Volkswagen 20-F 2009
Documents found in this filing:
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 2009
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[ ] 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
(Exact name of registrant as specified in its charter)
215 Redfern Avenue, Suite 410
Securities registered or to be registered pursuant to Section 12(b) of the Act
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.
Indicate the number of outstanding shares of each of the
issuers classes of capital or common stock
15,889,619 Class A Common Shares
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the
If this report is an annual or transition report, indicate by
check mark if the registrant is not required to
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-
Indicate by check mark which basis of accounting the registrant
has used to prepare the financial statements
Indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 [ ] Item 18 [X]
If this is an annual report, indicate by check mark whether the
registrant is a shell company (as defined in
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by
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SAND TECHNOLOGY INC.
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In this Annual Report on Form 20-F (the "Report"), unless we indicate otherwise or the context requires, we, our and us refers to Sand Technology Inc. ("SAND" or the "Company") and its consolidated subsidiaries.
Except where otherwise indicated, all dollar amounts stated in this Annual Report on Form 20-F are Canadian dollars.
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
ITEM 3. KEY INFORMATION
A. Selected Financial Data
The following table sets forth selected consolidated financial information with respect to SAND for the five (5) years ended July 31, 2009 and is extracted in part from the consolidated financial statements that have been audited by our auditors, Raymond Chabot Grant Thornton LLP for the fiscal years ended July 31, 2009 (included herein at Item 18), July 31, 2008, July 31, 2007 and July 31, 2006 and Deloitte & Touche LLP for the fiscal year ended July 31, 2005. 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 enterity by the consolidated financial statements included in Item 18.
This selected financial data has been prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP") which differs in many respects from generally accepted accounting principles in the United States ("US GAAP"). A discussion of differences between Canadian GAAP and US GAAP is contained in Note 17 to the audited consolidated financial statements included in Item 18. Any monetary figure included in this Report is presented consistent with Canadian GAAP except where otherwise indicated.
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The selected financial data set forth below is stated in thousands of Canadian dollars (except per share amounts).
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The same data, presented in conformity with U.S. GAAP is shown in the following table:
As of November 12, 2009, the Company had 15,889,619 Class A Common Shares issued and outstanding. Each common share entitles its holder to one vote.
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Disclosure of the Exchange Rate with Financial Reporting Currency
On November 12, 2009, the noon buying rate for US$1.00 was CAN$1.0519, the high rate was CAN$1.0577 the low rate was CAN$1.0479 and the closing rate was $1.0561.
Summary of Differences Between US and Canadian GAAP
A reconciliation of the differences between generally accepted accounting principles in the United States and Canada is presented in Note 17 of the audited consolidated financial statements stated in Item 18.
B. Capitalization and Indebtedness
C. Reasons for the Offer and Use of Proceeds
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D. Risk factors
I. Risk factors that could affect future results:
In addition to the other information in this Report, 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.
II. Risks specific to the Company:
The following risks are specific to SANDs operations as a whole.
a) Financial Risks
Risk: We have incurred the following net losses between 2004 and 2009,
Because we have not been profitable, we have had to fund our losses through raising additional capital by way of a private placement of convertible debentures and a loan from a major shareholder.
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Risk: We need to raise additional capital to fund our operating expenses. Our ability to obtain financing will depend, among other things, on the Companys development efforts, business plan, operating performance and the condition of the capital markets at the time we seek financing. Given the current global financial crisis, it will be very difficult to raise large additional funds through private placements or the market and 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 shareholders may experience dilution.
Risk: Our quarterly and operating results are difficult to predict and have fluctuated in the past, and may fluctuate in the future.
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Risk: Our future operating results depend to a large extent on our managements ability to plan and direct our growth successfully, including training our sales personnel to become productive and generate revenue, forecasting revenue, controlling expenses, addressing new markets and maintaining our research and development efforts.
c) Risks which may affect the value of our securities
Risk: Our Class A Common Shares are currently listed on the OTC Bulletin Board (the "OTCBB") under the symbol SNDTF.OB. Our share price, which has ranged from a low of
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US$0.26 to a high of US$0.81 during the past twelve months, could continue to be subject to wide fluctuations.
Risk: We are authorized to issue an unlimited number of Class A Common Shares, of which 15,889,619 shares are outstanding as of November 12, 2009, 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.
Risk: Our major shareholders beneficially own approximately 34.49% of our Class A Common Shares. Arthur G. Ritchie, Chairman of the Board and a director of SAND, beneficially owns approximately 22.65% of SANDs Class A Common Shares. Thomas ODonnell, President and Chief Executive Officer of SAND and a director of SAND, beneficially owns approximately
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5.24% of SANDs Class A Common Shares. Carol Shattner, the wife of the late Jerome Shattner (Jerome Shattner was the late Executive Vice President of the Company), beneficially owns 6.60% of our Class A Common Shares.
Risk: 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.
III. Risks common to the industry:
The following risks are common to companies of the same profile as SAND and in the similar industry as the one that SAND operates in:
a) Technology Risks
Risk: We are focusing our selling efforts increasingly on larger, enterprise-wide implementations of 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 Product Suite.
Impact: 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.
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Risk: 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.
Risk: 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.
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Risk: We currently rely mainly 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 nine 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 may be owned by us.
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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.
Risk: 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.
b) Business Risks
Risk: 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:
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Risk: Revenues earned outside North America are expected to remain significant in the future. We have sales offices in the United Kingdom and Germany. The following table summarizes the percentage of sales generated outside North America.
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.
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Risk: Our success depends to a significant degree upon the continued contributions of our research and development and sales and marketing teams, as well as our management, some of whom would be difficult to replace.
Recent events have demonstrated that businesses and industries throughout the world are intertwined to a degree that we do not always realize. Thus, events seemingly unrelated to us or to our industry may adversely affect us over the course of time. For example, rapid changes to the foreign currency exchange regime may adversely affect our financial results. Credit contraction in financial markets may hurt our ability to access credit in time of need. A reduction in credit, combined with reduced economic activity, may adversely affect businesses and industries that collectively constitute a significant portion of our customer base. As a result, these customers may need to reduce their purchases of our products or services, or we may experience greater difficulty in receiving payment for the products or services that these customers purchase from us. Any of these events, or any other events caused by turmoil in world financial markets, may have a material adverse effect on our business, operating results, and financial conditions.
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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 (the "CBCA") 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.
Until 1999, 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 Company ("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 and have since maintained our focus on the design, development, marketing and support of software products, collectively known as the SAND/DNA Product Suite, that enable users to retrieve usable business information from large amounts of data and on providing specialized systems integration services in connection with those products.
Initially, SAND offered products mainly 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 name ClarityBlue. ClarityBlue Limited (previously named Sand Technology (U.K.) Limited) ("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 intelligent information management and consultative "best practices" leveraging the latest developments in our SAND/DNA Access and SAND/DNA Analytics platforms.
Packaged around our solution offerings is the concept of Nearline 2.0, the logical evolution of older data warehouse and information lifecycle approaches that have struggled to maintain acceptable performance levels in the face of the ever-increasing data volumes. Whereas older archiving solutions based their viability on the declining prices of hardware and storage, and rigid "Nearline 1.0" solutions were mainly designed to work with transactional systems, Nearline 2.0 embraces the dynamism of a software and services approach to fully leverage the potential of large enterprise data architectures.
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B. Business Overview
We are a company with a 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 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, marketing and the distribution of our products, and generally support our expanding operations.
Products and Services
Our software product solutions 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.
These software product solutions have been marketed and are known as the SAND/DNA Product Suite and are based on our patented tokenized database engine. It 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. Our products permit more timely and accurate decisions across the extended enterprise, making "business intelligence" a key component of operational excellence.
SAND/DNA Access Advanced Data Management
In 2004, we introduced patent-protected SAND/DNA Access. This product builds on SANDs strength in advanced data management to:
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SAND/DNA Access 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 technology and has particular impact on the current information technology environment where volumes of corporate data are growing at an exponential rate.
SAND/DNA Access 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.
During the fiscal year ended on July 31, 2009, SAND/DNA Access has been extended with the introduction of the DNA/Enhance module to integrate data transformation process executed on compressed data. This new functionality enables enterprises to maintain an original version of the captured data and use it to create a business view: data transformed to answer specific business questions. This module is at the base of the SAND/DNA Corporate Information Memory used as the new approach for data warehouse implementation.
SAND/DNA Analytics Converting Data into Key Decisions
The SAND/DNA Analytics product, which incorporates SANDs 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 SAND/DNA Analytics product incorporates a number of advanced technologies. Its development has required substantial investment in research and development:
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SAND/DNA Platform - Empowering the Users
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 and how they need it to perform business operations more effectively at a lower cost.
During the fiscal year ended on July 31, 2009, SAND designed a new data warehouse architecture named the Scalable Corporate Information Factory (SCIF) based on Access and Analytics products. The SCIF enables large data warehouse implementations that deliver high flexibility with limited total cost of ownership.
We have two key geographic segments North America and Europe. The following table summarizes the percentage of our total revenue generated in the fiscal years 2009, 2008 and 2007 for each of our geographic segments.
Our customers in North America and Europe use SANDs solutions for:
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In particular, the SAND/DNA Analytics Product Suite is already used to provide fast measurable business benefits in the retail, finance, healthcare, transportation, telecommunication, manufacturing, government and insurance sectors. 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 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.
Among others, we have alliances or commercial relationships with the following companies,
SAND is an approved vendor on the United States General Services Administration (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.
Our long-term goal is to ensure that our products become a recognized platform for advanced analytical applications and managing large data volumes through strategic systems integration assignments and our direct sales force. 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.
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:
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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 we were seen as competitors with respect to SAND/DNA Analytics. We now have offerings that complement SAP, Oracle, IBM DB2, and Microsoft SQL warehouses. 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 (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, our market is evolving at a rapid pace.
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 nine United States patents and thirty-two foreign patents.
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, there 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 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 nine 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
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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 or national processing which is entailed, give the applicant more time and better basis for deciding whether and in what countries to further pursue the application.
The Company holds registered trademarks and trademarks. SAND Technology, N-Vector, Sandonline and Nucleus are registered trademarks, and SAND/DNA Access, SAN 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 Nucleux-based marks and designs are trademarks of the Company.
The Company's operations are not expected to be seasonal and its operations are carried out year round.
Impact of Governmental Policies
There is no current governmental economic, fiscal, monetary or political policy or factor that has materially affected or that could materially affect the Company's operations or investments by shareholders.
C. Organizational Structure
SAND has three wholly-owned subsidiaries: (i) Sand Technology (Ireland) Limited; (ii) STSI Licensing, LLC; and (iii) Sand Technology Corporation. Sand Technology (Ireland) Limited has itself two wholly-owned subsidiaries, Sand Technology Deutschland GmbH, an entity existing under the laws of Germany, and Sand Technology Limited, a company existing under the laws of England:
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The following chart illustrates the principal subsidiaries of SAND, together with the jurisdiction of incorporation of each company and the significant properties held by each company:
D. Property, Plant and Equipment
As at July 31, 2009, we leased a total of approximately 14,073 square feet of office space in three cities across North America, and 1,054 square feet in Germany. The weighted average annualized cost per square foot of the space occupied is $23.77 including real estate taxes and operating expenses. No lease extends beyond November 30, 2015.
ITEM 4A. UNRESOLVED STAFF COMMENTS
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. Operating Results
Compared to the fiscal year ended on July 31, 2008, in the fiscal year ended on July 31, 2009, there was a reduction in our net loss of 6%. Disappointingly, sales were only up by 1% with total operating expenses down by 1% having an impact of a reduction in loss from operations of 16%. However, we sold our solution into five new customers two are based in North America and three are based in Europe. We secured a multi-year, multi-million dollar deal with a distributor, we closed a very important deal with one of the worlds leading chemical companies and sold additional solutions and licenses into existing customers that required upgrades. We were expecting a higher increase in revenue; however due to the overall extremely cautious attitude of customers,
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information technology budget cuts and further delays caused by certain systems integrators in releasing the next version of their products as well as issues being encountered by these same products, these sales have been further delayed. Although North America showed an increase in revenue of 12%, there was an increase in net loss of 22%. This was mainly driven by the increase in professional fees, consulting services, travel to events and overall weakening of the Canadian dollar against the US dollar of 17%. There was an opposite effect in Europe; there was a slight decrease in revenue of 5% and an increase in net earnings of 56%. In Europe, overall there wasnt a significant movement of the Euro (an increase of 6%) and Pound Sterling (a decrease of 8%) against the Canadian dollar. So the increase in net earnings was driven by the reduction in costs and commissions due to lower overall sales.
The following table provides a summary of the revenue growth for fiscal years 2009, 2008, and 2007.
Compared to the fiscal year ended on July 31, 2008, the increase in our revenues for the fiscal year ended on July 31, 2009 was minimal. Our revenue growth has been much lower than expected due to a) customers cut in IT spending due to the slowdown in the economy, b) a cautious attitude of customers towards investing in long-term solutions, and c) delays by third-party software vendors in releasing the next version of their products as well as issues being encountered by these same products.
II. Revenue Segment and Variation
The Company has two geographical segments. Both North American and European segments market SAND/DNA Product Suite. The following table provides a summary of the revenue growth by geographical segments for fiscal years 2009, 2008 and 2007.
a) North America
Our sales in the fiscal year ended on July 31, 2009 in North America increased by 12% compared to the fiscal year ended on July 31, 2008 due to the sale of our software solutions to two new customers and selling additional licenses and solutions to two existing customers; whereas last year, we sold our software licenses to two new customers.
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Our sales in the fiscal year ended on July 31, 2009 in Europe decreased by 5% compared to the fiscal year ended on July 31, 2008. In 2008, SAND sold two large software licenses in the United Kingdom; whereas none were sold in 2009. The continued focus in the fiscal year ended on July 31, 2009 was to build up relationships with customers in order to grow revenues by selling additional licenses and solutions. In this regard, there was a significant amount of activity in Germany, which saw an increase in additional software licenses to existing customers as well as sales of new software licenses.
The following table provides a summary of the operating expenses for the fiscal years 2009, 2008 and 2007.
a) Cost of Sales and Product Support
Cost of sales and product support consists mainly of costs related to providing customer implementation and support services and the lesser costs related to the sale of third-party software, including certain license fees and royalties.
Compared to the fiscal year ended on July 31, 2008, the cost of sales remained fairly stable in the fiscal year ended on July 31, 2009. The 5% decrease was due to the overall reduction in travel and related expenses as well as the reduction in external consulting.
b) Amortization of Capital Assets and Other Assets
Amortization of capital assets and other assets consists of the depreciation of furniture and equipment, computer equipment and leasehold improvements and contract costs over their estimated useful lives.
The reduction in amortization in the fiscal year ended on July 31, 2009 from the amortization in the fiscal year ended on July 31, 2008, was due to the contract costs being fully amortized in the fiscal year ended on July 31, 2008.
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c) Selling, General and Administrative Expenses (SG&A)
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.
Our SG&A expenses remained stable in the fiscal year ended on July 31, 2009 compared to the fiscal year ended on July 31, 2008. There is a continued focus on controlling costs by keeping the headcount to an optimal level, and spending selectively on marketing events and activities, travel and entertainment.
IV. Net Losses Total and Variation
The following table provides a summary of the net losses for fiscal years 2009, 2008 and 2007.
In the fiscal year ended on July 31, 2009, our net loss was reduced by 6% compared to the fiscal year ended on July 31, 2008 due to the slight increase in revenue of 4%. Although the reduction is lower than expected, these results reflect the evolving nature of the business and distribution model of SAND. Any sustained shortfall in our revenues relative to our expectations will negatively impact our operating results.
V. Net Losses Segment and Variation
The following table provides a summary of net losses by geographical segments for fiscal years 2009, 2008 and 2007.
a) North America
Compared to the fiscal year ended on July 31, 2008, the increase in our net loss for the fiscal year ended on July 31, 2009 of 22% was mainly due to the increase in professional fees such as audit and legal, consulting services for various marketing and sales related activities, travel to events and the overall weakening of the Canadian dollar against the US dollar.
Compared to the fiscal year ended on July 31, 2008, the increase in net earnings of 56% was mainly due to the reduction in external consulting costs and commissions from lower overall sales.
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Inflation has no material impact on the Company's operations.
Impact of Foreign Currency
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 in Note 15 to the audited consolidated financial statements.
B. Liquidity and Capital Resources
The Company used $434,114 to finance operating activities during the fiscal year ended July 31, 2009, including $993,911 in operating losses and a decrease of $559,797 in non-cash operating working capital. This result compares with the cash used in the fiscal year ended July 31, 2008 of $1,065,329 to finance operating activities including $951,804 in operating losses and a decrease of $113,525 in non-cash operating working capital.
Accounts receivable was $1,384,199 as at July 31, 2009 compared to $1,573,867 as at July 31, 2008. Although the sales increased by 1% during the fiscal year ended July 31, 2009, the drop in accounts receivable of 12% was due to the prompt collection of some of the outstanding balances before year end. The reduction in unbilled receivable from $245,184 to $109,414 was due to the billing and receipt of the amount outstanding.
Accounts payable and accrued liabilities were $1,002,902 as at July 31, 2009 and $1,327, 575 as at July 31, 2008. The decrease was mainly due to reduction in accounts payable in the US and Germany as payments were made and contractors costs were reduced during the year. In addition, at July 31, 2008, there was a large accrual for sales taxes due in the United Kingdom which was reduced by 58% during the fiscal year ended on July 31, 2009.
As at July 31, 2009, there was a working capital deficiency of $362,753 compared to a positive working capital of $85,442 as at July 31, 2008. Working capital has been calculated by netting current assets and current liabilities, excluding deferred revenue and deferred credits which are non-cash items. The deterioration in working capital was driven by the increase in a loan payable to a major shareholder.
During the year ended July 31, 2009, the Chairman and former President and Chief Executive Officer of the Company advanced an additional $749,024 to the Company.
The current indebtedness of the Company is limited to its outstanding convertible debentures (the debt component of which is more fully described in Item F hereof) and to the loans made to the Chairman and former President and Chief Executive Officer of the Company. The Company incurs indebtedness on a needed basis only.
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Capital expenditures for the fiscal year ended July 31, 2009 were $24,781, compared to $17,315 for the fiscal year ended July 31, 2008. The expenditures were mostly related to computer equipment. The Company does not anticipate large increases in capital expenditures in the coming fiscal year.
Our cash as at July 31, 2009 was $1,065,572 compared to $775,443 in 2008. The increase is mainly due to additional funding by a major shareholder during the fiscal year. The additional funds compensated the cash usage from operating activities of $434,114. Going forward, the cash required to sustain the business operations will have to come from revenue growth and future financing. We believe our cost structure will remain stable as SAND has basically reached its optimal level with respect to headcount and its related expenses. Given the current global financial crisis it will be very difficult to raise large additional funds through private placements or the market. Another impact of the current global financial situation is that potentially customers will want longer payment terms.
In November 2009, the Corporation completed a non-brokered private placement where the Company issued 785,715 units for US$0.70 per unit, for total proceeds of US$550,000 to investors, one of whom is the President and Chief Executive Officer. Each unit consists of two Class A common shares and one share purchase warrant, exercisable at a price of US$0.50 per warrant.
The Company believes that its current cash and cash equivalents may not be sufficient to meet its anticipated cash needs for ongoing operating expenses and working capital expenditures. If cash generated from operations becomes insufficient to satisfy its liquidity requirements, the Company may seek to sell additional equity or debt securities. If additional funds are raised through the issuance of debt securities, holders of these securities could have certain rights, preferences and privileges senior to holders of its Common Shares and the terms of this debt could restrict the Companys operations. The sale of additional equity or convertible debt securities could result in additional dilution to the Companys existing shareholders. The Company cannot be certain that additional financing will be available in amounts or on terms acceptable to it, if at all. If the Company is unable to obtain additional financing, it may be required to reduce the scope of its operations, which could harm its business, financial condition and operating results.
C. Research and Development, Patents and Licenses
Research and Development
The objective of SANDs research and development activities is to focus on enhancing its current products to exceed customer expectations, and to develop new products to maintain its competitive advantage in the market.
The Companys research and development activities are central to fueling its existing and potential business. SAND engages in research and development activities relating to the introduction of new features, enhancements and new packaged products. SAND focuses on its two products -SAND/DNA Access and SAND/DNA Analytics.
The Corporation maintains its main research and development facility in Montreal, Canada. It also has a network of research and development technologists in the United States, the United Kingdom and Germany. As of November 21, 2009, there are 23 technologists. After research and development tax credits, SAND spent $1.96 million in 2009, $1.97 million in 2008 and $2.25 million in 2007 on research and development.
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The Company will continue to focus on research and development efforts that are key to responding to current changing technology. The Company expects to continue to maintain the headcount as at July 31, 2009, as it appears to be at an adequate level under current circumstances.
Research and development expenses consist mainly 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.
Compared to the fiscal year ended on July 31, 2008, the research and development expenses remained stable in the fiscal year ended on July 31, 2009.
Please see Item 5A Operating Results, III. Operating Expenses a description of the amounts spent by the Company during each of the last three financial years on Companys sponsored research and development activities.
D. Trend Information
The world has experienced severe volatility in the last year. The Company continues to maintain a prudent attitude as to the future. Based on the last three years, revenues have been increasing, operating costs have been decreasing and now remaining stable and thus net losses have been significantly decreasing. The Companys revenue is dependent on customers information technology budgets opening up, customers outlook on investing in better, more long-lasting solutions, and stability of the Company itself.
The Company will continue to focus its attention on growing successfully through direct sales, partnerships with key systems integrators and application vendors and alliances with proven indirect channels. The focus will be on delivering nearline software solutions and best practices. The focus will be on converting established relationships into sales.
The Company will continue to maintain the current headcount, as it appears to be at an adequate level under current circumstances. It will also focus on controlling expenses by being cost-conscious; it will spend based on a sound business case model, train sales personnel to become more productive and generate revenue in local and international markets, and implement enhanced systems to closely monitor results.
Cash and financing
The Company will continue to closely monitor its cash needs. The Company does not plan on spending any significant amounts on capital assets. Given the current global financial crisis, customers may delay payments to us and suppliers may put more pressure on us to pay earlier. As well, the financial environment does not appear to be conducive to raising additional capital.
In summary, 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
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sales force and distribution channels, the state of the market for our products and general economic conditions.
There are currently no known trends, uncertainties, demands, commitments or events for the fiscal year ended on July 31, 2009 that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that would cause reported financial information not necessarily to be indicative of future or operating results or financial condition.
E. Off-balance Sheet Arrangements.
There are currently no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on SAND's financial condition, changes in financial conditions, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
F. Tabular disclosure of contractual obligations.
The following table provides a summary of the contractual commitments for the next five years.
The following table sets forth the maturity schedule of our material contractual financial obligations at July 31, 2009:
Note (1): The amount above represents the redemption value of the convertible debentures at the end of the term. Please refer to the audited consolidated financial statements for the book value as at July 31, 2009.
G. Safe Harbor.
Certain statements contained in this Report 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 "Exchange Act"). 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 to be materially different from any future results, performance or achievements expressed or
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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 November 12, 2009. For a more detailed discussion of these risks and uncertainties and other business risks, see Item 3 - "Risk Factors" and Item 5 "Trend Information". Although the Company has attempted to identify important risks and factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors and risks that cause actions, events or results not to be as anticipated, estimated or intended. 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 undertake no obligation 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.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
The following table sets forth certain information concerning the directors of the Company, including their beneficial ownership of shares of the Company as of November 12, 2009. Unless otherwise indicated, each nominee holds sole voting and investment power over his shares.
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As of November 12, 2009, the directors and officers of the Company as a group beneficially owned 4,712,559 Common Shares representing approximately 29.66% of the outstanding Common Shares of the Company excluding Common Shares subject to exercise of share purchase warrants or to conversion of convertible debentures. The information as to Common Shares beneficially owned or over which control or direction is exercised, not being within the knowledge of the Company, has been furnished by the respective directors and officers individually.
Mr. Wayne Musselman, BCom (Hon), FCA, retired as a partner of Deloitte & Touche LLP in 2004 after a career of nearly forty years during which he served clients in the banking, securities, international trade and distribution industries. He directed the Japanese Service Group of Deloitte Canada and served on the Board of Deloittes Global Japanese Services Group. He is currently the Chairman of the Board of FaithLife Financial and a director and the Chairman of the Audit Committee of State Bank of India (Canada). Mr. Wayne Musselman is the Chairman of the Audit Committee of SAND.
Mr. Thomas M. O'Donnell has an extensive career in the software and financial markets. He is Chief Executive Officer, founder and majority owner of Edge Specialists LLC, which is an independent software vendor with extensive United States patent protection providing derivative trading tools including options, stocks and futures trading. He is a co-inventor of two extensive trading software patents, a C.P.A. and a graduate of Harvard Business School. In addition, Mr. O'Donnell was a Designated Primary Market Maker on the Chicago Board of Options Exchange and has extensive experience in the financial markets. Effective November 1, 2009, Thomas M. ODonnell was appointed President and Chief Executive Officer of SAND, as Arthur G. Ritchie retired.
Mr. Douglas Pryde was a member and a partner of the law firm of Lavery, de Billy, L.L.P. and its predecessor firms from 1965 to 2001.
Mr. Arthur G. 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. Effective November
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1, 2009, Arthur G. Ritchie retired as President and Chief Executive Officer of SAND but remains the Chairman of the Board of Directors of SAND.
Mr. Martin Shindler has since 1964 been the president of a firm of accountants and business consultants located in Florida.
Mr. George Wicker held executive level positions in general management, program management and finance with Lockheed Martin Corporation and its predecessor corporations during a thirty-three 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.
The following table shows certain information with respect to the executive and other officers of the Company:
Ms. Zainab Ahmed Schwartz was previously Director of Internal Controls at Quebecor World Inc. Previously, she specialized in auditing technology and telecommunications clients while with Deloitte & Touche LLP, including two of the largest public Canadian telecommunications companies as well as private software technology companies. She holds a Graduate Diploma in Accountancy from Concordia University in Montreal together with a Bachelor of Commerce from McGill University in Montreal. She is a member of the Institute of Chartered Accountants of Ontario.
Mr. Sébastien Vézina is currently a Partner of Lavery, de Billy, L.L.P., where he has been practising as a lawyer since 1999. He holds a Bachelor of Laws from Laval University in Québec City and is a member of the Québec Bar since 1999.
There are no family relationships between any director or executive officer and any other director or executive officer.
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Compensation of Directors
During the fiscal year ended July 31, 2009, 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.
Executive Compensation Analysis
General Principles of Executive Compensation
Although the Company has not adopted a formal compensation program, remuneration plays an important role to attract, motivate and retain key members of the management team required for its success and to drive strategic growth. Compensation is designed so as to constitute adequate reward for services and incentive for the executive management team to implement strategies aimed at increasing share value and creating economic value. The compensation is also established according to the duties and responsibilities that rest on the individuals and their own level of performance. The total compensation package is designed in a manner that takes into account the constraints under which the Company operates and that takes into account that it is a technology company without a history of earnings in the last 5 years.
The compensation of the Named Executive Officer is established by the Board, upon the recommendation of the Governance, Nomination, Human Resources and Compensation Committee (Compensation Committee) (please refer to section C Board Practices for more details on the role and responsibility of this committee). The compensation of the Named Executive Officer, to the exception of the President and Chief Executive Officer, is proposed by the President and Chief Executive Officer to the Compensation Committee, which recommends the adoption by the Board of Directors. The compensation of the President and Chief Executive Officer is established by the Compensation Committee which recommends the adoption by the Board of Directors.
Components of Overall Compensation
When assessing total direct annual compensation, the Company focuses on four key components which are intended to collectively make up most of an executive total compensation opportunity. There are two fixed components base salary and possibility to participate to the collective insurance plans. There are two variable components incentive bonus and the grant of common share stock options of the Company.
The Named Executive Officers receive a base salary which is based primarily on the level of responsibility of the position, the qualifications and experience of the officer and market conditions. The base salary may be paid to the Named Executive Officer in the form of a consulting fee or in shares.
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The amount of bonus is based on factors relating to both corporate and individual performance, including business development and probability.
Option-Based or Share-Base Award Plan
The option or share plan is the only long-term incentive plan (LTIP) of the Company. Stock options or share awards ensure that the Named Executive Officers are motivated to achieve long-term growth of the Company and increases in shareholder value, and provide capital accumulation linked directly to the Companys performance. Options or awards are made by the Board of Directors, after recommendation by the Compensation Committee. Options or awards are established, among other things, according to the role and responsibilities associated with the participants position and his or her influence over appreciation in shareholder value. The terms of the plans are described below under section E Share Ownership.
The Named Executive Officers have the right to receive the benefits from any collective insurance plans in force of the Company.
Compensation of Executive Management
The following table sets forth information concerning the compensation paid to the Company's President and Chief Executive Officer and named executive officers (the "Named Executive Officers") as required to be disclosed in accordance with applicable Canadian and United States securities regulations during the Company's three financial years ended July 31, 2009, July 31, 2008 and July 31, 2007:
"Named Executive Officers" or "NEOs" means the following individuals:
Such information includes the following: the salary earned, the bonus, any other compensation, including the specific benefits and other personal benefits, the options granted under the stock option plan of the Company and any other compensation which is not disclosed elsewhere.
As at July 31, 2009, the end of the most recently completed financial year of the Company, the Company had two Named Executive Officers, whose names and positions held within the Company are set out in the summary compensation table below.
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Summary Compensation Table
Outstanding Option-Based Awards
As at July 31, 2009, there are no stock-options outstanding for the Named Executive Officers.
Outstanding Share-Based Awards
As at July 31, 2009, there are 30,000 share awards that have been granted to the Vice President, Finance and Administration and Chief Financial Officer of the Company. The shares can be acquired at no cost after three years of employment at the Company, i.e. June 9, 2011.
Pension Plan Benefits
No pension or retirement benefit plans have been instituted and none are proposed at this time.
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Securities Authorized for Issuance under Equity Compensation Plans
The following tables summarize as of November 12, 2009, the equity compensation plans pursuant to which equity securities of the Company may be issued:
Stock-Option Plan Information
Share Award Plan Information
Directors and Officers Liability Insurance
The Company maintains Directors and Officers liability insurance. The policy contains standard industry exclusions, and no claims have been made thereunder to date. 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$134,000. SAND has entered into an indemnification agreement with each of its directors and senior officers.
C. Board Practices
Date of expiration of current term of office
Pursuant to 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
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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.
SAND has entered into the following arrangements with its directors mentioned above:
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Directors Services Contract
During the fiscal year ended July 31, 2009, the Company had Employment Agreements with Arthur G. Ritchie and Zainab A. Schwartz, whereby Arthur G. Ritchie agreed to provide his services as President and Chief Executive Officer and Zainab A. Schwartz agreed to provide her services are Vice President, Finance and Administration and Chief Financial Officer.
The Employment Agreement of Arthur G. Ritchie provided that he would 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. In the event the Employment Agreement of Arthur G. Ritchie (i) was terminated by SAND for any reason other than for Cause (as defined in the Employment Agreement) or death or (ii) was terminated by Arthur G. Ritchie for Good Reason (as defined in the Employment Agreement), Arthur G. Ritchie would have been 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 Arthur G. Ritchie would have continued for a period of two (2) years to participate in all benefit plans and programs of SAND to the extent such participation was possible, and, if such continued participation was barred, to receive amounts equal to the out-of-pocket costs of participation in plans and programs providing substantially similar benefits. Effective November 1, 2009, Arthur G. Ritchie retired as President and Chief Executive Officer of SAND and was replaced by Thomas M. ODonnell. As a result, the Employment Agreement was replaced by a Consulting Agreement, for the severance payout, which has been entered by and between Arthur G. Ritchie, SAND and Jerart. Please see Item 6A Directors, for details of this agreement.
Effective November 1, 2009, Thomas M. ODonnell, President and Chief Executive Officer, entered into an employment agreement with SAND. His base salary is payable by the issuance to him by SAND of 50,000 Class A Common Shares of its share capital per month (currently valued at $0.35 per share). There are no other terms or conditions.
The Employment Agreement of Zainab A. Schwartz provides a severance pay in case of termination without cause of eight (8) weeks.
Audit Committee Charter
The Audit Committee of the Board of Directors of SAND (the "Audit Committee") has a formal charter setting out its mandate and responsibilities of the Audit Committee that has been reviewed and adopted as amended on June 14, 2005, the text of which was included as Exhibit 15.1 of the Annual Report on Form 20-F for the fiscal year ended July 31, 2005.
Composition of Audit Committee
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The Audit Committee is comprised of three directors, each of whom is independent under applicable Canadian requirements and the rules of the United States Securities and Exchange Commission (the "S.E.C."). Based on their profiles (please see Item 6A Directors, for more details), the education and experience of each Audit Committee member is relevant to the performance of his responsibilities as Committee members. All the members of the Committee are "financially literate" and have the ability to read and understand a set of financial statements.
Audit Committee Meetings
The Audit Committee meets on a quarterly basis and holds special meetings as circumstances require. During the year ended on July 31, 2009, the Audit Committee held five meetings. All members attended the five meetings of the Audit Committee held during the last fiscal year.
Audit Committee Responsibilities
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:
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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 Audit Committee is also empowered to instruct and retain outside counsel or other experts as necessary.
Governance, Nomination, Human Resources and Compensation Committee
Charter of the Governance, Nomination, Human Resources and Compensation Committee
The Governance, Nomination, Human Resources and Compensation Committee of the Board (the "Compensation Committee") is governed by a formal charter that details its mandate, the text of which was included as Exhibit 15.2 of the Annual Report on Form 20-F for the fiscal year ended July 31, 2005.
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Composition of the Compensation Committee
The Compensation Committee is composed of Messrs. Musselman, ODonnell and Wicker, all of whom were non-management and independent directors during the fiscal year ended July 31, 2009. They satisfy the current requirements of the NASDAQ Stock Market relating to independence.
Compensation Committee Meetings
During the year ended July 31, 2009, the Compensation Committee did not meet.
Compensation Committee Responsibilities
The Compensation Committee has the following duties and responsibilities:
Statement of Corporate Governance Practices
The Company has reviewed its corporate governance practices in light of the guidelines contained in Regulation 58-101 respecting Disclosure of Corporate Governance Practice ("Regulation 58-101") of the Canadian Securities Administrators. A description of the Companys corporate governance practices is set out below in response to the requirements of Regulation 58-101.
Board of Directors
The Board has delegated to the Chief Executive Officer and senior management the responsibility for day-to-day management of the business of the Company, subject to compliance with the plans approved from time to time by the Board of Directors. In addition to those matters, which must by law or by the Articles of the Company be approved by the Board, the Board retains responsibility for significant changes in the Companys affairs such as approval of major capital expenditures, debt and equity financing arrangements and significant acquisitions and divestitures.
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The Board oversees the identification of the principal risks of the Company's business and the implementation by management of appropriate systems to manage such risks. The Board reviews from time to time organizational matters such as succession planning.
During the fiscal year ended July 31, 2009, the following directors are "independent" pursuant to National Policy 58-201 Corporate Governance Guidelines ("NP 58-201") as they qualify as "independent" directors, as such term is defined in Regulation 52-110 respecting Audit Committees: Wayne Musselman, Thomas O'Donnell, Douglas Pryde, Martin Shindler and George Wicker. Arthur G. Ritchie was not independent, as he was the President and Chief Executive Officer of SAND.
Effective November 1, 2009, Arthur G. Ritchie retired as President and Chief Executive Officer and Thomas ODonnell replaced him. Thomas M. ODonnell is no longer independent and Arthur G. Ritchie will remain not independent as he was an employee of the Company in the last three years.
None of the directors is presently a director of any other issuer that is a reporting issuer (or the equivalent) in any jurisdiction.
Orientation and Continuing Education
The Board of Directors of the Company takes the following steps to ensure that all new directors receive orientation regarding the role of the Board, its committees and its directors, and the nature and operation of the Company.
The first step is to assess a new director's set of skills and professional background. This allows the orientation to be customized to that director's needs since different information regarding the nature and operations of the Company's business will be necessary and relevant to each new director. Once determined, one or more existing directors, who may be assisted by the Company's management, provide the new director with the appropriate orientation through a series of meetings, telephone calls and other correspondence.
Orientation and education of directors is an ongoing matter. As such, ongoing informal discussions between management and members of the Board are encouraged and visits to the Companys operations are organized.
Ethical Business Conduct
The Company is committed to promote the highest standard of ethic and integrity in the pursuance of all of its activities. Furthermore, the directors, officers and employees of the Company are expected to act and to hold their office within the best interests of the Company. The Company expects that all directors shall act in compliance of all laws and regulations applicable to their office as director of the Company.
In the event any transactions or agreements occur in respect of which a director or executive officer has a material interest, the matter must be initially reviewed by the Audit Committee and is then submitted to the Board of Directors. The Board may implement any measures that it finds necessary in order to ensure the exercise of independent judgment. In the event a director has a material interest in any transaction or agreement, such Director will abstain from voting in that regard.
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Nomination of Directors
The Board of Directors of the Company does not feel it is necessary to increase the number of directors on the Board at this time.
The Compensation Committee seeks qualified candidates to be considered for nomination as directors. Proposed nominations are subject to review and approval by the Board.
Any new appointees or nominees to the Board of Directors must have a favourable track record in general business management, special expertise in areas of strategic interest to the Company, the ability to devote the time required and a willingness to serve as a director.
The Compensation Committee evaluates the adequacy of compensation of the directors and the Companys management. After sufficient review and analysis, the Compensation Committee recommends the compensation of the directors and the Companys management to the Board for approval.
Other Board Committees
As of the date hereof, the Audit Committee and the Compensation Committee are the only Board committees created by the Board of Directors.
The Compensation Committee is responsible for assessing the individual and collective effectiveness of the Board and selecting new directors.
On July 31, 2009, the Company had 44 employees, including 25 full-time employees and 1 part-time employee with SAND, and 5 full-time employees with Sand Technology Company ("Sand USA"), 3 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, 2008, the Company had 42 employees, including 26 full-time employees with SAND, and 5 full-time employees with Sand USA, 3 full-time employees with Sand UK and 7 full-time employees and 1 part-time employee with Sand Germany.
On July 31, 2007, the Company had 47 employees, including 27 full-time employees with SAND, and 7 full-time employees with Sand USA, 4 full-time employees with Sand UK and 9 full-time employees and 1 part-time employee 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.
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E. Share Ownership
The shareholdings of the directors and officers of the Company as at November 12, 2009 are as follows:
The details of the stock options held by any officer or director of SAND as at November 12, 2009 are as follows:
Except as disclosed above, no director or officer of SAND holds any shares or options entitling its holder to acquire share in the capital of SAND. However, under the terms of an employment agreement between the Company and Thomas O'Donnell, he is entitled to receive 50,000 shares of Class A Common Shares per month.
Arrangements Involving the Employees in the Capital of the Company
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.
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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 Company at the annual and special meeting of the shareholders held on December 17, 1996. On November 9, 1999, by resolution, the directors of the Company 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 Company at the annual and special meeting of the shareholders held on December 17, 1999. The total number of Common Shares of the Company 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 Company.
On November 21, 2005, the Board of Directors approved an amendment to the 1996 Stock Incentive Plan to extend the life of the Incentive Plan for an additional period of ten (10) years. This amendment was confirmed, approved and ratified by the shareholders of the Company 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 Company whereby the options granted and outstanding thereunder became exercisable for a period of ten (10) years from July 7, 2006 with immediate vesting for all those outstanding options which have vested on or prior to July 7, 2006.
The Incentive Plan is administered by the Compensation Committee of the Board of Directors. The former Options Committee has been dissolved. The Incentive Plan permits the granting of incentive stock options on terms designed to gain certain advantages under United States Federal income tax law.
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 Compensation 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 Company. The exercise price of each option for Common Shares may not be 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 Company may terminate the Incentive Plan at any time, subject to vested rights.
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 Company at the annual and special meeting of the shareholders held on December 17, 1996. On November 9, 1999, by resolution, the directors of the Company amended the Option Plan to increase the maximum aggregate number of options to purchase Common Shares, which may be granted under the Option Plan. This resolution of the directors was
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confirmed, approved and ratified by the shareholders of the Company at the annual and special meeting of the shareholders held on December 17, 1999. The total number of Common Shares of the Company 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 Company.
On November 21, 2005, the Board of Directors approved an amendment to the Option Plan to extend the life of the Option Plan and of the options granted and outstanding under the Option Plan for an additional period of ten (10) years. This amendment was confirmed, approved and ratified by the shareholders of the Company 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 Company whereby the options granted and outstanding thereunder became exercisable for a 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.
The Option Plan is administered by the Compensation Committee of the Board of Directors each of whose members is a "disinterested person" as defined under the Exchange Act and an "outside director" as defined in the United States Internal Revenue Code.
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 Compensation 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 Company. The exercise price of each option for Common Shares may not be less than the price of the Common Shares as determined by the Compensation Committee 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 Company may terminate the Option Plan at any time subject to vested rights.
As at November 12, 2009, 551,000 options had been granted and remained outstanding under the Option Plan and the Incentive Plan and 1,449,000 options remained available for grant under both plans.
During the fiscal year ended July 31, 2009, no options were granted and 5,000 options expired. No options were exercised.
During the period August 1, 2009 to November 12, 2009, no options were granted, cancelled or 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 Company are issuable 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 state 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 Company. The award recipient shall obtain the rights and obligations of a shareholder of the Company with respect to the
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Common Shares of the Company award under the Share Award Agreement only upon vesting of the award.
On August 28, 2007, the Board of Directors of the Company authorized the award of up to 665,000 Common Shares. As of November 12, 2009, the Company has awarded 407,500 Common Shares including grants which are dependant on the award recipients and achieving certain defined objectives.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
As of November 12, 2009, the Company had 15,889,619 Class A Common Shares outstanding. Each Class A Common Share entitles its holder to one vote.
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 percent (5%) of the votes attached to Class A Common Shares of the Company at November 12, 2009:
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.
To our knowledge, as of November 12, 2009, 9,607,607 Class A Common Shares were held of record by 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.
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B. Related Party Transactions
Loan Payable and Inter-Creditor Priority Agreement
The Company has entered into the following loan agreements with Arthur G. Ritchie, a major shareholder and its Chairman and former President and Chief Executive Officer, which are as follows.
On April 18, 2008, SAND entered into a Voting Agreement with Arthur G. Ritchie and Bradley G. Griffith on behalf of the subscribers of debentures issued pursuant to a private placement on April 24, 2008 for aggregate proceeds of US$1,002,600 (the "Debentureholders"), whereby SAND granted the right to holders of such debentures holding a majority of the aggregate principal amount of the debentures outstanding to have the right to designate one member to be nominated as director of SAND and which provided that this member shall initially be Thomas M. O'Donnell.
Also on April 18, 2008, SAND entered into an Inter-Creditor Priority Agreement with Arthur G. Ritchie and Bradley G. Griffith on behalf of the Debentureholders, whereby Arthur G. Ritchie consented to the issue of the debentures by the Company, subject to the fact that for each two Canadian dollars paid (whether prior to a default or further to a default, including pursuant to realization proceedings) to the Debentureholders, SAND shall remit one Canadian dollar to Arthur G. Ritchie for the sums representing the principal amount only (excluding specifically any interest) owing to Arthur Ritchie as part of the advances, until all sums owing to the Debentureholders or to Arthur G. Ritchie has been repaid by SAND. This Inter-Creditor Priority Agreement was amended on October 31, 2009 by a priority agreement pursuant to which the parties agreed that the sums owing under the debentures will be paid by the Company to the Debentureholders and the trustee pari passu to the sums owing by the Company to Arthur G. Ritchie, such that for every 1$ paid to the Debentureholders, the Company shall remit 1$ to Arthur G. Ritchie.
As a result of Arthur G. Ritchies retirement, his loan agreements have been ratified and a Repayment Agreement was entered into by and between Arthur G. Ritchie and SAND such that the amounts owing to him will be repaid in equal instalments over three (3) years commencing January 1, 2011. The loans will continue to bear interest at 15% per annum and are payable on a semi-annual basis. In the event of default to pay an amount when due and owing to Mr. Ritchie hereunder, in addition to all other rights and remedies that he may have, Mr. Ritchie shall have the
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right, exercisable by way of written notice to the Company, to convert all outstanding amounts owing to him hereunder into Common Shares of the Company based on the average closing price of such shares on the OTC Bulletin Board or on any other exchange, alternative trading system (ATS) or quotation or trade reporting system (QTRS) for the month immediately preceding the month in which such right is exercised. The outstanding balance shall be grossed up for purposes of the conversion by one hundred and ten percent (110%) if such right is exercised in the calendar year 2011, by one hundred and twenty percent (120%) if exercised in the calendar year 2012 and by one hundred and thirty percent (130%) if such right is exercised in the calendar year 2013.
In conjunction with the ratification of the loan agreement formalized in 2007, the Company also issued to Arthur G. Ritchie 103,061 share purchase warrants, each warrant entitling the significant shareholder, who was also the President and Chief Executive Officer, to purchase one class "A" common share of the Company at a price of US$0.44 per share and each warrant being valid for the term of the agreement.
In May 2007, the Company completed a non-brokered private placement where the Company issued 1,500,000 Common Shares at a price of US$0.40 share for a total cash proceeds of $675,795. In addition, the Company issued 750,000 share purchase warrants entitling two shareholders to purchase up to 750,000 shares of the Company at a price of US$0.60 for three years. One of these shareholders is Arthur G. Ritchie, the Chairman and former President and Chief Executive Officer of the Company.
In November 2009, the Company completed a non-brokered private placement where the Copmpany issued 785,715 units for US$0.70 per unit, for total proceeds of US$550,000 to investors, one of whom is Arthur Ritchie, the Chairman and former President and Chief Executive Officer of the Company. Each unit consists of two Class A Common Shares and one warrant to purchase one Class A Common Share for an exercise price of US$0.50 per share.
C. Interests of Experts and Counsels
ITEM 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
The Companys consolidated financial statements are set out under Item 18.
There are no on-going legal proceedings.
Dividend Record and Policy
The Company has never paid any dividend on its Common Shares. The Companys present policy is to retain any earnings to finance future growth. Dividends on the Common Shares paid to nonresidents of Canada will generally be subject to withholding tax under the Income Tax Act (Canada) at the rate of 25%. Such rate may be subject to reduction under the provisions of a tax treaty between Canada and the country in which the recipient is resident. The Canada-U.S. Income Tax Convention (1980) (the "Convention") provides for a general reduction in the rate of withholding tax
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to 15% on dividends paid on shares of a Company resident in Canada (such as the Company) to a resident of the United States, and also provides for a further reduction to 5% where the beneficial owner of the dividend is a Company, resident in the United States, which owns at least 10% of the voting shares of the Company paying the dividend.
B. Significant Changes
There have been no significant changes since the date of the consolidated financial statements included in this Report.
ITEM 9. THE OFFER AND LISTING
A. Offer and listing details
The following tables sets forth the price ranges and volume of Common Shares during the periods indicated on the OTCBB, or before August 5, 2005, on the Nasdaq SmallCap Market System.
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B. Plan of distribution
The Companys Common Shares are listed and traded in the United States on the OTCBB since August 9, 2005, under the symbol "SNDTF". Before August 9, 2005, the Company's Common Shares were listed on the Nasdaq SmallCap Market System.
In 2008, the management of SAND had learned that its Common Shares have been listed for trading on the Berlin-Bremen Stock Exchange (the "Berlin Exchange") under the symbol "SD1A", without the Company's prior knowledge, consent or authorization. Any authorized broker may list a company on the Berling Exchange by filing an application with the administration of the exchange for a permit to trade a company's stock already listed on and regulated by other markets. SAND does not anticipate that this will materially affect the price of its Common Shares.
On January 30, 2008, SAND applied to the Autorité des marchés financiers (the "AMF"), the securities regulatory authority in the Province of Québec in Canada to become reporting issuer in the Province of Québec in order to allow its securities to be freely tradeable in the province (subject to applicable resale restriction periods). On April 15, 2008, the application was granted and SAND became a reporting issuer in the Province of Québec and is now subject to the disclosure requirements of the AMF.
D. Selling Shareholders
F. Expenses of the issue
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ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
B. Memorandum and Articles of Incorporation
SAND was incorporated on December 10, 1982 under the provisions of the CBCA. The articles of the Company place no restrictions upon the Company's objects and purposes.
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 directors 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 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)
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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 Companys 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 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.
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 Companys knowledge or by the articles of the Company.
Change in Control of Company
There are no provisions in the Companys 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.
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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 Shares have been authorized.
Class A Common Shares
The Class A Common Shares of the Company have the following rights, privileges, restrictions and conditions:
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.
Class B Shares
The Class B Shares, as a class, have the following rights, privileges, restrictions and conditions:
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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:
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 then issuable upon the conversion of the Class B, Series A Shares into Class A Common Shares and to vote together with the holders of Class A Common Shares of the Company.
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 Class A 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 the S.E.C. 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
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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.
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 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.
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 Class A 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
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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 Class A 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 Class A 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 of any Class B, Series A Shares; (ii) securities issued upon the conversion of any debenture, warrant, option or other convertible security; and (iii) Class A Common Shares of the Company (or options or rights or purchase such Class A 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
The material contracts concluded by the Company for the two years immediately preceding publication of this Report are as follows:
D. Exchange Controls
Other than as provided in the Investment Canada Act (Canada) (the "Investment Act"), there are currently no limitations imposed by Canadian laws, decrees or regulations that restrict the import or export of capital, including foreign exchange controls, or that affect the remittance of dividends to non-resident holders of the Companys securities. However, any such remittances of dividends paid to United States residents are subject to withholding tax at a rate equal to a maximum of 15% of the amount paid (see Section E Taxation under Item 10 Additional Information).
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The following discussion summarises the material features of the Investment Act, in its present form, for a non-resident of Canada who proposes to acquire Common Shares of the Company. The Investment Act regulates the acquisition of control of a Canadian business by a non-Canadian as defined under the Investment Act. With respect to the Company, an acquisition of control is considered to be the acquisition of the majority of its Common Shares. However, if a non-Canadian acquires more than one-third of the voting shares of the Company, but less than a majority, there is a presumed acquisition of control unless it can be established that the Company is not controlled in fact by the acquirer. All acquisitions of control of a Canadian business are notifiable (which requires that a notification form be submitted to Investment Canada within thirty days after the implementation of the investment) unless the investment is reviewable. If the investment is reviewable, the investment may not be implemented until the Minister responsible for the Investment Act is, or has been deemed to be, satisfied that the investment is likely to be of net benefit to Canada.
Where either the acquirer is, or the Company is presently controlled by, a WTO investor (as that term is defined in the Investment Act), a direct acquisition of control of the Company will only be reviewable if the value of the Companys assets, as shown on its audited financial statements for the most recently completed fiscal year, is equal to or greater than $223 million. This amount varies each year based on the rate of growth in Canadian gross domestic product. Other direct acquisitions of control are reviewable if the value of the assets of the Company, as calculated above, is equal to or greater than $5 million. The $5 million threshold for review also applies with respect to the acquisition of control of any Canadian business that provides any financial services or transportation services, is a cultural business, or is engaged in the production of uranium and owns an interest in or producing uranium property in Canada.
Indirect acquisitions of control (acquisitions of control of an entity which in turn controls the Company) are not reviewable under the Investment Act if the acquirer is a WTO investor or if the Company is controlled by a WTO investor. Otherwise, an indirect acquisition will be reviewable if the value of the Companys assets is $50 million or more, or if the value of the Companys assets acquired in the total transaction are in Canada or the acquisition is not effected through the acquisition of control of a foreign Company.
Certain types of transactions are exempt from application of the Investment Act including acquisitions of control of the Company:
There are currently no limitations on the right of foreign or non-resident owners of Common Shares to hold or vote such securities imposed by Canadian law or the Companys charter or other constituent documents.
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Certain Canadian Federal Income Tax Consequences
The discussion under this heading summarises the material Canadian federal income tax consequences of acquiring, holding and disposing of Common Shares of the Company for a shareholder of the Company who is not resident in Canada but is resident in the United States and who will acquire and hold Common Shares of the Company as capital property for the purpose of the Income Tax Act (Canada) (the "Tax Act"). This summary does not apply to a shareholder who carries on business in Canada through a "permanent establishment" situated in Canada or who has a fixed tax base regularly available to him through which he or she performs independent personal services in Canada if the shareholders holding in the Company is effectively connected with such permanent establishment or fixed base. This summary is based on the provisions of the Tax Act and the regulations thereunder and on the Companys understanding of the administrative practices of the Canada Revenue Agency and takes into account all specific proposals to amend the Tax Act or regulations made by the Minister of Finance of Canada to November 12, 2009. It has been assumed that there will be no other relevant amendment of any governing law although no assurance can be given in this respect. This discussion is general only and is not a substitute for independent advice from a shareholders own Canadian and U.S. tax advisors.
The provisions of the Tax Act are subject to income tax treaties to which Canada is a party, including the Convention and the Protocols to the Convention.
Dividends on Common Shares
Under the Tax Act, a non-resident of Canada is generally subject to Canadian withholding tax at the rate of 25% on dividends paid or deemed to have been paid to him by a Company resident in Canada. The Convention limits the rate to 15% if the shareholder is resident in the United States and the dividends are beneficially owned by and paid to him, and to 5% if the shareholder is a company that beneficially owns at least 10% of the voting shares of the payer company. The Convention generally exempts from Canadian income tax dividends paid to a religious, scientific, literary, educational or charitable organisation or to an organisation constituted and operated exclusively to administer a pension, retirement or employee benefit fund or plan, if the organisation is resident in the United States and is exempt from income tax under the laws of the United States.
Disposition of Common Shares
Under the Tax Act, a taxpayers capital gain or capital loss from a disposition of Common Shares of the Company is the amount, if any, by which his proceeds of disposition exceed (or are exceeded by, respectively) the aggregate of his adjusted cost base of the share and reasonable expenses of disposition. One-half of a capital gain (the "taxable capital gain") is included in income, and one-half of a capital loss in a year (the "allowable capital loss") is deductible from taxable capital gains realized in the same year. The amount by which a shareholders allowable capital loss exceeds the taxable capital gain in a year may be deducted from a taxable capital gain realized by the shareholder in the year or in the three previous or any subsequent year, subject to certain restrictions in the case of a corporate shareholder.
In the case of a shareholder that is a company, the amount of any capital loss otherwise determined may be reduced, in certain circumstances, by the amount of dividends previously received in respect of the shares disposed of, unless the company owned the shares for at least 365 days prior
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to sustaining the loss and (together with companies, persons and other entities with whom the company was not dealing at arms length) did not, at the time the dividends were received, own more than 5% of the shares of any class of the capital stock of the company from which the dividend was received. These loss limitation rules may also apply where a company is a member of a partnership or a beneficiary of a trust that owned the shares disposed of.
A non-resident of Canada is not subject to tax under the Tax Act in respect of a capital gain realized upon the disposition of shares unless the shares represent "taxable Canadian property". Common shares of the Company will not generally constitute taxable Canadian property. Common shares of the Company will constitute taxable Canadian property of a shareholder at a particular time if the shareholder holds the shares as "capital property" and used the shares in carrying on a business in Canada, or if at any time in the five years immediately preceding the disposition the shareholder owned, either alone or with persons with whom the shareholder did not deal at arms length, 25% or more of the issued shares of any class of the capital stock of the Company.
Where a United States resident realises a capital gain on a disposition of shares that constitute "taxable Canadian property", the Convention relieves the United States resident from liability for Canadian tax on such capital gains unless:
Notwithstanding the potential exemption from Canadian tax provided under the Convention, where a non-resident of Canada disposes of Common Shares of the Company that are "taxable Canadian property", the non-resident is required to file a Canadian income tax return in respect of any such dispositions.
Certain United States Federal Income Tax Considerations
The following discussion summarises the material United States federal income tax consequences to certain U.S. Holders (as defined below) of the acquisition, ownership and disposition of the Companys Common Shares. This discussion assumes such holders hold the Common Shares as capital assets for United States Federal income tax purposes. This discussion does not address consequences peculiar to persons subject to special provisions of federal income tax law, such as tax-exempt organisations, qualified retirement plans, financial institutions, life insurance companies, real estate investment trusts, regulated investment companies, broker-dealers, non-resident alien individuals or foreign companies, shareholders actually or constructively owning Common Shares representing 10% of the vote and value of the Company, a person that holds shares as part of a
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straddle or hedging or conversion transaction, or a person liable for alternative minimum tax. In addition, this discussion does not address any state, local or foreign tax consequences.
The following discussion is based upon the Internal Revenue Code of 1986, as amended (the "Code"), final, temporary and proposed Treasury Regulations promulgated thereunder, published Internal Revenue Service ("IRS") rulings, published administrative positions of the IRS and court decisions that are currently applicable, any or all of which could be materially and adversely changed, possibly on a retroactive basis. In addition, this discussion does not consider the potential effects, both adverse and beneficial of recently proposed legislation which, if enacted, could be applied, possibly on a retroactive basis, at any time. The following discussion is for general information only and is not intended to be, nor should it be construed to be, legal or tax advice to any holder or prospective holder of the Companys Common Shares and no opinion or representation with respect to the United States federal income tax consequences, to any such holder or prospective holders is made. Accordingly, holders and prospective holders of the Companys Common Shares should consult their own tax advisors about the federal, state, local foreign tax consequences of purchasing, owning and disposing of shares of Common Shares of the Company.
As used in this Report, the term "U.S. Holder" means a beneficial owner of Common Shares that is (i) a citizen or resident individual of the United States, (ii) a corporation or partnership created or organised under the laws of the United States, or any political subdivision thereof, (iii) an estate the income of which is subject to United States federal income tax regardless of source, or (iv) a trust subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust.
Distributions on Common Shares
Dividends (without reduction for Canadian income tax withheld) paid to a noncorporate U.S. Holder in taxable years beginning before January 1, 2011 that constitute qualified dividend income will be taxable to such holder at a maximum tax rate of 15% provided that the noncorporate U.S. Holder holds shares for more than 60 days during the 121 day period beginning 60 days before the ex-dividend date and meets other holding period requirements. A U.S. Holder must include the dividend in its taxable income when the holder receives the dividend, actually or constructively. The dividend will not be eligible for the dividends-received deduction generally allowed to U.S. corporations in respect of dividends received from other U.S. corporations. The amount of the dividend distribution that a U.S. Holder must include in its income will be the U.S. dollar value of the payments made, determined at the spot rate on the date of the dividend distribution, regardless of whether the payment is in fact converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date the U.S. Holder includes the dividend payment in income to the date it converts the payment into U.S. dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. The gain or loss generally will be income or loss from sources within the U.S. for foreign tax credit limitation purposes. Distributions in excess of current and accumulated earnings and profits, as determined for U.S. federal income tax purposes, will be treated as a non-taxable return of capital to the extent of U.S. Holders basis in the shares and thereafter as capital gain.
Subject to certain limitations, the Canadian tax withheld will be creditable against a U.S. Holders United States federal income tax liability. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the maximum 15% tax rate. To the extent a
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refund of the tax withheld is available to a U.S. Holder, the amount of tax withheld that is refundable will not be eligible for credit against the U.S. Holder United States federal income tax liability.
Disposition of Common Shares
A U.S. Holder will recognize United States source gain or loss upon the sale of Common Shares equal to the difference, if any, between (i) the amount of cash plus the fair market value of any property received, and (ii) the shareholders tax basis in the Common Shares. This gain or loss will be capital gain or loss if the shares are a capital asset in the hands of the U.S. Holder, and such gain or loss will be long-term capital gain or loss if the U.S. Holder has held the Common Shares for more than one year. Gains and losses are netted and combined according to special rules in arriving at the overall capital gain or loss for a particular tax year. Prior to January 1, 2001, the net long-term capital gain of non-corporate U.S. Holders generally will be subject to tax at a maximum rate of 15%. Deductions for net capital losses are subject to significant limitations.
In the following circumstance, the above discussion may not describe the United States federal income tax consequences resulting from the holding and disposition of the Companys Common Shares:
Passive Foreign Investment Company
Special rules are applicable to U.S. Holders owning shares in a passive foreign investment company (a "PFIC"). A foreign company will be classified as a PFIC if at least 75% of its gross income for the taxable year is passive income or if the value of assets held by it during the taxable year which produce passive income represents at least 50% of the value of its assets. In determining whether a foreign company is a PFIC, if the foreign company owns 25% or more (by value) of the stock of another company, the foreign company is treated as if it (i) held its proportionate share of the assets of such other company, and (ii) received directly its proportionate share of the income of such other company. In general, "passive income" includes the excess of gains over losses from certain commodities transactions, including transactions involving gold and other precious metals.
Based on the nature of the income, assets and activities of the Company, it is not certain whether the Company could be classified as a PFIC for any taxable year. While the Company believes that it presently not a PFIC, the application of the relevant provisions of the Code and accompanying prior and current regulations to the Company is not. Further, the operations and business plans of the Company may change in subsequent taxable years. Therefore, no assurances can be made regarding the present of future status of the Company.
If the Company was treated as a PFIC at any time during a U.S. Holders holding period for the Common Shares, such U.S. Holder might be subject to additional tax as well as certain interest charges in respect of the deferral of tax for the period during which such Common Shares were held. Any such additional tax and interest charges would apply to the disposition of the Common Shares or the receipt of certain dividends that are considered "excess distributions" under the Code. Additionally, any gain realized on the disposition of such Common Shares would be treated as ordinary income rather than as capital gain and the tax basis of the Common Shares held by a U.S. Holder generally would not be stepped up to fair market value at death. U.S. Holders and prospective holders of Common Shares should consult their own tax advisors regarding the possible application of the PFIC rules to the Company.
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Certain non-corporate U.S. Holders may be subject to backup withholding at a rate of 28% on taxable distributions with respect to the Common Shares and the proceeds of a disposition of the Common Shares. Backup withholding will apply only if the U.S. Holder (i) fails to furnish its Taxpayer Identification Number ("TIN") which, in the case of an individual, would be his or her social security number, (ii) furnishes an incorrect TIN, (iii) is notified by the IRS that it has failed to properly report payments of interest or dividends or (iv) under certain circumstances, fails to certify, under the penalty of perjury, that it has furnished a correct TIN and has not been notified by the IRS that it is subject to backup withholding. Under newly issued U.S. Treasury regulations, in the case of interest paid after December 31, 1999, a U.S. Holder generally will be subject to backup withholding at a 28% rate unless certain IRS certification procedures are complied with, directly or through an intermediary. U.S. Holders should consult their tax advisors regarding their qualification for exemption from backup withholding and the procedure for obtaining such an exemption if applicable.
F. Dividends and paying agents
G. Statements by experts
H. Documents on Display
The Company is subject to certain of the information requirements of the Exchange Act, and in accordance therewith, files reports and other information with the S.E.C. 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 S.E.C. You may read and copy any of these documents at the S.E.C.'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 S.E.C. at (800) SEC-0330. The S.E.C. maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the S.E.C. The address of that site is http://www.sec.gov.
Any shareholder may also inspect any of the documents or Exhibits referred to in this Report or any other disclosure by making a request to the Company in writing.
I. Subsidiary Information
Information relating to the Companys subsidiaries is described in Information on the Company particularly under "Organizational Structure" in Item 4 and in "Exhibit 8.1" hereof.
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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to credit risk as a result of our cash and accounts receivable balance. We minimize this risk by placing our cash with major banks that are considered to be at low risk of loss and we sell software licenses, maintenance and consulting with short credit terms. On a regular basis, we also monitor the financial condition of our customers.
We are subject to currency risk as we are an international company. 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. We minimize this risk by paying the expenditures incurred in the local operations using the monies received in the local currency.
We are subject to liquidity risk, the risk that we may not be able to meet our financial obligations as they fall due. We manage this risk by regulary evaluating the liquid resources available to fund the current and long-term obligations in a cost-effecitve manner using budgets and cash flow estimates.
We are not subject to fluctuations in cash flow due to interest rate risk, as a majority of the companys debt is at fixed rates.
Please see Note 15 in the audited consolidated financial statements for more details on each of the risks above.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHT 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 the 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 the shareholders of SAND held on December 15, 2005. The Rights Plan expired at the close of the annual meeting of shareholders of the Company held on January 29, 2008 and was not renewed.
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ITEM 15. CONTROLS AND PROCEDURES
A. Disclosure Controls and Procedures
As of July 31, 2009, an evaluation was carried out, under the supervision of and with the participation of management, including the President and Chief Executive Officer (the "CEO") and the Vice President Finance and Administration and Chief Financial Officer (the "CFO"), of the effectiveness of the Companys disclosure controls and procedures as defined in National Instrument 52-109 - Certification of Disclosure in Issuers' Annual and Interim Filing and in Rule 13a-15 or 15d-15 under the Exchange Act.
Based upon that evaluation, our CEO and our CFO concluded that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the S.E.C.s rules and forms, and that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Companys management, including its CEO and CFO, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
B. Managements annual report on internal control over financial reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with Canadian generally accepted accounting principles. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect the transactions and disposition of our assets; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures of the Company are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of Company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company's internal control over financial reporting was effective as of July 31, 2009.
There have been no changes in our internal control over financial reporting during the fiscal year ended July 31, 2009 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
This Report does not include an attestation report of the Companys registered public accounting firm regarding internal control over financial reporting. Managements report was not subject to
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attestation by the Companys registered public accounting firm pursuant to temporary rules of the S.E.C. that permit the Company to provide only managements report in this Report.
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 of the Board of Directors of the Company. Mr. Musselman is Chairman of the Audit Committee.
Based on the qualifications summarized in his profile in Item 6A Directors, the Board of Directors of SAND has determined that Mr. Musselman qualifies as an "audit committee financial expert". Mr. Musselman is independent as defined under Regulation 52-110 respecting Audit Committees and under the rules of The NASDAQ Stock Market.
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 Comany that immediately follows the grant of such waiver. No waiver has been granted to date. A copy of the "Standards of Ethical Conduct" is filed as an exhibit to this Report.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
(a) Audit Fees
The aggregate fees billed for professional services rendered by Raymond Chabot Grant Thornton LLP, the principal accountant for the Company, for the audit of the Companys annual financial statements and services normally provided by such accountants in connection with the Companys statutory and regulatory filings for the Companys fiscal year ended July 31, 2009, were $120,000 ($100,000 in the fiscal year ended July 31, 2008).
(b) Audit-Related Fees
There were $4,500 in fees billed for assurance and related services by Raymond Chabot Grant Thornton LLP that are reasonably related to the performance of the audit or review of the Companys financial statements for the Companys fiscal year ended July 31, 2009 ($4,500 in the fiscal year ended July 31, 2008).
(c) Tax Fees
The aggregate fees billed for products and services rendered by Raymond Chabot Grant Thornton LLP for tax compliance, tax advice and tax planning for the Companys fiscal ended July 31, 2009 were $8,000 ($7,540 in the fiscal year ended July 31, 2008).
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(d) All Other Fees
There were no fees billed for professional services rendered by Raymond Chabot Grant Thornton LLP other than the fees reported in this Item 16C above during the Companys two fiscal years ended July 31, 2009.
(e) Audit Committees Pre-Approval Policies
The Audit Committee approves the engagement terms for all audit and non-audit services to be provided by the Companys accountants before such services are provided to the Company or any of its subsidiaries.
The Audit Committee approved one hundred percent (100%) of the services provided to the Company and its subsidiaries described in Items 16C (a) through 16C (d) above.
(f) Auditors Use of Non-Permanent Employees
None of the hours expended by Raymond Chabot Grant Thornton LLP on its engagement to audit the Companys financial statements for the fiscal year ended July 31, 2009, were performed by persons other than full-time permanent employees of Raymond Chabot Grant Thornton LLP.
Interest of Auditors
Raymond Chabot Grant Thornton LLP are the Independent Registered Chartered Accountants of the Company and are independent within the meaning of the Code of Ethics of the Ordre des comptables agréés du Québec.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
ITEM 16F. CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT
ITEM 16G. CORPORATE GOVERNANCE
Not applicable, as the securities of SAND are not listed on a national securities exchange.
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ITEM 17. FINANCIAL STATEMENTS
ITEM 18. FINANCIAL STATEMENTS
The Audited Consolidated Financial Statements of the Company are included in this Report beginning on page F-1.
These financial statements were prepared in accordance with generally accepted accounting principles in Canada and are expressed in Canadian dollars. Such financial statements have been reconciled to U.S. GAAP in Note 17. For a history of the exchange rates which were in effect for Canadian dollars against U.S. dollars, see Section A Selected Financial Data under Item 3 "Key Information" of this Report.
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ITEM 19. EXHIBITS
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Notes to Exhibit Index:
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SAND Technology Inc.
Consolidated Financial Statements
To the Shareholders of SAND Technology Inc.
We have audited the consolidated balance sheets of SAND Technology Inc. (the “Corporation”) as at July 31, 2009 and 2008 and the consolidated statements of operations and comprehensive loss, shareholders’ deficiency and cash flows for each of the years in the three-year period ended July 31, 2009. 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 the 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, these consolidated financial statements present fairly, in all material respects, the financial position of the Corporation as at July 31, 2009 and 2008 and the results of its operations and its cash flows for each of the years in the three-year period ended July 31, 2009 in accordance with Canadian generally accepted accounting principles.
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 Corporation’s internal control over financial reporting. Accordingly, we express no such opinion.
Montréal, Canada, October 9, 2009
(Except for Note 18 which is as of November 12, 2009)
1 Chartered accountant auditor permit no. 20154
Comments by Independent Auditors for U.S. Readers on Canada-U.S. Reporting Differences
In the United States, 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 2 to the consolidated financial statements of the Corporation. Our report to the shareholders, dated October 9, 2009 is expressed in accordance with Canadian reporting standards, which do not require a reference to such events and conditions in the independent auditors’ report when the events and conditions are properly accounted for and adequately disclosed in the financial statements.
Montréal, Canada, October 9, 2009
(Except for Note 18 which is as of November 12, 2009)
1 Chartered accountant auditor permit no. 20154
Basis of presentation (Note 2)
The accompanying notes are an integral part of the consolidated financial statements.
On behalf of the Board,
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
1 - NATURE OF OPERATIONS
SAND Technology Inc. and its subsidiaries (the Corporation) is involved in the design, development, marketing and support of software products and services that reduce large amounts of data into a tiny footprint and enable users to retrieve usable business information from large amounts of data. The 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 and easy inquiries of large databases without the intervention of specialist information technology professionals.
2 - BASIS OF PRESENTATION
The financial statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAP) 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 debenture holders, its ability to obtain additional financing and its ability to achieve revenue growth. The Corporation is executing a business plan to allow it to continue as a going concern which is to continue to search for additional sources of debt and equity financing, and achieve profitability through cost containment and revenue growth. There can be no assurance that the Corporations activities will be successful.
While the financial statements have been prepared on the basis of accounting principles applicable to a going concern, current global economic turbulence and liquidity crisis cast substantial doubt upon the validity of this assumption. If the going concern assumption was not appropriate for these financial statements, then adjustments would be necessary in the carrying values of the assets and liabilities, the reported net losses and the balance sheet classifications used.
3 - ACCOUNTING POLICIES
CURRENT ACCOUNTING POLICIES
The preparation of financial statements in accordance with Canadian GAAP 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. The most significant estimates relate to the establishment of fair value of the components of convertible debentures, accounting for options, Share Award Plan, warrants and evaluation of R&D provision. 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.
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 Corporations software products. Service revenues are generated from sales of maintenance, implementation, consulting and training services performed for customers that licence the Corporations 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 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.
3 ACCOUNTING POLICIES (Continued)
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 sales with extended payment terms are recognized when collectibility is reasonably assured.
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. Revenues recognized in advance of invoicing to the customer are recorded as unbilled receivables where the collection of the receivable is probable.
Capital assets are recorded at cost and are amortized over their estimated useful lives using the straight-line method over the following periods:
Contract costs were comprised of an amount paid to a vendor upon the transfer of a long-term service contract and were amortized rateably over the term of the contract which ended in 2008.
3 ACCOUNTING POLICIES (Continued)
Impairment of long-lived assets
Capital 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 must be recognized and is equivalent to the excess of the carrying amount of a long-lived asset over its fair value.
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.
Financing costs and transaction costs
Financing costs associated with the issuance of debt are recorded directly against net income. Transaction costs, such as legal fees, that are directly attributable to the acquisition of financial assets or incurrence of financial liabilities are recorded directly against net income.
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 costs. These tax credits must be examined and approved by the tax authorities and it is possible that the amounts granted will differ from the amounts recorded.
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.
3 ACCOUNTING POLICIES (Continued)
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
Monetary assets and liabilities in foreign currency of Canadian corporations and integrated foreign operations 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, shares from the Share Award Plan, and warrants is determined using the treasury stock method. The if-converted method is used with regards to the effect of the convertible debentures.
Stock-based compensation and other stock-based payments
The Corporation uses the fair value method to account for stock-based compensation. This method consists of recording expenses to earnings based on the exercise terms and conditions of the options granted. The fair value is calculated using the Black-Scholes option pricing model.
For stock options, when options are exercised, any consideration paid and any amount recorded under stock-based compensation are credited to the share capital. When options are forfeited, any amount recorded under stock-based compensation related to the forfeited options is debited to the contributed surplus. See Note 9 for additional information.
For the share awards, when the awards are issued, any amounts recorded under stock-based compensation are credited to the share capital. When the awards are forfeited, any amount recorded under stock-based compensation related to the forfeited awards is debited to the contributed surplus. See Note 9 for additional information.
3 ACCOUNTING POLICIES (Continued)
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 AcG14 Disclosure of Guarantees.
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.
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, ClarityBlue Limited on July 31st, 2003, for claims against it related to conditions existing prior to the sale. The warranties expire in 2010.
Financial assets and liabilities
On initial recognition, all financial assets and liabilities are measured and recognized at their fair value.
Subsequently, financial assets and liabilities are measured and recognized as follows:
3 - ACCOUNTING POLICIES (Continued)
ADOPTION OF NEW ACCOUNTING POLICIES
The Canadian Institute of Chartered Accountants (CICA) issued CICA Handbook Section 1535, "Capital Disclosures", which establishes standards for disclosing information about a companys capital and how it is managed. It describes the disclosure of the companys 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. As a result of the adoption of this standard, additional disclosures on financial and capital management have been included in Note 14.
Financial instruments disclosures
CICA Handbook Section 3862, "Financial Instruments Disclosures", describes the required disclosures for the assessment of the significance of financial instruments for a companys 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. As a result of the adoption of this standard, additional disclosures on the risks of certain financial instruments have been included in Note 15.
Financial instruments presentation
CICA Handbook Section 3863, "Financial Instruments Presentation", establishes standards for the presentation of financial instruments and non-financial derivatives. It deals with the classification of financial instruments, from the perspective of the issuer, between liabilities and equity; the classification of related interest, dividends, losses and gains; and the circumstances in which financial assets and financial liabilities are offset. The adoption of this standard had no financial impact on the Corporations consolidated financial statements.
Credit risk and the fair value of financial assets and financial liabilities
In January 2009, the Emerging Issues Committee of the CICA issued EIC-173, Credit risk and the fair value of financial assets and financial liabilities. EIC-173 provides guidance on how to take into account an entitys own credit risk and the credit risk of the counterparty in determining the fair value of financial assets and financial liabilities, including derivative instruments, for presentation and disclosure purposes. The adoption of this standard had no financial impact on the Corporations consolidated financial statements.
3 - ACCOUNTING POLICIES (Continued)
FUTURE ACCOUNTING CHANGES
Accounting changes (amendment)
In July 2009, the AcSB amended CICA Section 1506, Accounting Changes to exclude from its scope, changes in accounting policies upon complete replacement of entity's primary basis of accounting, for example, in the change to International Financial Reporting Standards. This amendment applies to interim and annual financial statements relating to fiscal years beginning on or after July 1, 2009.
Financial instruments disclosures (amendment)
In June 2009, the AcSB amended CICA Section 3862, Financial Instruments Disclosure to include certain requirements related to financial instrument disclosure in response to amendments issued by the International Accounting Standards Board. The amendments are consistent with its strategy to adopt IFRS and to ensure the existing disclosure requirements for financial instruments are converged to IFRS to the extent possible. The new disclosure standards require disclosure of fair values based on a fair value hierarchy as well as enhanced discussion and quantitative disclosure related to liquidity risk. The amended disclosure requirements are effective for annual financial statements relating to fiscal years ending after September 30, 2009. The Corporation is currently evaluating the impact of the adoption of this requirement on the consolidated financial statements.
4 INFORMATION ON EARNINGS
Amortization expense of contract costs amounted to $0 in 2009 ($110,847 in 2008 and $110,846 in 2007). Amortization expense of capital assets amounted to $63,643 in 2009 ($76,670 in 2008 and $90,428 in 2007).
5 - CAPITAL ASSETS
6 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
7- DUE TO A SHAREHOLDER
During the fiscal year 2009, the Corporation obtained an additional loan from a significant shareholder who is also the President and Chief Executive Officer. Under the loan agreement, a maximum of $250,000 of funds is available. As at July 31, 2009, an amount of $188,532 was used and is repayable within 30 days of the receipt of a written demand from the shareholder. The loan bears interest at 15% and it is payable on the last business day of each calendar month.
During the fiscal year 2008, the Corporation obtained a loan from a significant shareholder who is also the President and Chief Executive Officer. Under the loan agreement, a maximum of $400,000 of funds is available. As at July 31, 2009, an amount of $68,995 is outstanding and is repayable within 30 days of the receipt of a written demand from the shareholder. The loan bears interest at 15% and it is payable on the last business day of each calendar month.
During the fiscal year 2007, the Corporation received a loan from a significant shareholder who is also the President and Chief Executive Officer. The loan originated from amounts owed by the Company to the shareholder by virtue of his employment contracts. As at July 31, 2009, an amount of $1,605,616 was outstanding and repayable within 90 days of the receipt of a written demand from the shareholder. The loan bears interest at 15% and it is payable on the last business day of each calendar month. As well, as part of his employment contract, he is entitled to a bonus based on the gross revenues resulting from the licensing, sale or other disposition of Nucleus software. As at July 31, 2009, an amount of $153,582 was outstanding.
In conjunction with the ratification of the loan agreement formalized in 2007, the Corporation also issued 103,061 warrants, each warrant entitling the significant shareholder to purchase one class "A" common share of the Corporation at a price of US$0.44 per share and each warrant being valid for the term of the agreement. (Please see Note 9 for additional information.) 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.
During the fiscal year 2008, an inter-creditor priority agreement was signed when the Corporation issued the secured convertible debentures described in Note 8. The parties agreed that the sums owing under the debentures will be paid by the Corporation to debenture holders and the trustee in priority to the sums owing by the Corporation to the principal shareholder subject to the fact that for each $2 paid to the debenture holders, the Corporation shall remit $1 to the principal shareholder as repayment for the sums representing the principal amount only.
8 - CONVERTIBLE DEBENTURES
On April 18, 2008, the Corporation issued secured convertible debentures ("Convertible Debentures") on a private placement basis and received proceeds of $1,009,819 (US$1,002,600) for the issue of a total of 1,114 units. Each unit consists of one 8% Convertible Debenture due December 31, 2017, having a nominal value of US$900, redeemable at the option of the Corporation if the bid price of the common share has been above $1.50 for 60 consecutive trading days, and convertible at the option of the holder into class "A" common shares at US$0.45 per share and 1,000 share purchase warrants of the Corporation. Each warrant entitles its holder to purchase one additional common share (warrant share) of the Corporation at a price of US$0.70 per warrant share at any time until the earlier of the close of business on the day which is 36 months from April 18, 2008 or the sixtieth consecutive trading day in which the bid price of the common shares has been above US$1.50. Interest is calculated at the rate of 8% per annum, payable in kind, i.e. in common shares at a rate of US$0.45 per share. The interest is due on each conversion date (date when that principal amount is being converted) subsequent to January 1, 2009, and on the maturity date. The financing is secured by a first rank hypothec on all of the Corporations property and assets, movable and immovable, corporeal and incorporeal, present and future, of every kind and nature for the principal amount and accrued interest. The proceeds from the private placement will be used to increase marketing and advertising capital needs and expansion.
For accounting purposes, the debenture contains both a liability component and an equity component being the share warrants, conversion option and the interest payable in shares, which have been separately presented in the consolidated balance sheet:
8 - CONVERTIBLE DEBENTURES (Continued)
The remaining balance represents the fair value of the conversion option and the interest payable in shares in the amount of $446,027. This amount was recorded in a separate caption of shareholders deficiency as the equity component of the convertible debentures.
9 - SHARE CAPITAL
a) Authorized and issued
During the fiscal year 2009, the Corporation did not conduct any transactions that impacted the share capital.
During the fiscal year 2008, the Corporation did not conduct any transactions that impacted the share capital.
9 SHARE CAPITAL (Continued)
During the fiscal year 2007, 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 at $170,110. This amount was recorded as contributed surplus. The fair value of the warrants at the time they were granted were estimated using the Black-Scholes option pricing model with the following assumptions:
The following table summarizes information about the Corporations share warrants described in Notes 7, 8 and 9:
9 SHARE CAPITAL (Continued)
c) Share Award Plan
Effective September 30, 2007, under a Share Award Plan, the Corporation may grant class "A" common shares to its regular full-time employees and those of its subsidiaries up to a maximum of 1,000,000 class "A" common shares, at a value not to exceed the fair market value of the class "A" common shares at the time of grant, conditioned upon a certain period of continued service with the Corporation or other acceptable consideration.
The Share Award Plan is intended to promote the interests of the Corporation by (i) aiding the retention and facilitating the recruitment of outstanding personnel by providing incentive compensation opportunities; and (ii) matching employees financial interests with those of the Corporations shareholders. The administrator has the authority to determine terms and conditions of each award granted.
The following table presents the share award compensation expense included in selling, general and administrative expenses for the year ended July 31, 2009 and 2008. The table also presents the assumptions used to determine the fair value of the share awards granted during 2008, using the Black-Scholes option pricing model:
(a) Weighted average assumptions.
9 SHARE CAPITAL (Continued)
d) Stock option plans
The Corporation has two stock option plans:
Under both plans, the exercise price of each option is not less than the market price of the Corporations shares on the Over the Counter Bulletin Board (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 10 years except for three key employees for which management allows an extension of 10 years for the options already expired.
Options granted after 2003 fiscal year
The following table summarizes information about the Corporations stock options:
9 SHARE CAPITAL (Continued)
The following table summarizes significant ranges of exercise prices of outstanding options held by directors, officers and employees as of July 31, 2009:
The following table presents the stock-based compensation expense included in selling, general and administrative expenses for the years ended July 31, 2009, 2008 and 2007. The table also presents the assumptions used to determine the stock-based compensation expense for the options granted during 2007, using the Black-Scholes option pricing model:
(a) Weighted average assumptions.
9 SHARE CAPTIAL (Continued)
e) Loss per share
Shares from Share Award Plan, options, warrants and the effect of convertible debentures described in Notes 7, 8 and 9 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.
10 - RESEARCH AND DEVELOPMENT COSTS
The net amounts of research and development costs presented in the consolidated statements of operations and comprehensive loss have been determined as follows:
11 - INCOME TAXES
The reconciliation of income taxes at Canadian statutory rates with the reported income taxes is as follows:
The significant components of the Corporations future income tax assets and liabilities are as follows:
As at July 31, 2009, the Corporation has non-capital losses carried forward to reduce future taxable income for Canadian federal and provincial tax purposes as well as American, British and German tax purposes of approximately $12,200,000 and $12,100,000, US$23,200,000, £66,000 and €4,300,000, respectively, expiring at various dates to 2028. In addition, the Corporation has unclaimed research and development expenditures carried forward of approximately $14,700,000, which can be used to reduce taxable income at any time in the future, and investment tax credits of approximately $3,540,000, which can be applied against future Canadian federal income taxes payable, expiring at various dates to 2018. The benefits of these items have not been recognized in the consolidated financial statements.
12 - COMMITMENTS
The Corporation is committed under operating leases through 2015 for the rental of buildings for a total amount of $912,501. The minimum payments due in each of the forthcoming years are as follows:
13 SEGMENTED INFORMATION
The Corporation is considered to have only one reportable business segment in two geographic areas. Both the North American and European areas market the SAND/DNA Product suite. The accounting policies of the geographic areas are the same as described in the summary of accounting policies. The Corporation evaluates geographic areas performance based on income before income taxes. Sales for each geographic area are based on the location of the third party customer. All intercompany transactions between areas have been eliminated.
14 CAPITAL MANAGEMENT
The Corporations capital management objectives are to ensure the Corporations ability to continue as a going concern and to provide an adequate return to shareholders through the optimization of the debt and equity balance. The Corporations capital is described to be due to a shareholder, convertible debentures less cash and shareholders equity. The Corporation manages its capital structure and makes adjustments to it in the light of its expected business growth and changes in economic conditions. In order to maintain or adjust the capital structure, the Corporation may return capital to the shareholders, issue new shares or issue new debt.
15 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES, AND FINANCIAL RISKS
Managements objective is to minimize the risk exposure to the Corporation against various financial risks which include credit risk, currency risk and liquidity risk. The Corporation does not use derivative financial instruments to minimize such risk.
a) Interest rate risk
Interest rate risk is the risk that the future cash flows or the fair value of a financial instrument will fluctuate because of changes in market interest rate. The majority of the company's debt is at fixed rates. Accordingly, there is limited exposure to cash flow but a risk in changes of fair value resulting from interest rate fluctuations.
15 - FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES, AND FINANCIAL RISKS (Continued)
b) Credit risk
Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The Corporations maximum exposure to credit risk is limited to the carrying amount of financial assets recognized at the reporting date.
The Corporations credit risk exposure is detailed as follows:
The Corporation minimizes its exposure to credit risk by placing its cash with major banks. Management considers these major banks to be at low risk of loss.
The credit risk exposure through the Corporations accounts receivable is mitigated by selling software licenses, maintenance and consulting for invoicing with short credit terms. Software maintenance contracts are generally fully paid at the inception of service. In the normal course of operations, the Corporation evaluates the financial condition of its customers. Since most of the customers are relatively large companies in various industries, with a history of payment and all the accounts receivables are current, the allowance for doubtful accounts is nominal. In the year ended July 31, 2009, the Corporation generated approximately 11% of its revenue from one customer in Europe. No amounts were outstanding from that customer as at July 31, 2009. (For the year ended July 31, 2008, one customer in Europe represented 12% of the revenue (14% in 2007); however only 10% was outstanding as at July 31, 2008.) As such, management assesses the Corporations credit risk to be low.
15 - FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES, AND FINANCIAL RISKS (Continued)
c) Currency risk
Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Corporation operates internationally and is exposed to risk from changes in foreign currency rates. The Corporation does not hold any financial instruments that mitigate this risk. Management minimizes this risk by paying the expenditures incurred in the local operations using the monies received in the local currency.
The Corporation is mainly exposed to fluctuations in the U.S. dollar, the Pound Sterling and the Euro. The following table details the Corporations sensitivity to a 30% strengthening of the U.S. dollar, a 30% strengthening of the Pound Sterling and a 20% strengthening of the Euro on net earnings and comprehensive income against the Canadian dollar. The sensitivity analysis includes foreign currency denominated monetary items and adjusts their translation at period end for the changes described above. For a weakening of the U.S. dollar, the Pound Sterling and the Euro by the same percentages against the Canadian dollar, there would be an equal and opposite impact on net loss and comprehensive loss. The sensitivity analysis was based on the fluctuations in foreign currency rate over the last 3 years. As such, management assess the Corporations currency risk to be high.
As at July 31, 2009 and July 31, 2008, the Corporation had the following monetary assets and liabilities denominated in foreign currencies included in its financial statements:
15 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES, AND FINANCIAL RISKS (Continued)
d) Liquidity risk
Liquidity risk is the risk that the Corporation is not able to meet its financial obligations as they fall due or can do so only at excessive cost. The Corporation manages this risk by regularly evaluating its liquid resources to fund its current and long-term obligations in a cost-effective manner.
The Corporations exposure to liquidity risk is mitigated through its continued ability to sell software licenses, services and software maintenance contracts and the prompt collection of accounts receivable. The Corporation controls its liquidity risk by managing its cash and cash flows using budgets and cash estimates.
The table below summarizes the Corporations financial liabilities and their due dates:
As at July 31, 2009, there has been no significant change to the maturities of financial liabilities as such based on Note 2, management assesses the Corporations liquidity risk to be high.
16 FINANCIAL INSTRUMENTS
Fair value is the amount that willing parties would accept to exchange a financial instrument based on the current market for instruments with the same risk, principal and remaining maturity. These estimates are affected by assumptions made about the amount and timing of estimated future cash flows, discount rates and terms of the contract. As a result, the fair values are not necessarily the net amounts that would be realized if these instruments were settled.
The fair value of cash, accounts receivable, unbilled receivable, accounts payable and accrued liabilities approximates their respective carrying value given their short-term maturities. The fair value of the due to a shareholder could not be determined since it is practically impossible to find a financial instrument on the market having substantially the same economic characteristics.
The fair value of the debt component of the convertible debentures was determined by discounting future cash flows using rates that the Corporation could use for convertible debentures with similar terms and conditions and maturity dates.
As at July 31, 2009, the classification of the financial instruments, as well as their carrying values and the fair values, are shown in the table below:
17 - RECONCILIATION OF RESULTS REPORTED IN ACCORDANCE WITH CANADIAN GAAP TO U.S. GAAP AND OTHER SUPPLEMENTARY U.S. GAAP DISCLOSURES
Differences between Canadian and U.S. GAAP
The material differences between Canadian and U.S. GAAP affecting the Corporation's consolidated financial statements are detailed as follows:
17 - RECONCILIATION OF RESULTS REPORTED IN ACCORDANCE WITH CANADIAN GAAP TO U.S. GAAP AND OTHER SUPPLEMENTARY U.S. GAAP DISCLOSURES (Continued)
a) Stock-based compensation
Under Canadian GAAP, stock-based compensation expense was accounted for using the fair value based method beginning August 1, 2005.
Under U.S. GAAP, effective August 1, 2005, the Corporation adopted SFAS No. 123 (revised 2004), "Share-based Payment", which requires that share-based payments (to the extent they are compensatory) be recognized based on their fair value and the estimated number of shares that the Corporation ultimately expects will vest and to be expensed over the applicable vesting period. The fair value of the unvested portion of the share-based payments granted prior to August 1, 2005 (the Corporations adoption date of SFAS No. 123(R)) is measured based on the grant date fair value of those awards previously calculated under SFAS No. 123, net of estimated forfeitures.
The impact for fiscal year 2009 was an increase in net loss by $6,156, an increase in contributed surplus and shareholders equity by $313,572. The impact for fiscal year 2008 was an increase in net loss by $22,653 and an increase in shareholders deficiency and contributed surplus by $307,416.
b) Share purchase warrants
Under Canadian GAAP, share purchase warrants are classified and accounted for as equity in the Corporations consolidated financial statements.
Under U.S. GAAP, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" it is required that 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. As well, any gains or losses in fair value are recognized in earnings.
The impact for fiscal year 2009 was a decrease in net loss by $215,759, an increase in long-term liabilities by $141,488, a decrease in shareholders deficiency by $141,488 and a decrease in contributed surplus by $170,110. The impact for fiscal year 2008 was an increase in net loss by $45,834, an increase in long-term liabilities by $357,267 and a decrease in shareholders deficiency by $357,267 and a decrease in contributed surplus by $170,110.
17 - RECONCILIATION OF RESULTS REPORTED IN ACCORDANCE WITH CANADIAN GAAP TO U.S. GAAP AND OTHER SUPPLEMENTARY U.S. GAAP DISCLOSURES (Continued)
c) Convertible debentures
Under Canadian GAAP, share purchase warrants of the convertible debentures are classified and accounted for as equity. Conversion option and the interest payable in shares are classified and accounted for as equity component of the convertible debentures.
The technical interpretation of U.S. GAAP, in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, currently requires that share purchase warrants and conversion option with an exercise price denominated in a currency other than Corporations functional currency be classified and accounted for as financial derivative liabilities at fair value with changes in fair value recognized in net operations.
Under Canadian GAAP, the fair value of the debt component of the convertible debentures is required to be calculated and the debt component is accounted for as liability; the balance of the debentures issue price over the initial carrying amount of the debt component is recognized in equity as described above.
Under U.S. GAAP, in accordance with SFAS No. 133, the initial carrying amount of the debt component represents the balance of the debentures issue price over the initial fair value of the conversion option and share purchase warrants. Under both GAAP, the carrying amount of the debt component is accreted to its face value over the contractual period of the debentures by using the effective interest method.
The impact for fiscal year 2009 was to decrease net loss by $536,596, decrease equity component by $446,027, increase long-term liabilities by $1,009,538, increase shareholders deficiency by $796,672 and decrease contributed surplus by $303,415. The impact for fiscal year 2008 was to increase net loss by $217,375, decrease equity component by $446,027, increase long-term liabilities by $966,717, decrease shareholders deficiency by $966,717 and decrease contributed surplus by $303,415.
17 - RECONCILIATION OF RESULTS REPORTED IN ACCORDANCE WITH CANADIAN 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:
ADOPTION OF NEW ACCOUNTING POLICIES
SFAS No. 157, "Fair Value Measurement"
In September 2006, in an effort to increase consistency and comparability in fair value measurements, the Financial Accounting Standards Board (FASB) issued Statement 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 defines fair value as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between participants at the measurement date. The standard creates a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three board levels as follows:
Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
In February 2008, the FASB issued FASB Staff Position FAS 157-2, Effective date of FASB statement No. 157, to provide a one-year deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in financial statements at fair value on a recurring basis (that is, at least annually). For non-financial assets and non-financial liabilities subject to the deferral, the effective date of SFAS 157 is postponed to fiscal year beginning after November 15, 2008 and to interim periods within those fiscal years.
The Corporations financial instruments consist primarily of cash, accounts receivable, unbilled receivable, accounts payable and accrued liabilities, due to a shareholder and convertible debentures. Pursuant to SFAS No. 157, the fair value of cash is determined based on Level 1 inputs, which consist of quoted prices in active markets for identical assets. The Corporation believes that the recorded values of accounts receivable, unbilled receivable, accounts payable and accrued liabilities approximate their current fair values because of the nature and respective maturity dates or durations. The fair value of the due to a shareholder could not be determined since it is practically impossible to find a financial instrument on the market having substantially the same economic characteristics. The fair value of the convertible debentures, including the share purchase warrants and the option to convert, is determined based on Level 2 inputs, which consists of inputs derived principally from observable market data and input into model-derived valuations.
SFAS No. 165, "Subsequent Events"
In May 2009, the FASB issued Statement No. 165 Subsequent Events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or available to be issued. This Statement sets forth: (i) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and (iii) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This Statement is effective for interim and annual periods ending after June 15, 2009.
The adoption of SFAS No.165 did not have an impact on the Corporations consolidated financial statements.
SFAS No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (GAAP)"
In June 2009, the FASB issued Statement No. 168 The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (GAAP). The Codification supersedes all then-existing non-SEC accounting and reporting standards to become the single source of authoritative non-governmental US GAAP. All other non-grandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. SFAS No.168 represents the final standard that the FASB will issue in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. All subsequent standards will be issued as Accounting Standard Updates, which will serve only to update the Codification. The Codification and SFAS No.168 are effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Corporation is currently evaluating the effect that the adoption of SFAS No. 168 will have on its consolidated results.
18 SUBSEQUENT EVENTS
Effective November 1, 2009, Arthur G. Ritchie, President and Chief Executive Officer retired. He continues to be the Chairman of the board of directors. As a result of his retirement, his loan agreements have been ratified such that the amounts owing to him will be repaid in equal instalments over 3 years. The loan will continue to bear interest at 15% per annum and will be paid on a semi-annual basis. As well, an amendment was made to the inter-creditor priority agreement, whereby the parties agreed that the sums owing under the debentures will be paid by the Corporation to debenture holders and the trustee pari passu to the sums owing by the Corporation to the principal shareholder. So for every $1 paid to the debenture holders, the Corporation shall remit $1 to the principal shareholder.
In November 2009, the Corporation completed a non-brokered private placement where the Corporation issued 785,715 units for US$0.70 per unit, for total proceeds of US$550,000 to investors, one of whom effective November 1, 2009, is the President and Chief Executive Officer. Each unit consists of two Class A common share and one share purchase warrant, exercisable at a price of US$0.50 per warrant.
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.