' POWERS
Pursuant to the Articles and the By-laws of the Company and the
requirements of the CBCA, the board of directors must consist of not fewer than
three (3) and not more than eleven (11) directors. A majority of the number of
directors appointed constitutes a quorum at any meeting of directors, provided,
however, that no business may be transacted at a meeting of directors unless at
least one-quarter of the directors present are resident Canadians. The duty of
the directors is to manage or supervise the management of the business of the
Company.
There is no provision in the By-laws that imposes a requirement in respect
of a director's power to vote on a proposal, arrangement or contract in which
the director is materially interested. The CBCA provides that a director must
disclose to the Company, in writing or by requesting to have it entered in the
minutes of meetings of directors or of
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meetings of committees of directors, the nature and extent of any interest that
he or she has in a material contract or material transaction, whether made or
proposed, with the Company, if the director (a) is a party to the contract or
transaction; (b) is a director, or an individual acting in a similar capacity of
a party to the contract or transaction; or (c) has a material interest in a
party to the contract or transaction.
The By-laws of the Company state that the directors may fix the
remuneration of the directors and that the directors shall be paid such
remuneration for their services as the board may from time to time determine.
The directors are also entitled to be reimbursed for travel and other expenses
properly incurred by them in attending meetings of the board or any committee of
the board of directors. Nothing in the By-laws precludes any director from
serving the Company in any other capacity and receiving remuneration for such
services.
The Articles of the Company state that without limiting the borrowing
powers of the Company as set forth in the CBCA, the board may from time to time
on behalf of the Company without authorization of the shareholders (a) borrow
money upon the credit of the Company; (b) issue, reissue, sell or pledge debt
obligations of the Company; (c) to the extent permitted by the CBCA, give a
guarantee on behalf of the Company to secure performance of an obligation of any
person; and (d) mortgage, hypothecate, pledge or otherwise create a security
interest in all or any property of the Company owned or subsequently acquired to
secure any obligation of the Company.
The directors may, by resolution, make, amend or repeal any By-laws that
regulate the business or affairs of the Company. Any resolution making, amending
or repealing any By-laws of the Company must be submitted to the next following
shareholders meeting for ratification by the shareholders who may by ordinary
resolution confirm, reject or amend the By-law, amendment or repeal.
The powers of the directors set forth in the Articles of the Company may be
amended by special resolution. A special resolution is a resolution passed by a
majority of not less than two-thirds (2/3) of the votes cast by shareholders of
the Company who being entitled to do so, vote in person or by proxy at an annual
or special meeting of shareholders of the Company. Under the CBCA, an ordinary
resolution of shareholders requires approval by a majority of the votes cast at
a meeting of shareholders, present in person or represented by proxy.
ELECTION AND QUALIFICATIONS OF DIRECTORS
The directors of the Company stand for election at the annual meeting of
shareholders and there are no staggered terms. There is no cumulative voting for
directors of the Company. There is no provision in the Articles or By-laws that
imposes a requirement for retirement or non-retirement of directors.
There is no provision in the Company's Articles or By-laws that a director
be required to hold a share in the capital of the Company as a qualification for
his office, but he must be qualified to become or act as a director as required
by the CBCA. The CBCA provides that no person is qualified to act as a director
if that person is less than 18 years of age; is a
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person who has been found to be a person of unsound mind by a court in Canada; a
person who is not an individual; or is a person who has the status of bankrupt.
The CBCA provides that a director of a Company may be removed if the
shareholders by ordinary resolution at a special meeting vote to remove a
director or directors from office.
MEETINGS
The CBCA provides that the Company must call an annual meeting of its
shareholders not later than 15 months after holding the last preceding annual
meeting but no later than 6 months after the end of the Company's preceding
financial year. The Company must give notice of any meeting to its shareholders
entitled to receive notice not more than 60 days prior to and not less than 21
days before the date of meeting. The CBCA requires the directors of a company to
provide with the notice of a general meeting a form of proxy for use by every
member entitled to vote at such meeting as well as an information circular
containing prescribed information regarding the matters to be dealt with and the
conduct of the meeting.
Under the CBCA, the directors of the Company may call a meeting of
shareholders and one or more shareholders holding not less than 5% of the issued
voting shares of the Company may give notice to the directors requiring them to
call and hold a meeting.
LIMITATIONS ON OWNERSHIP OF SECURITIES
Except as described below under "Exchange Controls," there are no
limitations on the right to own securities imposed by foreign law to the
Company's knowledge or by the Articles of the Company.
CHANGE IN CONTROL OF COMPANY
There are no provisions in the Company's Articles or By-laws that would
have the effect of delaying, deferring, or preventing a change in control of the
Company and that would operate only with respect to a merger, acquisition or
corporate restructuring of the Company or its subsidiaries.
A shareholder rights plan (the "Rights Plan") was adopted by the Board of
Directors on November 12, 2003 and made effective on November 17, 2003. The
Rights Plan was ratified, confirmed and approved by the shareholders of SAND at
the Annual and Special Meeting of Shareholders held on December 16, 2003. The
Board of Directors renewed and continued the Rights Plan on November 21, 2005
and the renewal and continuation of the Rights Plan was ratified, confirmed and
approved by the shareholders of SAND at the Annual and Special Meeting of
Shareholders of SAND held on December 15, 2005. The Rights Plan will expire,
subject to certain conditions, at the close of the annual meeting of
shareholders of the Company held following the fiscal year ended July 31, 2007,
unless renewed and continued.
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OWNERSHIP THRESHOLD
There are no provisions in the Articles or By-laws governing the ownership
threshold above which shareholder ownership must be disclosed.
DESCRIPTION OF SHARE CAPITAL
The authorized share capital of the Company consists of an unlimited number
of Class A Common Shares, all without par value, and, an unlimited number of
Class B Shares, issuable in series, all without par value, of which Class B,
Series A have been authorized.
Class A Common Shares
The Class A Common Shares of the Company have the following rights,
privileges, restrictions and conditions:
Dividends. Subject to the prior rights of the holders of the Class B Shares
and any other shares ranking senior to the Class A Common Shares with
respect to priority in the payment of dividends, the holders of Class A
Common Shares are entitled to receive dividends and the Company must pay
dividends thereon, as and when declared by the Board of Directors of the
Company out of moneys properly applicable to the payment of dividends, in
such amount and in such form as the Board of Directors of the Company may
from time to time determine and all dividends which the Board of Directors
of the Company may declare on the Class A Common Shares must be declared
and paid in equal amounts per share on all Class A Common Shares at the
time outstanding.
Dissolution. In the event of the dissolution, liquidation or winding-up of
the Company, whether voluntary or involuntary, or any other distribution of
assets of the Company among its shareholders for the purpose of winding-up
its affairs, subject to the prior rights of the holders of the Class B
Shares and any other shares ranking senior to the Class A Common Shares
with respect to priority in the distribution of assets upon dissolution,
liquidation, winding-up or distribution for the purpose of winding-up, the
holders of the Class A Common Shares are entitled to receive the remaining
property and assets of the Company.
Voting Rights. The holders of the Class A Common Shares are entitled to
receive notice of and to attend all meetings of the shareholders of the
Company and have one vote for each Class A Common Share held at all
meetings of the shareholders of the Company, except meetings at which only
holders of another specified class or series of shares of the Company are
entitled to vote separately as a class or series.
There are no redemption or sinking fund provisions relating to the Class A
Common Shares and the Class A Common Shares are fully paid and non-assessable.
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Class B Shares
The Class B Shares, as a class, have the following rights, privileges,
restrictions and conditions:
Directors' Authority to Issue in One or More Series. The Board of Directors
of the Company may issue the Class B Shares at any time and from time to
time in one or more series. Before the first shares of a particular series
are issued, the Board of Directors of the Company must fix the limited or
unlimited number of shares in such series and must determine, subject to
the limitations set out in the articles, the designation, rights,
privileges, restrictions and conditions to be attached to the shares of
such series including, without limitation, the rate or rates, amount or
method or methods of calculation of dividends thereon, the time and place
of payment of dividends, whether cumulative or non-cumulative or partially
cumulative and whether such rate, amount or method of calculation shall be
subject to change or adjustment in the future, the currency or currencies
of payment of dividends, the consideration and the terms and conditions of
any purchase for cancellation, retraction or redemption rights (if any)
(but in no event shall the voting rights attributable to a Class B Share
exceed those attributable to a Class A Common Share), the conversion or
exchange rights attached thereto (if any), the voting rights attached
thereto (if any), and the terms and conditions of any share purchase plan
or sinking fund with respect thereto. Before the issue of the first shares
of a series, the Board of Directors of the Company shall send to the
Director (as defined in the CBCA) articles of amendment containing a
description of such series including the designation, rights, privileges,
restrictions and conditions determined by the Board of Directors of the
Company.
Ranking of Class B Shares. No rights, privileges, restrictions or
conditions attached to a series of Class B Shares may confer upon a series
a priority in respect of dividends or return of capital over any other
series of Class B Shares then outstanding. The Class B Shares are entitled
to priority over the common shares of the Company and over any other shares
of the Company ranking junior to the Class B Shares with respect to
priority in the payment of dividends and the distribution of assets in the
event of the liquidation, dissolution or winding-up of the Company, whether
voluntary or involuntary, or any other distribution of the assets of the
Company among its shareholders for the purpose of winding-up its affairs.
If any cumulative dividends or amounts payable on a return of capital in
respect of a series of Class B Shares are not paid in full, the Class B
Shares of all series must participate rateably in respect of such
dividends, including accumulations, if any, in accordance with the sums
that would be payable on such shares if all such dividends were declared
and paid in full, and in respect of any repayment of capital in accordance
with the sums that would be payable on such repayment of capital if all
sums so payable were paid in full; provided however, that in the event of
there being insufficient assets to satisfy in full all such claims to
dividends and return of capital, the claims of the holders of the Class B
Shares with respect to repayment of capital must first be paid and
satisfied and any assets remaining thereafter must be applied
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towards the payment and satisfaction of claims in respect of dividends. The
Class B Shares of any series may also be given such other preferences over
the common shares and over any other shares ranking junior to the Class B
Shares as may be determined in the case of such series of Class B Shares.
Voting Rights. Except as otherwise required by law or in accordance with
any voting rights which may from time to time be attached to any series of
Class B Shares, the holders of the Class B Shares as a class are not
entitled as such to receive notice of, to attend or to vote at any meeting
of the shareholders of the Company.
Approval of Holders of Class B Shares. The rights, privileges, restrictions
and conditions attaching to the Class B Shares as a class may be added to,
changed or removed but only with the approval of the holders of the Class B
Shares given as hereinafter specified.
The approval of the holders of Class B Shares to add to, change or remove
any right, privilege, restriction or condition attaching to the Class B Shares
as a class or to any other matter requiring the consent of the holders of the
Class B Shares as a class may be given in such manner as may then be required by
law, subject to a minimum requirement that such approval shall be given by
resolution passed by the affirmative vote of at least two-thirds of the votes
cast at a meeting of the holders of Class B Shares duly called for that purpose.
The formalities to be observed in respect of the giving of notice of any such
meeting or any adjourned meeting and the conduct thereof shall be those from
time to time required by the CBCA (as from time to time amended, varied or
replaced) and prescribed in the by-laws of the Company with respect to meetings
of shareholders. On every poll taken at a meeting of holders of Class B Shares
as a class, each holder entitled to vote thereat shall have one vote in respect
of each Class B Share held by him.
Class B, Series A Shares
The first series of the Class B Shares of the Company consists of
20,000,000 shares and no more and is designated as the Class B, Series A Shares
(the "Class B, Series A Shares") and in addition to the preferences, rights,
privileges, restrictions and conditions attaching to all of the Class B Shares
as a class, the rights, privileges, restrictions and conditions attaching to the
Series A Shares are as follows:
Voting Rights
Each holder of Class B, Series A Shares shall be entitled to receive notice
of and to attend all meetings of shareholders of the Company, except
meetings at which only holders of other classes or series of shares are
entitled to attend, and at all such meetings shall be entitled to a number
of votes equal to the number of Class A Common Shares of the Company (the
"Common Shares") then issuable upon the conversion of the Class B, Series A
Shares into Common Shares and to vote together with the holders of Class A
Common Shares of the Company.
Cumulative Dividends
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The holders of the Class B, Series A Shares shall be entitled to receive
and the Company shall pay to them, always in preference and priority to any
payment of dividends on the Common Shares of the Company and any other
Shares of the Company ranking junior to the Class B, Series A Shares, as
and when declared by the board of directors of the Company out of moneys of
the Company properly applicable to the payment of dividends, fixed,
cumulative cash dividends at the annual rate per share of 7% of the amount
equal to the amount recorded in the stated capital account maintained in
respect of the Class B, Series A Shares outstanding payable quarterly, by
cheque of the Company or in kind. Such dividend on any particular Class B,
Series A Share shall accrue and be cumulative from the date of issue of
such Class B, Series A Share. In the event the price of the Common Shares
of the Company is more than 200% of the conversion price of the Class B,
Series A Shares for thirty (30) consecutive trading days, and provided that
a Registration Statement has been declared effective by the Securities and
Exchange Commission of the United States or 365 days have passed since the
initial issue of the Class B, Series A Shares, the Company shall cease
paying dividends.
Liquidation, Dissolution or Winding-Up
In the event of the liquidation, dissolution or winding-up of the Company,
whether voluntary or involuntary, or any other distribution of assets of
the Company among its shareholders for the purpose of winding-up its
affairs, the holders of the Class B, Series A Shares shall be entitled to
receive the amount received by the Company upon initial issue in respect of
each Class B, Series A Share plus all accrued and unpaid cumulative
dividends before any amount shall be paid to the holders of the Common
Shares or any other shares ranking junior to the Class B, Series A Shares.
Except as provided above, the holders of the Class B, Series A Shares shall
not be entitled to any further participation in the assets of the Company.
Modification Procedure
The rights, privileges, restrictions and conditions attached to the Class
B, Series A Shares may be added to, changed or removed only with the prior
approval of the holders of the Class B, Series A Shares given as specified
herein, in addition to any vote or authorization required by law or the
articles of the Company.
Any approval of the holders of Class B, Series A Shares with respect to the
modification of the rights, privileges, restrictions and conditions
attached to the Class B, Series A Shares or to any other matter requiring
the consent of the holders of the Class B, Series A Shares shall be given
in such manner as may then be required by law, subject to a minimum
requirement that such approval be given by resolution passed by the
affirmative vote of at least two-thirds of the votes cast by the holders of
Class B, Series A Shares who voted in respect of that resolution at a
meeting of the holders of the Class B, Series A Shares duly called for that
purpose at which the holders of at least fifty per cent (50%) of the
outstanding Class B, Series A Shares are present in person or represented
by proxy, or, if such quorum is not present at
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such meeting, at an adjournment thereof at which the holders of twenty-five
per cent (25%) Class B, Series A Shares then present in person or
represented by proxy shall constitute a quorum for all purposes. The
formalities to be observed with respect to proxies, the giving of notice
and the conduct of any such meeting or any adjourned meeting shall be those
from time to time prescribed by the articles and by-laws of the Company or
otherwise prescribed by law with respect to meetings of shareholders. On
every poll taken at every meeting of holders of Class B, Series A Shares,
each holder entitled to vote thereat shall be entitled to one vote for each
Class B, Series A Share held by such holder.
Conversion Rights
The holders of the Class B, Series A Shares shall have the right at any
time to convert the Class B, Series A Shares into a number of Common Shares
of the Company equal to the amount received by the Company upon the initial
issue of each Class B, Series A Share plus all accrued and unpaid
cumulative dividends divided by the conversion price of $0.40 per Class B,
Series A Share (the "Conversion Price").
The conversion privilege herein provided for may be exercised by notice in
writing given to the Company at its registered office, accompanied by the
certificate or certificates representing the Class B, Series A Shares in
respect of which the holder thereof desires to exercise such right of
conversion. Such notice shall be signed by such holder or his duly
authorized attorney and shall specify the number of Class B, Series A
Shares which the holder desires to have converted. If less than all the
Class B, Series A Shares represented by a certificate or certificates
accompanying any such notice are to be converted, the holder shall be
entitled to receive, at the expense of the Company, a new certificate
representing the number of Class B, Series A Shares comprised in the
certificate or certificates surrendered as aforesaid which are not to be
converted.
On any conversion of Class B, Series A Shares the share certificates for
Common Shares of the Company resulting therefrom shall be issued in the
name of the registered holder of the Class B, Series A Shares converted or
in such name or names as such registered holder may direct in writing,
provided that such registered holder shall pay any applicable security
transfer taxes. In either instance the transfer form on the back of the
certificates in question shall be endorsed by the registered holder of the
Class B, Series A Shares or his duly authorized attorney, with signature
guaranteed in a manner satisfactory to the Company, provided that the
Company may wave the requirement for any such guarantee.
In the event that the Company issues Common Shares, Class B Shares or other
securities at a price which is less than the then current conversion price
of the Class B, Series A Shares, the conversion price of the Class B,
Series A Shares shall be reduced to the price at which the Common Shares,
Class B Shares or other securities are issued. The following issuances of
securities shall not bring about the foregoing reduction in the conversion
price: (i) securities issued upon the conversion
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of any Class B, Series A Shares; (ii) securities issued upon the conversion
of any debenture, warrant, option or other convertible security; and (iii)
Common Shares of the Company (or options or rights or purchase such Common
Shares) issued or issuable to employees, directors, officers or consultants
pursuant a plan approved by the Board of Directors of the Company.
Change of Rights of Shareholders
The CBCA requires the consent by special resolution of a majority of not
less than two-thirds (2/3) of the votes cast by the shareholders entitled to
vote in order to change the rights of holders of shares, including the
designation of all or any shares, and any addition, change or removal of rights,
privileges, restrictions and conditions, including rights to accrued dividends,
in respect of all or any shares, whether issued or unissued.
C. MATERIAL CONTRACTS
On July 31, 2003, SAND sold its wholly-owned subsidiary, ClarityBlue
Limited (previously named Sand Technology (U.K.) Limited), for total proceeds of
approximately $20 million to a group of investors which included members of
senior management of the subsidiary and Duncan Painter who was a member of the
Board of Directors of SAND. The Company provided warranties for claims against
ClarityBlue Limited for matters existing prior to the sale. The warranties for
tax matters expire in calendar 2010. All other warranties have expired.
SAND entered into a Shareholder Rights Plan Agreement dated as of November
17, 2003 with CIBC Mellon Trust Company, as rights agent. The continued
existence of the Rights Plan was confirmed by the shareholders of SAND on
December 15, 2005. Information as to the shareholder rights plan of SAND is
found under Item 10 - "Additional Information" under "Change in Control of
Company".
D. EXCHANGE CONTROLS
There are no governmental laws, decrees, or regulations in Canada relating
to restrictions on the export or import of capital, or affecting the remittance
of interest, dividends, or other payments to non-resident holders on the
Company's Class A Common Shares, other than withholding tax requirements. Any
remittances of dividends to United States residents are subject to a 15%
withholding tax (5% if the shareholder is a company owning at least 10% of the
outstanding voting shares of the Company) pursuant to Article X of the
reciprocal tax treaty between Canada and the United States. See Item 10 -
"Additional Information" - "E, - Taxation".
To our knowledge, except as provided in the INVESTMENT CANADA ACT (the
"Act") enacted on June 20, 1985, as amended, as further amended by the NORTH
AMERICAN FREE TRADE AGREEMENT (NAFTA) IMPLEMENTATION ACT (Canada) and the WORLD
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TRADE ORGANIZATION (WTO) AGREEMENT IMPLEMENTATION ACT, there are no limitations
specific to the rights of non-Canadians to hold or vote the common shares of the
Company under the laws of Canada or the Province of Quebec or in our Articles or
By-laws.
Management of the Company considers that the following general summary
fairly describes those provisions of the Act pertinent to an investment by an
American investor in the Company.
The Act requires a non-Canadian making an investment which would result in
the acquisition of control of a Canadian business, the gross value of the assets
of which exceed certain threshold levels or the business activity of which is
related to Canada's cultural heritage or national identity, to either notify, or
file an application for review with the Director of Investments, Industry Canada
who administers provisions of the Act. Under the Act, control of a company is
deemed to be acquired through the acquisition of a majority of the voting shares
of a company, and is presumed to be acquired where one-third or more, but less
than a majority of the voting shares of a company are acquired, unless it can be
established that the Company is not controlled in fact through the ownership of
voting shares.
The notification procedure involves a brief statement of information about
the investment on a prescribed form which is required to be filed with
Investment Canada by the investor at any time up to 30 days following
implementation of the investment. It is intended that investments requiring only
notification will proceed without government intervention unless the investment
is in a specific type of business activity related to Canada's cultural heritage
and national identity.
If an investment is reviewable under the Act, an application for review in
the form prescribed is required to be filed with Investment Canada prior to the
investment taking place and the investment may not be implemented until the
review has been completed and the Minister responsible for Investment Canada is
satisfied that the investment is likely to be of net benefit to Canada. If the
Minister is not satisfied that the investment is likely to be of net benefit to
Canada, the non-Canadian must not implement the investment or, if the investment
has been implemented, may be required to divest himself of control of the
business that is the subject of the investment.
E. TAXATION
CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
The following summary of certain Canadian federal income tax considerations
generally applicable in respect of the Company's Class A Common Shares reflects
the Company's opinion. The tax consequences to any particular holder of Class A
Common Shares will vary according to the status of that holder as an individual,
trust, corporation or member of a partnership, the jurisdictions in which that
holder is subject to taxation, the place where that holder is resident and,
generally, according to that holder's particular
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circumstances. This summary is applicable only to holders who are resident in
the United States, have never been resident in Canada for tax purposes, deal at
arm's length with the Company, hold their Class A Common Shares as capital
property and who will not use or hold the Class A Common Shares in carrying on
business in Canada.
This summary is based upon the provisions of the Income Tax Act of Canada
and the regulations thereunder (collectively, the "Tax Act", or "ITA") and the
Canada-United States Tax Convention as amended by the Protocols thereto (the
"Tax Convention") as at the date of this Annual Report on Form 20-F and the
current publicly known administrative practices of the Canada Revenue Agency.
This summary does not take into account Canadian provincial income tax
considerations.
This summary is not exhaustive of all possible income tax considerations
pertaining to the Class A Common Shares. It is not intended as legal or tax
advice to any particular holder of Class A Common Shares and should not be so
construed. Each holder should consult his own tax advisor with respect to the
income tax consequences applicable to him in his own particular circumstances.
DISPOSITION OF CLASS A COMMON SHARES
Under the Tax Act, a gain from the disposition of Common Shares by a
non-resident of Canada will generally not be subject to Canadian tax, provided
the shareholder (and/or persons who do not deal at arm's length with the
shareholder) have not held a "substantial interest" in the Company (25% or more
of the shares of any class of the Company's share capital) at any time in the
five years preceding the disposition. Even if a gain would have been taxable
under the Tax Act, generally, the Tax Convention will exempt from Canadian
taxation any capital gain realized by a resident of the United States, provided
that the value of the Class A Common Shares is not derived principally from real
property situated in Canada. It is likely that this exemption would apply to the
Class A Common Shares of the Company.
Where a holder disposes of Class A Common Shares to the Company (unless the
Company acquired the common shares in the open market in the manner in which
shares would normally be purchased by any member of the public), this will
result under the TAX ACT in a deemed dividend to the holder equal to the amount
by which the consideration paid by the Company exceeds the paid-up capital of
such shares. The amount of such dividend will be subject to withholding tax as
described below.
DIVIDENDS
In the case of any dividends paid to non-residents of Canada, the Canadian
tax is withheld by the Company, which remits only the net amount of such
dividend to the shareholder. By virtue of Article X of the Tax Convention, the
rate of tax on dividends paid to residents of the United States is generally
limited to 15% of the gross dividend (or 5% in the case of certain corporate
shareholders owning shares of the Company entitling the shareholder to at least
10% of the Company's voting shares). In the event the provisions of
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the Tax Convention are not applicable, the rate of Canadian withholding tax
imposed on non-residents according to the TAX ACT is 25% of the gross dividend.
F. DIVIDENDS AND PAYING AGENTS
Not applicable.
G. STATEMENTS BY EXPERTS
Not applicable.
H. DOCUMENTS ON DISPLAY
The Company is subject to certain of the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, files reports and other information with the SEC. As a
foreign private issuer, the Company is exempt from the rules under the Exchange
Act prescribing the furnishing and content of proxy statements, and its
officers, directors and principal shareholders are exempt from the reporting and
short-swing profit recovery provisions contained in Section 16 of the Exchange
Act. As a foreign private issuer, the Company is not required to publish
financial statements as frequently or as promptly as United States companies.
We file annual reports and other information with the SEC. You may read and
copy any of these documents at the SEC's Public Reference Room at Judiciary
Plaza, 100 F Street N.E., Washington, D.C. 20549. You may obtain information on
the operation of the Public Reference Room by calling the SEC at (800) SEC-0330.
The SEC maintains an internet site that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the SEC. The address of that site is http://www.sec.gov.
I. SUBSIDIARY INFORMATION
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are not subject to material market risk exposures, except for risks
related to interest rate fluctuations and foreign currency exchange rates.
We have not invested in market risk sensitive instruments such as
derivative financial instruments or derivative commodity instruments. We invest
in high quality issuers and limit
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the amount of our credit exposure with any one issuer. We are averse to
principal loss and ensure the safety and preservation of our invested funds by
limiting default, market and reinvestment risk. We do not make use of a bank
line of credit and we do not have any long term debt.
Since we currently earn revenues and incur expenses in United States
dollars, British pounds, Euros and Canadian dollars, exchange rates for these
and other local currencies in countries where we may operate in the future may
fluctuate in relation to the Canadian dollar and such fluctuations may have an
adverse effect on our earnings or assets when United States dollars, British
pounds, Euros or local currencies are exchanged for Canadian dollars. We have
not entered into forward foreign exchange contracts. Losses and gains resulting
from the translation of revenue and expenses denominated in United States
dollars, British pounds, or Euros into Canadian dollars have been included in
our results of operations.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
A shareholder rights plan (the "Rights Plan") was adopted by the Board of
Directors on November 12, 2003 and made effective on November 17, 2003. The
Rights Plan was ratified, confirmed and approved by the shareholders of SAND at
the Annual and Special Meeting of Shareholders held on December 16, 2003. The
Board of Directors renewed and continued the Rights Plan on November 21, 2005
and the renewal and continuation of the Rights Plan was ratified, confirmed and
approved by the shareholders of SAND at the Annual and Special Meeting of
Shareholders of SAND held on December 15, 2005. The Rights Plan will expire,
subject to certain conditions, at the close of the annual meeting of
shareholders of the Company held following the fiscal year ended July 31, 2007,
unless renewed and continued.
Summary of the Rights Plan
The principal terms of the Rights Plan are summarized below. Capitalized
terms used but not defined in this summary are used as defined in the Rights
Agreement. The summary is qualified by reference to the actual provisions of the
Rights Agreement.
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Rights
One Right will be issued and will attach to each outstanding Common Share
of the Company. A Right only becomes exercisable upon the occurrence of a
Flip-In Event, which is a transaction by which a person becomes an Acquiring
Person and which otherwise does not meet the requirements of a Permitted Bid.
Prior to a Flip-In Event, the Rights are priced at CDN$100 per share. If a
Flip-In Event occurs, each Right issued under the Rights Plan thereafter will
entitle all holders, other than the Acquiring Person, to purchase that number of
Common Shares of the Company having an aggregate market value equal to twice
CDN$100 per share for CDN$100 per share. This purchase will cause substantial
dilution to the person or group of persons attempting to acquire control of the
Company, other than by way of a Permitted Bid. The Rights expire on the
termination of the Rights Plan, unless redeemed before such time.
Acquiring Person
An Acquiring Person is generally a person who becomes the beneficial owner
of 20% or more of the outstanding Common Shares of the Company. Under the Rights
Plan, there are various exceptions to the definition of Acquiring Person,
including:
- a person who acquires 20% or more of the outstanding Common
Shares due to (i) acquisitions of Common Shares by the Company,
(ii) pro rata distributions of Common Shares by the Company,
(iii) acquisitions of Common Shares upon exercise of Convertible
Securities acquired pursuant to certain exempt transactions, (iv)
an amalgamation, merger or other statutory procedure requiring
shareholder approval, or (v) the issuance of Common Shares on an
exempt private placement basis (subject to certain limits); and
- underwriters who obtain Common Shares for the purpose of a public
distribution.
Beneficial Ownership
The thresholds for triggering the Rights Plan are based on the percentage
of shares that are Beneficially Owned by a person or its Affiliates or
Associates. This is defined in terms of legal or equitable ownership of common
shares. In addition, a person is deemed to be the Beneficial Owner of Common
Shares in circumstances where that person or its Affiliates or Associates, and
any other person acting jointly or in concert with such person, has a right to
acquire Common Shares within 60 days. There are various exceptions to this
definition set forth in the Rights Plan.
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Permitted Bid
If a Take-over Bid is structured as a Permitted Bid, a Flip-In Event will
not occur and the Rights will not become exercisable. Permitted Bids must be
made by means of a take-over bid circular and comply with the following:
- the Take-over Bid must be made to all shareholders other than the
bidder;
- the Take-over Bid must not permit the bidder to take up any
Common Shares that have been tendered pursuant to the Take-over
Bid prior to the expiry of a period not less than 60 days after
the Take-over Bid is made, and then only if at such time more
than 50% of the Common Shares held by the Independent
Shareholders (which term generally includes shareholders other
than the bidder, its Affiliates, Associates and persons acting
jointly or in concert with the bidder), have been tendered
pursuant to the Take-over Bid and not withdrawn;
- the Take-over Bid must contain an irrevocable and unqualified
provision that, unless it is withdrawn, Common Shares may be
tendered at any time during the 60 day period referred to in the
immediately preceding paragraph and that any Common Shares
deposited pursuant to the Take-over Bid may be withdrawn until
they have been taken up and paid for; and
- the Take-over Bid must contain an irrevocable and unqualified
provision that, if more than 50% of the Common Shares held by
Independent Shareholders are tendered pursuant to the Take-over
Bid within the 60-day period, then the bidder must make a public
announcement of that fact and the Take-over Bid must then remain
open for an additional 10 business days from the date of such
public announcement.
The Rights Plan also allows a Competing Permitted Bid to be made while a
Permitted Bid is in existence. A Competing Permitted Bid is a Take-over Bid that
is made after a Permitted Bid has been made, but prior to its expiry, that
satisfies all of the requirements of a Permitted Bid, except that (i) no Common
Shares will be taken up or paid for until the later to occur of the date which
is generally 35 days after the date the Take-over Bid is made and the 60th day
after the date of the Permitted Bid that is then outstanding, and (ii) at the
close of business on the date Common Shares are first taken up or paid for, more
than 50% of the then outstanding Common Shares held by Independent Shareholders
have been tendered in such Take-over Bid and not withdrawn. If this 50%
requirement is satisfied, the applicable bidder must make a public announcement
of that fact and the Take-over Bid must remain open for tenders of Common Shares
for at least ten business days after the date of such public announcement.
The requirements of a Permitted Bid and a Competing Permitted Bid enable
shareholders to decide whether the Take-over Bid or any Competing Permitted Bid
is adequate on its own merits, without being influenced by the likelihood that a
Take-over Bid will succeed. Moreover, if there is sufficient support for a
Take-over Bid such that at least 50% of the Common Shares held by Independent
Shareholders have been tendered to it, a
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shareholder who has not yet tendered to that bid will have a further 10 business
days in which to decide whether to withdraw its Common Shares from a Competing
Take-over Bid, if any, and whether to tender to the Take-over Bid.
Waiver and Redemption
Until the occurrence of a Flip-In Event as to which the Board of Directors
has not issued a waiver, the Board of Directors may elect to redeem all but not
less than all of the then outstanding Rights at a redemption price of $0.0001
(subject to adjustment) per Right. In addition, until the occurrence of a
Flip-In Event as to which the Board of Directors has not issued a waiver, the
Board of Directors may determine to waive the application of the Rights Plan to
any Flip-In Event.
The Board of Directors may also waive the application of the Rights Plan to
any Flip-In Event if the Board determines that the Person became an Acquiring
Person by inadvertence and without any intention to become, or knowledge that it
would become, an Acquiring Person and such Person has reduced its Beneficial
Ownership of Common Shares such that at the time of the granting of a waiver,
such Person is no longer an Acquiring Person. The Board of Directors will be
deemed to have redeemed the Rights at the Redemption Price on the date that the
Person making the Permitted Bid, Competing Permitted Bid or Take-over Bid in
respect of which the Board of Directors has waived or been deemed to waive the
application of the Rights Plan, has taken up and paid for the Common Shares
pursuant to the applicable bid.
Termination
The Rights Plan will expire, subject to certain conditions, at the close of
the annual meeting of our shareholders to be held following the fiscal year
ended July 31, 2007, unless renewed and continued and every two year
anniversary thereafter and so on unless the continuation of the Rights Plan for
each such two year period (or other period approved by the Independent
Shareholders) is approved by the Independent Shareholders of the Company.
ITEM 15. CONTROLS AND PROCEDURES
"Disclosure controls and procedures" are controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports we file with the Securities and Exchange Commission is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms and that the information is accumulated and communicated
to our management, including our Chief Executive Officer and our Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
We carried out an evaluation of the effectiveness of the design and operation of
our disclosure controls and procedures as of the end of the fiscal year covered
by this Annual Report on Form 20-F. This evaluation was carried out under the
supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer. Based upon that evaluation,
our Chief Executive Officer and our Chief
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Financial Officer concluded that our disclosure controls and procedures are
effective. There have been no changes in our internal control over financial
reporting during the fiscal year ended July 31, 2007 that have materially
affected, or are reasonably likely to materially affect our internal control
over financial reporting.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Messrs. Musselman, Pryde and Shindler, all of whom are non-management and
unrelated directors, currently comprise the Audit Committee. Mr. Musselman is
Chairman of the Audit Committee. Messrs. Musselman, Pryde and Shindler satisfy
the current requirements of the Financial Industry Regulatory Authority relating
to the independence and the qualification of the members of the Audit Committee.
Wayne Musselman, BCom (Hon), FCA, retired as a partner of Deloitte & Touche
LLP in 2004 after a career of nearly thirty years during which he served clients
in the banking, securities, international trade and distribution industries. He
directed the Japanese Service Group of Deloitte's Global Japanese Services
Group. He is currently a director of the Deloitte Retired Partner Council and of
Faith Life Financial.
Our Board of Directors has determined that Mr. Musselman qualifies as an
"audit committee financial expert".
ITEM 16B. CODE OF ETHICS
As part of its stewardship responsibilities, the Board of Directors has
approved formal "Standards of Ethical Conduct" that govern the behaviour of the
directors, officers and employees of the Company. The Board monitors compliance
with these standards and is responsible for the granting of any waivers from
these standards to directors or officers. Disclosure will be made by the Company
of any waiver from these standards granted to the directors or officers of the
Company in the quarterly report of the Company that immediately follows the
grant of such waiver. No waiver has been granted to date. We will provide a
copy of our Standards of Ethical Conduct to any person without charge, upon
request. To request a copy, an interested person should contact our investor
relations consultants, de Jong & Associates, Inc. at
http://www.dejong.org/clients/sndt.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Raymond Chabot Grant Thornton LLP served as our auditors for the fiscal
years ended July 31, 2006 and July 31, 2007.
Deloitte & Touche LLP resigned as our auditors on August 2, 2006. There
were no reportable disagreements between the Company and Deloitte & Touche LLP
and no qualified opinions given or denials of opinions by Deloitte & Touche LLP.
The Audit Committee of the Board of Directors of the Company resolved on August
15, 2006 to appoint Raymond Chabot Grant Thornton LLP as auditors of the Company
for the fiscal year ended July 31, 2006 to replace Deloitte & Touche LLP. A
resolution to ratify this
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appointment and to appoint Raymond Chabot Grant Thornton LLP as auditors of the
Company was approved at the Annual Meeting of Shareholders held on July 6, 2007.
All sums set out under the headings "Audit Fees and Audit-Related Fees",
"Tax Fees" and "Other Fees" below were paid to our former auditors, Deloitte
& Touche LLP during the fiscal year ended July 31, 2006.
Audit Fees and Audit-Related Fees
Raymond Chabot Grant Thornton LLP billed the Corporation $104,270, in
fiscal 2007 ($117,627 in fiscal 2006) for professional services rendered for the
audit of the Annual Consolidated Financial Statements and the review of
financial statements included in statutory and regulatory filings. None of that
amount was related to the current fiscal year while $104,270 was related to
previous fiscal years (compared to $2,500 and $115,217 respectively in fiscal
2006).
Tax Fees
Raymond Chabot Grant Thornton LLP did not bill the Corporation in fiscal
2007 for specific tax advice outside the scope of the audit ($31,057 in fiscal
2006) for professional services rendered for tax compliance, tax advice, and tax
planning. The taxation advisory services provided related primarily to the
preparation of corporate tax returns, specific tax advice on research and
development tax credit payments.
Other Fees
Other than the audit and tax services described above, Raymond Chabot Grant
Thornton LLP did not provide other services to the Corporation in fiscal 2007
(none in fiscal 2006).
The Audit Committee has considered whether the provision of these services
is compatible with maintaining the independence of Raymond Chabot Grant Thornton
LLP. The Audit Committee is of the opinion that the provision of these services
does not compromise the independence of the Auditor. All non-audit services
provided by Raymond Chabot Grant Thornton LLP must be approved by the Audit
Committee.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
None.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
No repurchases of our Class A common shares were made by or on behalf of
us or any affiliated purchaser during the fiscal year ended July 31, 2007.
PART III
ITEM 17 FINANCIAL STATEMENTS
Not Applicable.
ITEM 18 FINANCIAL STATEMENTS
The Consolidated Financial Statements of the Company are included in this
Annual Report on Form 20-F beginning on page 65.
64
<Page>
SAND TECHNOLOGY INC.
CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2007 AND 2006
Report of Independent Registered Chartered Accountants 66
Comments by Independent Registered Chartered Accountants
for U.S. Readers on Canada-U.S. Reporting Differences 68
Report of Independent Registered Chartered Accountants 69
Financial Statements
Consolidated Balance Sheets 70
Consolidated Operations 71
Consolidated Shareholders' Equity (Deficiency) 72
Consolidated Cash Flows 73
Notes to Consolidated Financial Statements 74 - 93
65
<Page>
REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
To the Shareholders and Board of Directors of SAND Technology Inc.
We have audited the accompanying consolidated balance sheets of SAND Technology
Inc. and subsidiaries (the "Corporation") as at July 31, 2007 and 2006 and the
consolidated statements of operations, shareholders' equity (deficiency) and
cash flows for the years then ended. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards and standards of the Public Company Accounting Oversight Board (United
States). These standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Corporation as
at July 31, 2007 and 2006 and the results of its operations and its cash flows
for the years then ended in accordance with Canadian generally accepted
accounting principles.
66
<Page>
The Corporation is not required to have, nor were we engaged to perform, audits
of its internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion.
The financial statements as at July 31, 2005 and for the year ended July 31,
2005 were audited by other auditors who expressed an opinion without reservation
on those statements in their report dated September 16, 2005.
/s/ Raymond Chabot Grant Thornton LLP
Independent Registered Chartered Accountants
Montreal
September 14, 2007
67
<Page>
COMMENTS BY INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS FOR U.S. READERS ON
CANADA-U.S.
REPORTING DIFFERENCES
The standards of the Public Company Accounting Oversight Board (United States)
require the addition of an explanatory paragraph (following the opinion
paragraph) when the consolidated financial statements are affected by conditions
and events that cast substantial doubt on the Corporation's ability to continue
as a going concern, such as those described in Note 1 to the consolidated
financial statements of the Corporation. Our report to the shareholders and
Board of Directors, dated September 14, 2007, is expressed in accordance with
Canadian reporting standards, which do not require a reference to such changes
in accounting principles or such events and conditions in the report of
independent registered chartered accountants when the changes or events and
conditions are properly accounted for and adequately disclosed in the financial
statements.
/s/ Raymond Chabot Grant Thornton LLP
Independent Registered Chartered Accountants
Montreal
September 14, 2007
68
<Page>
[DELOITTE LOGO] Deloitte & Touche LLP
1 Place Ville Marie
Suite 3000
Montreal, QC H3B 4T9
Tel: (514) 393-5194
Fax: (514) 390-4104
www.deloitte.ca
REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
To the Shareholders and Board of Directors of
Sand Technology Inc.
We have audited the consolidated statements of operations, shareholders' equity
and cash flows of Sand Technology Inc. and subsidiaries (the "Corporation") for
the year ended July 31, 2005. These financial statements are the responsibility
of the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with Canadian generally accepted auditing
standards and auditing standards of the Public Company Accounting Oversight
Board (United States). These standards require that we plan and perform an
audit to obtain reasonable assurance whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, these consolidated financial statements of the Corporation
present fairly, in all material respects, the results of its operations and its
cash flows for the year ended July 31, 2005 in accordance with Canadian
generally accepted accounting principles.
The Corporation is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the
Corporation's internal control over financial reporting. Accordingly, we
express no such opinion.
/s/ Deloitte & Touche LLP
Independent Registered Chartered Accountants
Montreal, Canada
September 16, 2005
69
<Page>
SAND TECHNOLOGY INC.
CONSOLIDATED BALANCE SHEETS
July 31, 2007 and 2006
(In Canadian dollars)
<Table>
<Caption>
2007 2006
----------- -----------
$ $
ASSETS
Current assets
Cash and cash equivalents 330,711 1,412,548
Accounts receivable 1,582,957 1,486,287
Prepaid expenses 150,964 93,226
----------- -----------
2,064,632 2,992,061
Capital assets (Note 3) 181,669 231,367
Other assets (Note 4) 110,847 221,693
----------- -----------
2,357,148 3,445,121
=========== ===========
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities (Note 5) 1,076,116 710,882
Deferred revenue 1,305,270 1,231,094
Due to a shareholder (Note 6) 750,144 429,461
----------- -----------
3,131,530 2,371,437
Deferred credits 107,569 136,906
----------- -----------
3,239,099 2,508,343
----------- -----------
Commitments (Note 10)
SHAREHOLDERS' EQUITY (DEFICIENCY)
Common stock (Note 7)
Authorized
Unlimited number of class "A" common shares, without par value
Issued and outstanding 14,318,189 class "A" common shares
(12,818,189 in 2006) 38,530,441 38,024,756
Contributed surplus (Note 7b) 305,110 103,000
Deficit (39,717,502) (37,190,978)
----------- -----------
(881,951) 936,778
----------- -----------
2,357,148 3,445,121
=========== ===========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
On behalf of the Board,
/s/ Arthur G. Ritchie, Director /s/ Wayne Musselman, Director
70
<Page>
SAND TECHNOLOGY INC.
CONSOLIDATED OPERATIONS
Years ended July 31, 2007, 2006 and 2005
(In Canadian dollars)
<Table>
<Caption>
2007 2006 2005
---------- ---------- ----------
$ $ $
REVENUE 6,728,540 5,477,485 6,096,033
---------- ---------- ----------
Operating expenses
Cost of sales and product support 1,666,331 1,554,313 1,754,138
Research and development, net (Note 8) 2,215,146 2,441,950 3,272,102
Amortization of capital assets and other assets (Notes 3 and 4) 201,274 248,455 277,276
Selling, general and administrative expenses 5,100,057 5,220,443 8,317,831
---------- ---------- ----------
9,182,808 9,465,161 13,621,347
---------- ---------- ----------
Loss from operations (2,454,268) (3,987,676) (7,525,314)
Interest (expenses) revenues (72,256) 60,755 162,260
---------- ---------- ----------
NET LOSS (2,526,524) (3,926,921) (7,363,054)
========== ========== ==========
Basic and diluted loss per share (Note 7) (0.19) (0.31) (0.57)
========== ========== ==========
Basic and diluted weighted average number of common shares outstanding 13,094,288 12,818,189 12,860,438
========== ========== ==========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
71
<Page>
SAND TECHNOLOGY INC.
CONSOLIDATED SHAREHOLDERS' EQUITY (DEFICIENCY)
Years ended July 31, 2007, 2006 and 2005
(In Canadian dollars)
<Table>
<Caption>
COMMON STOCK
----------------------- SHAREHOLDERS'
NUMBER OF CONTRIBUTED EQUITY
SHARES AMOUNT SURPLUS DEFICIT (DEFICIENCY)
---------- ---------- ----------- ----------- -------------
$ $ $ $
Balance as at July 31, 2004 12,997,551 38,556,828 49,000 (26,246,606) 12,359,222
Net loss (7,363,054) (7,363,054)
Stock-based compensation (Note 7b) 25,000 25,000
Share repurchase (179,362) (532,072) 345,603 (186,469)
---------- ---------- ------- ----------- ----------
Balance as at July 31, 2005 12,818,189 38,024,756 74,000 (33,264,057) 4,834,699
Net loss (3,926,921) (3,926,921)
Stock-based compensation (Note 7b) 29,000 29,000
---------- ---------- ------- ----------- ----------
Balance as at July 31, 2006 12,818,189 38,024,756 103,000 (37,190,978) 936,778
Stock issuance (Note 7a) 1,500,000 675,795 675,795
Net loss (2,526,524) (2,526,524)
Warrants (Note 7a) (170,110) 170,110
Stock-based compensation (Note 7b) 32,000 32,000
---------- ---------- ------- ----------- ----------
Balance as at July 31, 2007 14,318,189 38,530,441 305,110 (39,717,502) (881,951)
========== ========== ======= =========== ==========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
72
<Page>
SAND TECHNOLOGY INC.
CONSOLIDATED CASH FLOWS
Years ended July 31, 2007, 2006 and 2005
(In Canadian dollars)
<Table>
<Caption>
2007 2006 2005
---------- ---------- ----------
$ $ $
OPERATING ACTIVITIES
Net loss (2,526,524) (3,926,921) (7,363,054)
Non-cash items
Amortization of capital assets and other assets 201,274 248,455 277,276
Stock-based compensation 32,000 29,000 25,000
Changes in working capital items
Accounts receivable (96,670) 75,326 803,042
Prepaid expenses (57,738) 34,505 60,949
Accounts payable and accrued liabilities 365,234 (362,717) (395,516)
Deferred revenue 74,176 (216,898) (106,793)
---------- ---------- ----------
Cash flows from operating activities (a) (2,008,248) (4,119,250) (6,699,096)
---------- ---------- ----------
INVESTING ACTIVITIES
Purchase of capital assets and cash flows from investing activities (40,730) (72,240) (70,578)
---------- ---------- ----------
FINANCING ACTIVITIES
Purchase of common shares (186,469)
Due to shareholders 320,683 17,463
Share issuance 675,795
Amortization of deferred credits (29,337) (29,337) (29,338)
---------- ---------- ----------
Cash flows from financing activities 967,141 (11,874) (215,807)
---------- ---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,081,837) (4,203,364) (6,985,481)
Cash and cash equivalents, beginning of year 1,412,548 5,615,912 12,601,393
---------- ---------- ----------
Cash and cash equivalents, end of year 330,711 1,412,548 5,615,912
========== ========== ==========
(a) Additional information Interest paid 70,938 -- --
========== ========== ==========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
73
<Page>
SAND TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2007 and 2006
(In Canadian dollars)
1 - GOVERNING STATUTES, NATURE OF OPERATIONS AND GOING CONCERN
SAND Technology Inc. and subsidiaries (the "Corporation") is involved in the
design, development, marketing and support of software products and services
that enable users to retrieve usable business information from large amounts of
data. The software products, collectively known as the SAND DNA Access and the
SAND DNA Analytics, are designed to provide an efficient and cost-effective way
for business users to make fast and easy inquiries of large databases without
the intervention of specialist information technology professionals.
The financial statements have been prepared in accordance with Canadian
generally accepted accounting principles and on the basis of the going concern
assumption, meaning that it is reasonably assumed that the Corporation will be
able to realize its assets and discharge its liabilities in the normal course of
operations.
In light of operating losses suffered in the current and past years, the
Corporation's ability to realize its assets and discharge its liabilities
depends on the continued financial support of its shareholders and creditors and
its ability to obtain additional financing. The Corporation's management will
continue to search for additional sources of debt and equity financing.
There can be no assurance that the Corporation's activities will be successful
and as a result there is doubt regarding the "going concern" assumption. These
consolidated financial statements do not reflect adjustments that would be
necessary if the "going concern" assumption was not appropriate. The adjustments
to the carrying values of the assets and liabilities, the reported expenses and
the balance sheet classifications, which could be material, may be necessary for
these consolidated financial statements.
2 - ACCOUNTING POLICIES
ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with Canadian generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts recorded in the financial statements and
notes to financial statements. These estimates are based on management's best
knowledge of current events and actions that the Corporation may undertake in
the future. Actual results may differ from these estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of SAND Technology
Inc. and its wholly-owned subsidiaries which are located in Germany, United
Kingdom, Ireland and United States. All intercompany transactions and balances
have been eliminated.
74
<Page>
SAND TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2007 and 2006
(In Canadian dollars)
2 - ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Corporation generates revenues principally through two sources: software
licences and services. Software licence revenues are normally generated from
licensing the perpetual use of the Corporation's software products. Service
revenues are generated from sales of maintenance, implementation, consulting and
training services performed for customers that licence the Corporation's
products.
Revenue from the sale of software licence agreements is recognized upon delivery
of software if persuasive evidence of an arrangement exists, collection is
probable, the fee is fixed or determinable and vendor-specific objective
evidence of an arrangement exists to allocate the total fee to the different
elements of an arrangement. Vendor-specific objective evidence (VSOE) is
typically based on the price charged when an element is sold separately or, in
the case of an element not yet sold separately, the price established by
management if it is probable that the price, once established, will not change
before market introduction. If VSOE of all undelivered elements exists but
evidence does not exist for one or more delivered elements, then revenue is
recognized using the residual method. Under the residual method, the fair value
of the undelivered elements is deferred, and the remaining portion of the
agreement fee related to the delivered elements is recognized as revenue
provided that all other revenue recognition criteria are met. If evidence of
fair value of one or more undelivered elements cannot be established, revenue is
deferred and recognized ratably over the last undelivered element.
In circumstances where the implementation services are essential to the
functionality of the software or where the software requires significant
customization, the Corporation recognizes software licence revenue using the
percentage-of-completion method over the implementation period. The
percentage-of-completion is measured by the percentage of implementation hours
incurred to date to total estimated implementation hours. Past experience has
shown expended hours to be the best measure of progress.
Revenues from maintenance services for licences previously sold and implemented
are recognized ratably over the term of the contract.
Revenues from consulting and training services not considered as part of the
implementation of software licences are recognized as the services are provided.
Amounts received in advance of the delivery of products or performance of
services are classified as deferred revenue.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include unrestricted cash and highly liquid
investments purchased with an original maturity of three months or less.
75
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SAND TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2007 and 2006
(In Canadian dollars)
2 - ACCOUNTING POLICIES (CONTINUED)
CAPITAL ASSETS
Capital assets are recorded at cost and are amortized over their estimated
useful lives using the straight-line method over the following periods:
PERIODS
----------------
Furniture and equipment 5 years
Computer equipment 3 years
Leasehold improvements Over the lease
term of 10 years
OTHER ASSETS
CONTRACT COSTS
Contract costs are comprised of an amount paid upon the transfer of a long-term
service contract and is amortized ratably over the term of the contract ending
in 2008.
IMPAIRMENT OF LONG-LIVED ASSETS
Capital assets and intangible assets subject to amortization are tested for
recoverability when events or changes in circumstances indicate that their
carrying amount may not be recoverable. The carrying amount of a long-lived
asset is not recoverable when it exceeds the sum of the undiscounted cash flows
expected from its use and eventual disposal. In such a case, an impairment loss
equivalent to the excess of the carrying amount of a long-lived asset over its
fair value must be recognized.
SHARE ISSUANCE COSTS
Costs directly identifiable with the raising of share capital financing are
charged against share capital. Share issuance costs incurred in advance of share
subscriptions are recorded as non-current deferred assets. Share issuance costs
related to uncompleted share subscriptions are charged to operations.
RESEARCH AND DEVELOPMENT COSTS
Research costs are charged to operations in the period in which they are
incurred. Development costs are expensed as incurred unless a project meets the
criteria under Canadian generally accepted accounting principles for deferral
and amortization. The Corporation has not deferred any such development costs to
date. Related tax credits are recorded as a reduction of research and
development expenses.
INCOME TAXES
The Corporation uses the liability method of accounting for income taxes. Under
this method, future income tax assets and liabilities are determined according
to differences between the carrying amounts and tax bases of assets and
liabilities. They are measured by applying enacted or substantively enacted tax
rates and laws at the date of the financial statements for the years in which
the temporary differences are expected to reverse. The Corporation records a
valuation allowance for future income tax assets if, based on available
information, it is more likely than not that some or all of the future income
tax assets will not be realized.
76
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SAND TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2007 and 2006
(In Canadian dollars)
2 - ACCOUNTING POLICIES (CONTINUED)
DEFERRED CREDITS
Deferred credits include deferred lease inducements, which are amortized on a
straight-line basis over the term of the lease as a deduction of lease expense.
FOREIGN CURRENCY TRANSLATION
Revenue, expenses and acquisition of non-monetary assets denominated in foreign
currencies are translated into Canadian dollars at the exchange rate in effect
at the transaction date. Monetary assets and liabilities are translated at the
rate in effect at the balance sheet date.
The accounts of the subsidiaries included in the consolidated financial
statements are translated into Canadian dollars using the temporal method. Under
this method, monetary items are translated at the exchange rate in effect at the
balance sheet date. Non-monetary items are translated at the historical rate.
Revenue and expenses in foreign currency are translated at the average rate in
effect during the year, with the exception of revenue and expenses relating to
non-monetary assets and liabilities, which are translated at the historical
rate. Gains and losses are included in operations for the year.
LOSS PER SHARE
Per share computations are based on the weighted average number of shares
outstanding during the year. The dilutive effect of options and warrants is
determined using the treasury stock method.
STOCK-BASED COMPENSATION AND OTHER STOCK-BASED PAYMENTS
In 2004, the Corporation early-adopted the recommendations of the CANADIAN
INSTITUTE OF CHARTERED ACCOUNTANTS (CICA) HANDBOOK Section 3870, "Stock-Based
Compensation and Other Stock-Based Payments", on a prospective basis, effective
August 1, 2003, as permitted by the standard.
Prior to August 1, 2003, the Corporation recorded no compensation cost on stock
options granted to employees (see Note 7b).
GUARANTEES
In the normal course of its operations, the Corporation has entered into
agreements that contain certain features which meet the definition of a
guarantee under the guidance provided by Accounting Guideline No. 14.
Certain agreements with customers include intellectual-property indemnification
obligations that are customary in the industry. These obligations would
generally require the Corporation to compensate a third party for certain
damages and claims incurred as a result of third-party intellectual-property
claims arising from these agreements.
77
<Page>
SAND TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2007 and 2006
(In Canadian dollars)
2 - ACCOUNTING POLICIES (CONTINUED)
The nature of these obligations prevents the Corporation from making a
reasonable estimate of the maximum potential amount it could be required to pay.
Historically, the Corporation has not made any payments under such obligations.
In addition, the Corporation has provided warranties as part of the sale of its
subsidiary for claims against it related to conditions existing prior to the
sale.
ASSET RETIREMENT OBLIGATIONS
As of August 1, 2004, the Corporation adopted the CICA HANDBOOK Section 3110,
"Asset Retirement Obligations", which focuses on the recognition and measurement
of liabilities for obligations associated with the retirement of property, plant
and equipment when those obligations result from the acquisition, construction,
development or normal operation of the assets. The adoption of this
recommendation did not have an impact on the Corporation's consolidated
financial statements.
ADOPTION OF NEW ACCOUNTING POLICIES
2007
STOCK-BASED COMPENSATION FOR EMPLOYEES ELIGIBLE TO RETIRE BEFORE THE VESTING
DATE
In July 2006, the Emerging Issues Committee (EIC) of the CICA issued EIC-162,
"Stock-based Compensation for Employees Eligible to Retire before the Vesting
Date". EIC-162 clarifies the accounting for compensation costs relating to
stock-based awards granted to employees. EIC-162 requires that i) compensation
costs attributable to stock-based awards granted to employees who are eligible
to retire on the grant date be recognized on the grant date, and ii)
compensation cost attributable to stock-based awards granted to employees who
will become eligible to retire during the vesting period be recognized over the
period from the grant date to the date of retirement eligibility. This abstract
is to be applied retroactively, with restatement of prior periods, and is
effective for interim periods beginning on or after December 1, 2006. The
adoption of EIC-162 did not have a material impact on the Corporation's
financial statements.
2006
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
The Accounting Guideline No. 15 (AcG-15), "Consolidation of Variable Interest
Entities", presents the views of the Accounting Standards Board on the
application of consolidation principles to certain entities that are subject to
control and on a basis other than ownership of voting interests. This guideline
is to be applied for years beginning on or after November 1, 2004. The adoption
of AcG-15 did not have an impact on the Corporation's results from operations or
financial position.
78
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SAND TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2007 and 2006
(In Canadian dollars)
2 - ACCOUNTING POLICIES (CONTINUED)
FINANCIAL INSTRUMENTS - DISCLOSURE AND PRESENTATION
The CICA issued revisions to Section 3860 of the CICA HANDBOOK, "Financial
Instruments - Disclosure and Presentation". The revisions change the accounting
for certain financial instruments that have liability and equity
characteristics. These revisions came into effect for years beginning on or
after January 1, 2005. The Corporation did not have any instruments with these
characteristics per such years.
NON-MONETARY TRANSACTIONS
The CICA issued revisions to Section 3831 of the CICA HANDBOOK, "Non-monetary
Transactions". The revisions replace the current exception from measurement of a
non-monetary transaction at fair value for non-monetary exchanges which do not
represent the culmination of the earnings process, with an exception based on
whether the transaction has commercial substance. These revisions apply to all
non-monetary transactions initiated in periods beginning on or after January 1,
2006. The revisions did not have an impact on the Corporation's consolidated
financial statements.
FUTURE ACCOUNTING CHANGES
FINANCIAL INSTRUMENTS - RECOGNITION AND MEASUREMENT
The CICA issued CICA HANDBOOK Sections 3855, "Financial Instruments -
Recognition and Measurement" and 3861, "Financial Instruments - Disclosure and
Presentation". These Sections are effective for annual and interim periods
beginning on or after October 1, 2006. They establish the standards for
recognition, measurement disclosure and presentation of financial assets,
financial liabilities and non-financial derivatives. These Sections require that
i) all financial assets be measured at fair value, with some exceptions such as
loans and investments that are classified as held-to-maturity, ii) all financial
liabilities be measured at fair value when they are derivatives or classified as
held for trading purposes (other financial liabilities are measured at their
carrying value), and iii) all derivative financial instruments be measured at
fair value, even when they are part of a hedging relationship. The Corporation
is currently evaluating the impact of this Section on the consolidated financial
statements.
HEDGES
The CICA recently issued CICA HANDBOOK Section 3865, "Hedges". The Section is
effective for annual and interim periods beginning on or after October 1, 2006.
It describes when and how hedge accounting may be applied. Hedging is an
activity used by a company to change an exposure to one or more risks by
creating an offset between changes in the fair value of a hedged item and a
hedging item, changes in the cash flows attributable to a hedged item and a
hedging item, or changes resulting from a risk exposure relating to a hedged
item and a hedging item. Hedge accounting changes the normal basis for recording
the gains, losses, revenues and expenses associated with a hedged item or a
hedging item in a company's statement of operations. It ensures that all
offsetting gains, losses, revenues and expenses are recorded in the same period.
The Corporation is currently evaluating the impact of this Section on the
consolidated financial statements.
79
<Page>
SAND TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2007 and 2006
(In Canadian dollars)
2 - ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
The CICA recently issued CICA HANDBOOK Section 1530, "Comprehensive Income". The
Section is effective for annual and interim periods beginning on or after
October 1, 2006. It describes how to report and disclose comprehensive income
and its components.
Comprehensive income is the change in a company's net assets that results from
transactions, events and circumstances from sources other than the company's
shareholders. It includes items that would be excluded from net earnings, such
as changes in the currency translation adjustment relating to self-sustaining
foreign operations, the unrealized gains or losses on available-for-sale
investments and the additional minimum liability for pension obligations.
The CICA also made changes to CICA HANDBOOK Section 3250, "Surplus", and
reissued it as Section 3251, "Equity". The Section is also effective for years
beginning on or after October 1, 2006. The changes in how to report and disclose
equity and changes in equity are consistent with the new requirements of Section
1530, "Comprehensive Income".
Adopting these sections on August 1, 2007 will require the Corporation to begin
reporting, to the extent that they are relevant, the following items in the
consolidated financial statements:
- - Comprehensive income and its components;
- - Accumulated other comprehensive income and its components.
ACCOUNTING CHANGES
The CICA issued revisions to Section 1506 of the CICA HANDBOOK, "Accounting
Changes". The revisions established criteria for changing accounting policies,
together with the accounting treatment and disclosure of changes in accounting
policies and estimates, and correction of errors. The revisions are effective
for annual and interim periods statements relating to years beginning on or
after January 1, 2007. The Corporation is currently evaluating the impact of
this Section on the consolidated financial statements.
The CICA has issued the following new CICA HANDBOOK sections which are effective
for interim periods beginning on or after October 1, 2007:
FINANCIAL INSTRUMENTS - DISCLOSURES
Section 3862, "Financial Instruments - Disclosures", describes the required
disclosure for the assessment of the significance of financial instruments for a
company's financial position and performance and of the nature and extent of
risk arising from financial instruments to which the company is exposed and how
the company manages those risks. The Corporation is currently evaluating the
impact of the adoption of this new Section on the consolidated financial
instruments.
80
<Page>
SAND TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2007 and 2006
(In Canadian dollars)
2 - ACCOUNTING POLICIES (CONTINUED)
FINANCIAL INSTRUMENTS - PRESENTATION
Section 3863, "Financial Instruments - Presentation", establishes standards for
presentation of the financial instruments and non-financial derivatives. It
carries forward the presentation related requirement of Section 3861, "Financial
Instruments - Disclosure and Presentation". The Corporation is currently
evaluating the impact of the adoption of this new Section on the consolidated
financial statements.
CAPITAL DISCLOSURES
Section 1535, "Capital Disclosures", establishes standards for disclosing
information about a company's capital and how it is managed. It describes the
disclosure of the company's objectives, policies and processes for managing
capital, the quantitative data about what the company regards as capital,
whether the company has complied with any capital requirements, and, if it has
not complied, the consequences of such non-compliance. The Corporation is
currently evaluating the impact of the adoption of this new Section on the
consolidated financial statements.
3 - CAPITAL ASSETS
2007
---------------------------------
ACCUMULATED
COST AMORTIZATION NET
--------- ------------- -------
$ $ $
Furniture and equipment 320,113 320,002 111
Computer equipment 628,301 546,539 81,762
Leasehold improvements 287,610 187,814 99,796
--------- ------------- -------
1,236,024 1,054,355 181,669
========= ============= =======
2006
---------------------------------
ACCUMULATED
COST AMORTIZATION NET
--------- ------------- -------
$ $ $
Furniture and equipment 320,113 320,002 111
Computer equipment 587,571 485,540 102,031
Leasehold improvements 287,610 158,385 129,225
--------- ------------- -------
1,195,294 963,927 231,367
========= ============= =======
Amortization expense of capital assets amounted to $90,428 in 2007 ($137,608 in
2006).
81
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SAND TECHNOLOGY INC.
Notes to Consolidated Financial Statements
July 31, 2007 and 2006
(In Canadian dollars)
4 - OTHER ASSETS
2007
--------------------------------
ACCUMULATED
COST AMORTIZATION NET
------- ------------ -------
$ $ $
Contract costs 471,100 360,253 110,847
======= ============ =======
2006
--------------------------------
COST ACCUMULATED
AMORTIZATION NET
------- ------------ -------
$ $ $
Contract costs 471,100 249,407 221,693
======= ============ =======
Amortization expense of contract costs amounted to $110,846 in 2007 ($110,847 in
2006).
5 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
2007 2006
--------- -------
$ $
Trade accounts 815,737 471,492
Accrued payroll payable and related expenses 98,769 104,531
Other 161,610 134,859
--------- -------
1,076,116 710,882
========= =======
6 - DUE TO A SHAREHOLDER
During the year 2007, the Corporation formalized the conditions pertaining to a
loan obtained from a significant shareholder who is also the President and Chief
Executive Officer. Following such, the loan is repayable within 90 days of the
receipt of a written demand from the shareholder. The loan originated from
amounts owed by the Company to the shareholder by virtue of his employment
contracts ($429,461 owed from services rendered prior to 2002 and $320,683 for
services rendered in 2006). The loan bears interest at 15%. In conjunction with
the ratification of the loan agreement, the Corporation also issued 103,061
warrants, each warrant entitling to purchase one class "A" common share of the
Corporation at a price of US$0.44 per share and is valid for the term of the
agreement. The residual valuation method was used to allocate the proceeds
between the liability component and the equity component. The value of the
liability component was determined to be the face value of the debt because
there is no maturity date and by difference, the value of the equity instrument
was determined to be nil.
82
<Page>
SAND TECHNOLOGY INC.
Notes to Consolidated Financial Statements
July 31, 2007 and 2006
(In Canadian dollars)
7 - COMMON STOCK
A) AUTHORIZED
2007 TRANSACTIONS
During the year, the Corporation concluded a private placement and issued
1,500,000 common shares at a price of US$0.40 per share for a total cash
proceeds of $675,795. In addition, the Corporation issued 750,000 warrants
entitling two shareholders to purchase up to 750,000 shares of the Corporation
at a price of US$0.60 for three years.
The fair value of the warrants at the time they were granted was estimated using
the Black-Scholes option pricing model with the following assumptions:
Dividend yield --
Expected volatility 90%
Risk-free interest rate 4.4%
Expected life 3 years
The fair value of the warrants at the time they were granted was estimated at
$170,110. This amount was recorded as contributed surplus.
B) STOCK OPTION PLANS
The Corporation has two stock option plans. Under the 1996 Stock Incentive Plan,
the Corporation may grant options to its regular full-time employees and those
of its subsidiaries up to a maximum of 1,100,000 common shares. Under the 1996
Stock Option Plan, the Corporation may grant options to its regular full-time
employees and non-employee directors and those of its subsidiaries up to a
maximum of 900,000 common shares. Under both plans, the exercise price of each
option is not less than the market price of the Corporation's shares on the OTC
BB on the day prior to the date of grant. Options vest equally over a five-year
period and the options' maximum term is 20 years.
83
<Page>
SAND TECHNOLOGY INC.
Notes to Consolidated Financial Statements
July 31, 2007 and 2006
(In Canadian dollars)
7 - COMMON STOCK (CONTINUED)
The following table summarizes information about the Corporation's stock options
as at July 31, 2007, 2006 and 2005:
<Table>
<Caption>
2007 2006 2005
---------------------------- ---------------------------- ----------------------------
NUMBER OF WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- ---------------- --------- ---------------- --------- ----------------
(000s) $US (000s) $US (000s) $US
Outstanding, beginning of year 1,041 1.59 1,121 2.10 1,478 2.15
Granted 288 1.00 133 1.00 163 1.00
--------- -------- --------
1,329 1,254 1,641
Forfeited 160 1.00 213 3.95 520 1.89
--------- -------- --------
Outstanding, end of year 1,169 1.52 1,041 1.59 1,121 2.10
========= ======== ========
Options exercisable, end of year 728 1.79 609 1.84 622 2.61
========= ======== ========
</Table>
84
<Page>
SAND TECHNOLOGY INC.
Notes to Consolidated Financial Statements
July 31, 2007 and 2006
(In Canadian dollars)
7 - COMMON STOCK (CONTINUED)
The following table summarizes significant ranges of exercise prices of
outstanding options held by directors, officers and employees as of July 31,
2007:
<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- --------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF EXERCISE NUMBER OF REMAINING LIFE AVERAGE NUMBER OF AVERAGE
PRICES OPTIONS (YEARS) EXERCISE PRICE OPTIONS EXERCISE PRICE
- ------------------ --------- -------------- -------------- --------- --------------
(000s) US$ (000s) US$
Less than US$1.00 160 8.98 0.69 160 0.69
US$1.00 to US$1.49 844 16.96 1.02 410 1.04
US$3.00 to US$3.99 20 8.98 3.37 20 3.37
US$4.00 to US$4.99 30 10.49 4.63 30 4.63
US$5.00 to US$5.99 105 14.50 5.07 98 5.08
US$6.00 to US$6.99 10 12.06 6.28 10 6.28
----- ---
1,169 15.30 1.52 728 1.79
===== ===
</Table>
The following table presents the weighted average assumptions used to determine
the stock-based compensation expense included in selling, general and
administrative expenses for the years ended July 31, 2007, 2006 and 2005, using
the Black-Scholes option pricing model:
2007 2006 2005
-------- -------- --------
Compensation cost $ 32,000 $ 29,000 $ 25,000
Fair value $ 74,300 $ 31,350 $ 92,170
Dividend yield -- -- --
Expected volatility 90% 90% 90%
Risk-free interest rate 4.0% 3.5% 3.3%
Expected life 7 years 7 years 7 years
Number of options granted 287,500 133,000 162,500
For stock options granted to employees during 2003, had the Corporation
determined compensation cost based on the fair value of the stock options at
grant dates consistently with the method recommended under CICA HANDBOOK Section
3870, the Corporation's earnings would have been reported at the pro-forma
amounts indicated below:
2007 2006 2005
---------- ---------- ----------
$ $ $
Net loss, as reported (2,526,524) (3,926,921) (7,363,054)
Fair value of stock-based compensation (55,380) (56,796) (103,603)
---------- ---------- ----------
Pro-forma net loss (2,581,904) (3,983,717) (7,466,657)
========== ========== ==========
Pro-forma basic and diluted loss per share (0.20) (0.31) (0.58)
========== ========== ==========
85
<Page>
SAND TECHNOLOGY INC.
Notes to Consolidated Financial Statements
July 31, 2007 and 2006
(In Canadian dollars)
7 - COMMON STOCK (CONTINUED)
The fair value of stock options granted during 2003 was estimated using the
Black-Scholes option pricing model using the following weighted average
assumptions:
Dividend yield --
Expected volatility 87%
Risk-free interest rate 4.8%
Expected life 7 years
C) WARRANTS
The following table summarizes information about the Corporation's stock
warrants described in Notes 6 and 7 as at July 31, 2007:
<Table>
<Caption>
WEIGHTED
AVERAGE WEIGHTED
NUMBER OF REMAINING LIFE AVERAGE
WARRANTS (YEARS) EXERCICE PRICE
--------- -------------- --------------
US$
Granted, outstanding and exercisable, end of year 853,061 2.8 0.58
</Table>
D) LOSS PER SHARE
Options and warrants described in Notes 6 and 7 were not included in the diluted
loss per share calculation because the Corporation incurred a loss, and
inclusion would have created an anti-dilutive effect.
8 - RESEARCH AND DEVELOPMENT
The net amounts of research and development expenses presented in the
consolidated statements of operations have been determined as follows:
2007 2006 2005
$ $ $
--------- --------- ---------
Research and development expenses 2,315,146 2,541,950 3,472,102
Government assistance
Investment tax credits (a) (100,000) (100,000) (200,000)
--------- --------- ---------
2,215,146 2,441,950 3,272,102
========= ========= =========
(a) The investment tax credits recorded by the Corporation are subject to
review and approval by tax authorities and it is possible that the amounts
granted will be different from the amounts accounted for.
Investment tax credits in accounts receivable as at July 31, 2007 amounted to
$100,000 ($100,000 in 2006).
86
<Page>
SAND TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2007 and 2006
(In Canadian dollars)
- --------------------------------------------------------------------------------
9 - INCOME TAXES
The reconciliation of income taxes at Canadian statutory rates with the reported
income taxes is as follows:
<Table>
<Caption>
2007 2006 2005
-------- ---------- ----------
$ $ $
Income tax recovery at Canadian statutory rates (785,000) (1,257,000) (2,368,000)
Non-recording of benefit from losses carried forward (785,000) (1,257,000) (2,368,000)
-------- ---------- ----------
-- -- --
======== ========== ==========
</Table>
The significant components of the Corporation's future income tax assets and
liabilities are as follows:
<Table>
<Caption>
2007 2006
----------- -----------
$ $
Future tax assets
Losses carried forward 14,000,000 15,000,000
Capital assets 173,000 150,000
Research and development 4,000,000 3,400,000
----------- -----------
18,173,000 18,550,000
Future tax liabilities
Investment tax credits 64,000 64,000
----------- -----------
18,109,000 18,486,000
Less: valuation allowance (18,109,000) (18,486,000)
----------- -----------
Net future income taxes -- --
=========== ===========
</Table>
The Corporation has non-capital losses carried forward to reduce future taxable
income for Canadian federal and provincial tax purposes as well as for American,
British and German tax purposes of approximately $16,000,000 and $14,000,000,
US$21,000,000, (pound)500,000 and (euro)3,500,000, respectively, expiring at
various dates to 2021. In addition, the Corporation has unclaimed research and
development expenditures carried forward of approximately $14,000,000, which can
be used to reduce taxable income at any time in the future, and investment tax
credits of approximately $2,800,000, which can be applied against future federal
income taxes payable, expiring at various dates to 2017. The benefits of these
items have not been recognized in the financial statements.
10 - COMMITMENTS
The Corporation is committed under operating leases through 2011 for the rental
of buildings for a total amount of $1,090,005. The minimum payments due in each
of the forthcoming years are as follows:
$
---------
2008 407,498
2009 275,317
2010 244,314
2011 162,876
---------
1,090,005
=========
87
<Page>
SAND TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2007 and 2006
(In Canadian dollars)
- --------------------------------------------------------------------------------
11 - SEGMENTED INFORMATION
The Corporation has two reportable geographic segments. Both the North American
and European segments market the SAND Analytical Server and the SAND Searchable
Archive. The accounting policies of the segments are the same as described in
the summary of accounting policies. The Corporation evaluates segment
performance based on income before taxes. Sales for each segment are based on
the location of the third party customer. All intercompany transactions between
segments have been eliminated.
NORTH AMERICA EUROPE TOTAL
------------- ---------- ----------
$ $ $
2007
Revenue 1,941,034 4,787,506 6,728,540
Loss before income taxes (3,789,146) 1,262,622 (2,526,524)
Identifiable assets 795,121 1,562,027 2,357,148
Capital assets 128,395 53,274 181,669
Other assets -- 110,847 110,847
2006
Revenue 1,634,977 3,842,508 5,477,485
Loss before income taxes (3,924,363) (2,558) (3,926,921)
Identifiable assets 1,630,134 1,814,987 3,445,121
Capital assets 157,101 74,266 231,367
Other assets -- 221,694 221,694
2005
Revenue 2,899,252 3,196,781 6,096,033
Loss before income taxes (5,965,661) (1,397,393) (7,363,054)
Identifiable assets 6,538,484 1,396,046 7,934,530
Capital assets 251,128 45,607 296,735
Other assets -- 332,541 332,541
12 - SIGNIFICANT CUSTOMERS
For the year ended July 31, 2007, the Corporation generated approximately 12%
and 14% of its revenue from two customers from Europe (10% from one customer in
2006 and 20% from two customers in 2005).
13 - FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the short-term financial assets and liabilities approximates
their carrying amount given that they will mature shortly.
88
<Page>
SAND TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2007 and 2006
(In Canadian dollars)
- --------------------------------------------------------------------------------
13 - FINANCIAL INSTRUMENTS (CONTINUED)
CONCENTRATION OF CREDIT RISK
The financial instruments that potentially expose the Company to credit risk are
primarily trade accounts receivable. As at July 31, 2007, one customer
represented 52% (two customers represented 55% in 2006) of accounts receivable.
CURRENCY RISK
The Corporation operates internationally and is exposed to market risk
principally due to changes in foreign currency rates. The Corporation does not
hold any financial instruments that mitigate this risk.
As at July 31, 2007 and 2006, the Corporation's current assets and liabilities
denominated in foreign currencies are as follows:
2007 2006
------------------------ ------------------------
CURRENT CURRENT CURRENT CURRENT
ASSETS LIABILITIES ASSETS LIABILITIES
--------- ----------- --------- -----------
$ $ $ $
U.S. dollars 386,956 239,049 115,133 226,494
Pounds sterling 1,038,036 1,007,192 1,379,555 912,955
Euros 421,477 454,423 489,476 307,795
CORRESPONDING FIGURES
Certain figures for 2006 were reclassified to conform to the presentation
adopted in 2007.
14 - RECONCILIATION OF RESULTS REPORTED IN ACCORDANCE WITH CANADIAN GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (GAAP) TO U.S. GAAP AND OTHER SUPPLEMENTARY
U.S. GAAP DISCLOSURES
Differences between Canadian and U.S. GAAP are not material in the Corporation's
consolidated financial statements with the exception of the following:
STOCK-BASED COMPENSATION
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123 (R), "Share-Based
Payment", which is a revision of SFAS No. 123 and supersedes APB Opinion No. 25.
SFAS No. 123 (R) requires all share-based payments to employees, including
grants of employee stock options, to be valued at fair value on the date of
grant and to be expensed over the applicable vesting period. Effective August 1,
2005, the Corporation adopted SFAS No. 123 (R) using the modified prospective
transition method. Under this transition method, stock-based compensation is
recognized for all stock-based awards granted on or after August 1, 2005. In
addition, companies must also recognize compensation expense related to any
awards that are not fully vested as of August 1, 2005. Compensation expense for
the unvested awards are measured based on the fair value of the awards
previously calculated in accordance with the provisions of SFAS No. 123.
The impact of adopting SFAS No. 123 (R) was to increase the stock-based
compensation expense by $86,572 and $198,191 and increase net loss by the same
amount in 2007 and 2006, respectively.
89
<Page>
SAND TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2007 and 2006
(In Canadian dollars)
- --------------------------------------------------------------------------------
14 - RECONCILIATION OF RESULTS REPORTED IN ACCORDANCE WITH CANADIAN GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (GAAP) TO U.S. GAAP AND OTHER SUPPLEMENTARY
U.S. GAAP DISCLOSURES (CONTINUED)
SHARE PURCHASE WARRANTS
For Canadian GAAP purposes, share purchase warrants are classified and accounted
for as equity on the Company's financial statements. The technical
interpretation of U.S. GAAP, in accordance with SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", currently requires share
purchase warrants with an exercise price denominated in a currency other than
its functional currency be classified and accounted for as a financial
liability. The impact for fiscal year 2007 was to increase net loss by $311,433
and increase liabilities by the same amount, and decrease contributed surplus by
$170,110.
The following table provides a reconciliation of the net loss and the
contributed surplus and deficit under Canadian GAAP to U.S. GAAP:
<Table>
<Caption>
2007 2006
----------- -----------
$ $
Net loss in accordance with Canadian GAAP (2,526,524) (3,926,921)
Additional compensation expense under SFAS No. 123 (R) (86,572) (198,191)
Mark-to-market loss on share purchase warrants (311,433)
----------- -----------
Net loss in accordance with U.S. GAAP (2,924,529) (4,125,112)
=========== ===========
Basic and diluted loss per share, U.S. GAAP (0.22) (0.32)
=========== ===========
Contributed surplus in accordance with Canadian GAAP 305,110 103,000
Additional compensation expense under SFAS No. 123 (R) 86,572 198,191
Share purchase warrants under Canadian GAAP (170,110)
----------- -----------
Contributed surplus in accordance with U.S. GAAP 221,572 301,191
=========== ===========
Deficit in accordance with Canadian GAAP (39,717,502) (37,190,978)
Additional compensation expense under SFAS No. 123 (R) (86,572) (198,191)
Mark-to-market loss on share purchase warrants (311,433)
----------- -----------
Deficit in accordance with U.S. GAAP (40,115,507) (37,389,169)
=========== ===========
</Table>
90
<Page>
SAND TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2007 and 2006
(In Canadian dollars)
- --------------------------------------------------------------------------------
14 - RECONCILIATION OF RESULTS REPORTED IN ACCORDANCE WITH CANADIAN GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (GAAP) TO U.S. GAAP AND OTHER SUPPLEMENTARY
U.S. GAAP DISCLOSURES (CONTINUED)
The following items present other supplementary disclosures required under U.S.
GAAP.
Accounts receivable are net of allowance for doubtful accounts of $9,068 (nil in
2006).
The amortization expense of contract costs for the next year will be $110,847.
Under U.S. GAAP, research and development investment tax credits (see Note 8)
would be classified as a reduction of the income tax expense instead of a
reduction of the related research and development expenses.
Under Canadian GAAP, future income taxes are calculated based on enacted or
substantially enacted tax rates applicable to future years. Under U.S. GAAP,
only enacted rates are used in the calculation of future income taxes. This
difference in GAAP did not result in a difference in the financial position,
results of operations or cash flows of the Corporation for the years presented.
COMPREHENSIVE INCOME
The Corporation has adopted SFAS No. 130, "Reporting Comprehensive Income",
which establishes rules for the reporting and display of comprehensive income
and its components. Comprehensive income is net income (loss), plus certain
other items that are recorded directly to shareholders' equity such as foreign
currency translation adjustment.
STOCK-BASED COMPENSATION
The Corporation accounts for its stock-based compensation for options granted
prior to August 1, 2003 using the intrinsic value method prescribed by the
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". U.S. GAAP required companies that follow this method to make
pro-forma disclosures of net income and earnings per share, as if the fair value
based methodology prescribed by SFAS No. 123, "Accounting for Stock-Based
Compensation", had been applied for the periods presented. For options granted
as of August 1, 2003, the Corporation has adopted the fair value method, on a
prospective basis.
The following table presents net loss and net loss per share in accordance with
U.S. GAAP on a pro-forma basis, giving effect to the pro-forma compensation
expense relating to stock options granted to employees after July 1, 1994 and
prior to August 1, 2003, in accordance with SFAS No. 123.
2005
----------
$
Net loss in accordance with U.S. GAAP, as reported (7,363,054)
Pro-forma expense (460,948)
----------
Pro-forma net loss (7,824,002)
==========
Pro-forma basic and diluted loss per share (0.61)
==========
91
<Page>
SAND TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2007 and 2006
(In Canadian dollars)
- --------------------------------------------------------------------------------
14 - RECONCILIATION OF RESULTS REPORTED IN ACCORDANCE WITH CANADIAN GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (GAAP) TO U.S. GAAP AND OTHER SUPPLEMENTARY
U.S. GAAP DISCLOSURES (CONTINUED)
SFAS No. 123 requires that the pro-forma compensation expense be recognized over
the service period based on the fair value of options granted to employees. The
pro-forma compensation expense presented above has been estimated using the
Black-Scholes option pricing model. In order to perform the calculation, the
following weighted average assumptions were used for fiscal year 2003:
Dividend yield --
Volatility factor of the expected market price of the Corporation's
common stock 87%
Risk-free interest rate 4.8%
Expected life 7 years
ADOPTION OF NEW ACCOUNTING POLICIES
2006
ACCOUNTING FOR CONDITIONAL ASSET RETIREMENT OBLIGATIONS - AN INTERPRETATION OF
FASB STATEMENT NO. 143
In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations - An Interpretation of FASB Statement
No. 143" (FIN 47), which required a company to recognize a liability for the
fair value of a conditional asset retirement obligation when incurred if the
liability's fair value can be reasonably estimated. FIN 47 is effective for
fiscal years ending after December 15, 2005 and is required to be adopted by the
Corporation in the first quarter of fiscal 2006. The adoption of FIN 47 did not
have an impact on the Corporation's consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary
Assets - An Amendment of APB Opinion No. 29". This standard eliminates the
exception from fair value measurement for non-monetary exchanges of similar
productive assets. The standard is applicable for fiscal periods beginning after
June 15, 2005. The adoption of SFAS No. 153 did not have an impact on the
Corporation's consolidated financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections", which replaces Accounting Principles Board Opinion No. 20,
"Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim
Financial Statements - An Amendment of APB Opinion No. 28". SFAS No. 154
provides guidance on the accounting for and reporting of accounting changes and
error corrections. It establishes retrospective application, or the latest
practicable date, as the required method for reporting a change in accounting
principle and the reporting of a correction of an error. SFAS No. 154 is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005 and is required to be adopted by the
Corporation in the first quarter of fiscal 2007. The adoption of SFAS No. 154
did not have an impact on the Corporation's consolidated financial statements.
92
<Page>
SAND TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2007 and 2006
(In Canadian dollars)
- --------------------------------------------------------------------------------
14 - RECONCILIATION OF RESULTS REPORTED IN ACCORDANCE WITH CANADIAN GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (GAAP) TO U.S. GAAP AND OTHER SUPPLEMENTARY
U.S. GAAP DISCLOSURES (CONTINUED)
In September 2006, the SEC released Staff Accounting Bulletin (SAB) 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements". SAB 108 expresses the SEC
staff's views on the process of quantifying potential financial statement
misstatements. In general, companies have used two common approaches to quantify
errors. The SEC staff believes that registrants should quantify errors using
both a balance sheet and an income statement approach (a "dual approach"). Thus
companies must adjust the financial statements when either approach results in
quantifying a misstatement that is deemed material after considering all
relevant quantitative and qualitative factors. SAB 108 is effective for fiscal
years ending after November 15, 2006. The adoption of the SAB 108 did not have
any impact on the Corporation's consolidated financial statements.
RECENT PRONOUNCEMENTS
In June 2006, the FASB issued FIN 48, "Accounting for Uncertainty in Income
Taxes - An Interpretation of FASB Statement No. 109". FIN 48 clarifies SFAS No.
109, "Accounting for Income Taxes", to indicate a criterion that an individual
tax position would have to meet for some or all of the benefit of that position
to be recognized in a company's financial statement. FIN 48 is effective for
fiscal year beginning after December 15, 2006. The Corporation is currently
evaluating the effect that the adoption of FIN 48 will have on its consolidated
results of operations and financial condition.
In September 2006, in an effort to increase consistency and comparability in
fair value measurements, the FASB recently issued SFAS No.157, "Fair Value
Measurement", which defines fair value, establishes guidelines for measuring
fair value and expands disclosures regarding fair value measurements. SFAS No.
157 does not require any new instruments to be recognized at fair value. SFAS
No. 157 is effective for financial statements issued for fiscal year beginning
after November 15, 2007. The Corporation is currently evaluating the effect that
the adoption of SFAS No. 157 will have on its consolidated results.
In 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial
Assets and Financial Liabilities", to address earning volatility caused by
existing accounting standards that require related financial assets and
liabilities to be measured using different measurement attributes (such as
historical cost and fair value). Previously, companies could mitigate this
accounting mismatch by applying complex hedge accounting. This statement is
intended to improve financial reporting by giving all companies the option to
recognize most financial assets and liabilities and certain items at fair value.
SFAS No. 159 is effective as of the beginning of the first fiscal year that
begins after November 15, 2007. The Corporation is currently evaluating if it's
elected or not.
93
<Page>
ITEM 19 EXHIBITS
EXHIBITS
1.1(1) Articles of Incorporation, as amended on December 20, 1996 and
December 31, 1996
1.2(2) Amendment to Articles of Incorporation dated January 1, 2000.
1.3(5) By-Laws approved, confirmed and ratified by the shareholders on
December 17, 2002
4.1(6) Sand Technology Inc. 1996 Stock Incentive Plan as amended
4.2(6) Sand Technology Inc. 1996 Stock Option Plan as amended
4.3(4) Agreement dated July 31, 2000 between the Registrant and Nucleus
International Corporation
4.4(3) Purchase and Sale Agreement dated July 31, 2003 between Sand
Technology Inc. and ClarityBlue Holdings Limited
4.5(3) Shareholder Rights Plan Agreement between Sand Technology Inc.
and CIBC Mellon dated November 17, 2003
4.6 Share Award Plan dated November 2, 2006 and Share Award
Agreement thereunder
4.7 Subscription Agreement dated April 23, 2007 between Sand
Technology Inc. and Arthur Ritchie together with Warrant
Agreement dated May 25, 2007
5.1 Statement detailing computation of per share earnings
8.1 Subsidiaries
11.1(6) Standards of Ethical Conduct
12.1 Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
12.2 Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
13.1 Certification of Periodic Financial Report Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
13.2 Certification of Periodic Financial Report Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
15.1 Consents of Independent Registered Chartered Accountants
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15.2(6) Amended and Restated Audit Committee Charter
15.3(6) Governance, Nomination, Human Resources and Compensation
Committee Charter
15.4(3) Board of Directors Charter
- ----------
(1) Incorporated by reference from the Registrant's Form 20-F Annual Report for
the fiscal year ending July 31, 1996.
(2) Incorporated by reference from Amendment No. 1 to the Registrant's Form F-2
Registration Statement (333-12216) filed on August 18, 2000.
(3) Incorporated by reference from the Registrant's Form 20-F Annual Report for
the fiscal year ending July 31, 2003.
(4) Incorporated by reference from the Registrant's Form 20-F Annual Report for
the fiscal year ending July 31, 2000.
(5) Incorporated by reference from the Registrant's Form 20-F Annual Report for
the fiscal year ending July 31, 2002.
(6) Incorporated by reference from the Registrant's Form 20-F Annual Report for
the fiscal year ending July 31, 2005.
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SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing
on Form 20-F and that it has duly caused and authorized the undersigned to sign
this Annual Report on Form 20-F on its behalf.
SAND TECHNOLOGY INC.
/s/ Arthur G. Ritchie
--------------------------------------
January 29, 2008 Arthur G. Ritchie
Chairman of the Board,
President and Chief Executive Officer
96