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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 6-K
REPORT OF FOREIGN ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the month of May, 2000
724 SOLUTIONS INC.
4101 Yonge Street, Suite 702
Toronto, Ontario, Canada M2P 1N6
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F
Form 20-F ____ X ____ Form 40-F ____________
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934
Yes __________ No ____ X____
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b):
82-____N.A.____
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724 SOLUTIONS INC.
Form 6-K
TABLE OF CONTENTS
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Signatures.................................................. 2
724 Solutions Inc. First Quarter Report 2000................ Exhibit 99.1
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
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724 SOLUTIONS INC.
By: /s/ KAREN BASIAN
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Name: Karen Basian
TITLE: CHIEF FINANCIAL OFFICER
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Date: May 17, 2000
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EXHIBIT 99.1
[LOGO]
First Quarter Report 2000
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OUR LOCATIONS
CANADA (HQ) JAPAN
724 Solutions Inc. Kaymiyacho Mori Building
4101 Yonge Street, Suite 702 14th Floor, 4-3-20 Toranomon
Toronto, ON Canada M2P 1N6 Minato-ku, Tokyo, Japan
Tel.: +1 (416) 226-2900 Tel.: 81+3 (5404) 3408
Fax.: +1 (416) 226-4456 Fax.: 81+3 (5404) 3571
[email protected] Mobile: 090-9316-9948
www.724.com
U.K. & EUROPE
U.S.A. No. 1 Poultry, 2nd Floor
1 Market, Steuart Tower 1475 London, England EC2R 8JR
San Francisco, CA USA 94105 Tel.: +44-207-643-2245
Tel.: +1 (415) 615-0724 Fax.: +44-207-643-2682
Fax.: +1 (415) 615-0195
[email protected] AUSTRALIA
Level 20, Tower 2 Darling Park
201 Sussex Street
Sydney 2000 Australia
Tel.: +(612) 9006-1000
Fax.:+(612) 9006-1430
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OUR COMPANY
724 Solutions brings together everything -- the technology, the
applications, and the partners -- that's needed to deliver secure financial
services on a broad variety of Internet-enabled devices -- any time, any place,
and on any device.
As the wireless market grows, there will be a huge range of new
devices -- with varying displays, functionality and operating systems. The 724
Solutions Financial Services Platform (FSP) allows financial institutions to
address the widest range of devices. As an open, flexible platform, the FSP can
deliver a consistent user experience, on today's devices as well as those that
will be on the market in the coming months and years.
CHAIRMAN'S LETTER
Fellow Shareholders,
This has been an incredible quarter. 724 Solutions has grown from 232
employees in January, to 315 at the end of the quarter. We have added support
for the devices we're on, in addition to strengthening our relationships with
Motorola and Ericsson. 724 Solutions continues to work with carriers around the
world, and we have recently announced our relationship with Exodus
Communications for our application hosting service (debuting soon with our
customer Claritybank.com). Our offices in San Francisco, London, Toronto, Tokyo
and Sydney are busy turning on our customers on a global scale.
These are things we said we would do, getting global, turning on our
customers, reaching more devices, more carriers and signing new bank customers.
In addition, we continue to expand the 724 Solutions Financial Services
Platform. Alliances with MasterCard and Ericsson enhance our mobile commerce
capabilities on a global level. Meanwhile, in Canada we launched functionality
for Indigo.ca in conjunction with Bank of Montreal, allowing consumers today to
buy books at the touch of a button, with much more selection to follow soon.
The first quarter of 2000 also saw us announce the acquisition of Yrless
Internet Corporation, and enter into an agreement to acquire ezlogin.com, Inc.
The Yrless acquisition involves a small team of great folks in the Toronto area
that specialize in carrier-grade messaging. Our ability to reach consumers is
enhanced with this carrier-grade messaging technology by making it faster for us
to connect to new carriers and new devices.
The proposed ezlogin.com acquisition is also a very powerful venture. The
Financial Services Platform currently gives us the ability to store a user's
preferences -- the stocks they follow, the devices they carry -- within the safe
confines of the financial institution. What ezlogin allows is an extension of
this through an easier way to log in. We can store a consumer's secure
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credentials and, on their behalf, go to other Web sites and bring back their
data to one secure, personalized, convenient place.
That means consumers can view their most important financial information in
one quick and easy place. But more than just financial information, ezlogin
allows you single sign-on access to information like frequent flyer points,
news, Web-based e-mail accounts. ezlogin allows the financial institution to
become more of a destination, and we tie it all together with our high standards
of security and the ability to transact and be on multiple devices.
This really has been a great quarter, and the developments of the past three
months really are compelling and make our Financial Services Platform that much
richer to consumers. 724 Solutions is about more than moving existing Web
content to phones; it's about helping create a better value proposition for our
customers by leveraging the financial institution's strength in people,
research, infrastructure, and trust, to provide consumers with a consistent,
ubiquitous, secure user experience.
Looking to the balance of 2000, 724 Solutions is poised to pursue customer
and partnership opportunities in new regions around the world, and to continue
our work with existing partners and clients to innovate for the technologies
that are just around the corner.
/s/ GREG WOLFOND
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Greg Wolfond
Chairman and Chief Executive Officer
724 Solutions Inc.
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MANAGEMENT DISCUSSION AND ANALYSIS
The following discussion and analysis should be read in conjunction with our
unaudited condensed consolidated financial statements for the three months ended
March 31, 2000 and the accompanying notes. All financial information is in U.S.
dollars unless otherwise noted.
This discussion contains forward-looking statements based on our current
expectations, and contains words and phrases such as we or management
"anticipates," "believes," "plans," "estimates," "expects," "intends" and words
of similar import. The statements are subject to certain risks, uncertainties
and assumptions relating to our operations and financial performance. Actual
results or outcomes accordingly may vary materially from those anticipated,
believed, planned, estimated, expected, or intended. We disclaim any intention
or obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or, except as otherwise required by
law.
OVERVIEW
724 Solutions provides an Internet infrastructure solution to financial
institutions that enables them to offer personalized and secure online banking,
brokerage and e-commerce services across a wide range of Internet-enabled
wireless and consumer electronic devices. Our solution currently enables
consumers to access online banking and brokerage services through network
service providers using digital mobile phones, personal digital assistants,
two-way pagers and personal computers. Our customers include Citigroup, Bank of
America, Bank of Montreal, Wells Fargo and Claritybank.com. Our headquarters are
in Toronto, Canada, and we have offices in London, San Francisco, Sydney, and
Tokyo.
Our unaudited condensed consolidated financial statements are prepared in
accordance with Canadian generally accepted accounting principles. These
principles conform in all material respects, as to measurement, with U.S.
generally accepted accounting principles.
RECENT DEVELOPMENTS
In February 2000, we completed an initial public offering of 6,900,000
common shares, at a price of $26.00 per common share, for total net proceeds
(after expenses of the offering) of $166.9 million.
In February and March we announced a number of key relationships. Motorola
is working with us to deploy our financial software applications in a variety of
Internet-enabled wireless devices, expanding the potential reach of financial
institutions working with our Company. We plan to collaborate with Ericsson on
devices, wireless infrastructure and standards, and secure payment between
financial institutions, merchants and consumers. We have entered into a
relationship with Baltimore Technologies to enhance our ability to extend
e-security to mobile transactions. Baltimore Technologies is also working with
us to offer Mobile Commerce and WAP Security
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Seminars. We entered into an agreement with MasterCard to jointly develop secure
payment solutions to facilitate mobile transactions. In addition, we will
incorporate payment transaction functionality based on MasterCard's family of
payment programs -- utilizing both magnetic stripe and chip technology -- into
the 724 Solutions Financial Services Platform.
In March 2000, we signed an agreement with Indigo.ca, a leading Canadian
bookseller, to offer wireless shopping capability to its customers. Indigo's
online wireless customers can now browse reviews and purchase from a series of
bestseller lists. Within the next six months, we expect Indigo.ca will be able
to offer its entire online inventory on wireless Internet-enabled devices. All
wireless purchases will be updated and stored in the customer's private online
account.
We are working with Exodus Communications to host our application hosting
services operations, and will have Claritybank.com as our first application
hosting customer. In March 2000, we entered into a license agreement with
Claritybank.com, a bank that serves all of its customers over the Internet,
which is the first Internet-only financial institution to deploy our technology,
and one of the first U.S. national banks planning to offer wireless service to
its entire customer base.
In December 1999, we launched an initial market trial of a wireless banking
service for Harris Bank; and in March 2000, Harris Bank enrolled its first
customers for the second phase of the market trial. This service is expected to
become generally available in the second quarter of 2000.
In March 2000, we purchased a one-third interest in Maptuit.com Inc. for
US$750,000 in cash. Maptuit is a privately-held Canadian company that develops
directional mapping software and provides online directional services, mapping
services and spatial relational search services to its customers. We intend to
offer Maptuit's services as additional content for users of the 724 Solutions
Financial Services Platform.
In March 2000, we acquired Yrless Internet Corporation, an Internet
messaging gateway developer. Yrless' software will help speed-up deployment of
our Financial Services Platform. By incorporating their technology into the
Financial Services Platform, we will enhance our ability to quickly connect to
carriers in a way that is easier on their network. The aggregate purchase price
was approximately $5.8 million, payable over three years. Yrless has developed
the YMG-2000 -- a fully scalable, platform-independent short messaging service
(SMS) gateway for wireless carriers. The YMG-2000 product is licensed by Bell
Mobility, Telus Mobility, and U.S. satellite network provider ORBCOMM Global.
YMG-2000 is a fast, reliable, and modular gateway product to which new
features -- including additional networking protocols, and interfaces to billing
and customer-care systems -- can be easily incorporated.
In March 2000, we entered into an agreement to acquire ezlogin.com Inc., a
provider of Internet infrastructure tools for user-driven personalization. The
acquisition is subject to customary closing conditions, and, if those conditions
are satisfied, the acquisition is likely to be completed by the end of the
second quarter of 2000. On closing, we will acquire all of the outstanding
shares of ezlogin.com in exchange for approximately 888,934 of our common
shares. The
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ezlogin.com solution offers data aggregation capabilities to create a
personalized site from which users can conveniently access all of their
password-protected online accounts and favourite Web-based content. We believe
that our acquisition of ezlogin.com will enable us to offer an important
value-added service to our customers in order to help them maintain and
strengthen their client relationships.
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1999 AND THREE MONTHS ENDED MARCH 31, 1999
ANALYSIS OF STATEMENT OF OPERATIONS
REVENUE
Our revenue, before the offset of stock-based compensation, increased to
$3.4 million for the three months ended March 31, 2000 from $764,000 for the
three months ended December 31, 1999 and increased from $582,000 for the three
months ended March 31, 1999. This increase was due to revenue received from five
customers (Bank of Montreal, Bank of America, Wells Fargo, Citigroup and
Claritybank.com) in the first quarter of 2000, compared to three customers in
the fourth quarter of 1999 and one customer in the first quarter of 1999.
Total revenues derived from customers in the United States increased
$2.1 million to $2.2 million for the three months ended March 31, 2000 from
$127,000 for the three months ended December 31, 1999 and $2.2 million from nil
revenues for the three months ended March 31, 1999. Total revenues from Canada
increased to $933,000 from $266,000 for the three months ended December 31, 1999
and $51,000 for the three months ended March 31, 1999. Although the growth in
revenues this quarter has been largely in the United States, we are
concentrating on growing our customer base internationally, particularly in
Europe and Asia.
PRODUCT REVENUE
Our product revenue, before the offset of stock-based compensation,
increased to $2.8 million for the three months ended March 31, 2000 from
$383,000 for the three months ended December 31, 1999 and from $548,000 for the
three months ended March 31, 1999. We received product revenue from Bank of
Montreal, Bank of America, Wells Fargo and Citigroup. Our license agreements
with Bank of Montreal and Bank of America use a fixed fee license model. Under
this model, our customer pays us a fixed annual license fee either upon
execution of the license agreement or periodically thereafter during the term of
the agreement. In February 2000, Bank of Montreal renewed its technology license
agreement for a further year.
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We are moving from our fixed fee license model to a variable fee license
model, which is based on a per user fee. The transition of our revenue model
from fixed fee to variable fee will have two primary consequences: first, we
will no longer receive large initial payments under our license agreements; and
second, we expect our revenue stream to vary with the number of our customers'
end users. We expect that these variable fees will be subject to minimum
quarterly payments and we expect to provide incentive discounts to our customers
based on the number of their users. Citigroup and Claritybank.com have signed
license agreements with us using the variable license fee model, with monthly
guaranteed minimums.
SERVICES REVENUE
Our services revenue increased to $597,000 in the first three months of
2000, compared to $381,000 for the three months ended December 31, 1999, and
from $34,000 for the three months ended March 31, 1999. The increase in services
revenues reflects our increased customer base. Services revenue is currently
comprised of revenue from consulting, implementation and maintenance fees.
Consulting and implementation revenues are usually performed under separate
service agreements and are generally recognized as the services are performed.
The maintenance fee is typically equal to a percentage of the customer's product
fee and is recognized on a monthly basis.
We expect to receive application hosting revenues from hosting and managing
the server infrastructure and software platform as part of the implementation of
our solution. Currently, we anticipate that this will begin once Claritybank.com
has installed the 724 Solutions Financial Services Platform, and its services
are running on data centres.
OPERATING EXPENSES
COST OF REVENUE
Our cost of revenue consists of expenses for salaries and third-party
consulting support for our consulting services, customer support,
implementation, training and application hosting services, and an allocation of
expenses for our facilities, administration and depreciation. It also includes
software licensing expenses paid for integration of third-party software into
our Financial Services Platform.
Our cost of revenue was $2.0 million for the three months ended March 31,
2000, compared to $1.0 million for the three months ended December 31, 1999 and
nil for the three months ended March 31, 1999. This increase was primarily
related to the addition of implementation and customer service personnel to
support our customers in 1999 and 2000. The increase in cost of
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services revenue also reflects amounts paid to third-party consultants and
software providers. We anticipate that our cost of revenue will continue to
increase, in absolute terms, as we establish our application hosting service,
and as we incur upfront implementation costs in order to enable our customers to
implement our solution more quickly.
RESEARCH AND DEVELOPMENT
Research and development expenses increased to $4.4 million for the three
months ended March 31, 2000 from $2.6 million and $1.1 million for the three
months ended December 31, 1999 and March 31, 1999, respectively. Research and
development expenses relate to staffing of software developers in connection
with the continuing expansion and enhancement of our Financial Services Platform
and our quality assurance and testing activities. These expenses also include
independent contractors and consultants, software licensing expenses, and
allocated operating expenses. We expect our research and development expenses to
continue to increase in absolute dollars as we expand our functionality and
other features to enable our customers to offer additional value-added services
to their consumers.
SALES AND MARKETING
Sales and marketing expenses were $2.4 million, compared to $1.5 million and
$207,000 for the three months ended December 31, 1999, and March 31, 1999,
respectively. This increase is primarily attributable to the hiring of
additional sales and marketing personnel, together with increased travel and
related expenses. We opened sales offices in San Francisco and London in 1999
and in Tokyo and Sydney in 2000. The increase in absolute dollars was primarily
the result of costs associated with the hiring and training of our sales and
marketing organization, both domestically and internationally, as well as
significant investments in marketing as we launched our product and a number of
marketing programs.
GENERAL AND ADMINISTRATIVE
Our general and administrative expenses increased to $2.2 million for the
three months ended March 31, 2000 from $1.7 million for the three months ended
December 31, 1999 and from $283,000 for the three months ended March 31, 1999.
This reflects the increase in our corporate staff and expenses related to
building our general and administrative infrastructure. The increase in general
and administrative expenses in absolute dollars reflected our continued
investment in increased staffing and related expenses for the enhancement of the
infrastructure necessary to support our growing business, including improved
management information systems and our increased utilization of outside
professional service firms.
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EBITDA
Our loss before interest, taxes, depreciation and amortization, stock-based
compensation related to stock options and equity in losses of affiliate was
$7.9 million for the three months ended March 31, 2000, compared to a loss of
$6.4 million for the three months ended December 31, 1999, and of $1.5 million
for the three months ended March 31, 1999. This largely reflects the increase in
our expenses in the first quarter of 2000, compared to the last and first
quarters of 1999.
DEPRECIATION AND AMORTIZATION
Total depreciation and amortization were $317,000 for the three months ended
March 31, 2000, compared to $507,000 for the three months ended December 31,
1999 and $100,000 for the three months ended March 31, 1999. The decline from
the fourth quarter of 1999 reflects the fact that some of our assets were fully
depreciated in 1999, and therefore no depreciation was attributable in 2000. The
increase year over year reflects the capital spending in computer hardware and
office furniture for our increase in personnel and additional software
development tools used for research and development purposes.
AMORTIZATION OF DEFERRED STOCK-BASED COMPENSATION RELATED TO STOCK OPTIONS
Amortization of employee stock-based compensation was $843,000 for the three
months ended March 31, 2000, compared to $41,000 for the three months ended
December 31, 1999 and $27,000 for the three months ended March 31, 1999. The
deferred stock-based compensation represents the difference between the exercise
prices of options granted to acquire our common shares and the deemed fair value
for financial reporting purposes of our common shares on their respective grant
dates. This deferred stock-based compensation will be amortized on a
straight-line basis over the vesting periods of these options. The increase is
largely attributed to the amortization of deferred stock-based compensation
related to options that were granted from October 1, 1999 to January 28, 2000,
based on the issue price for our initial public offering.
INTEREST INCOME
Interest income increased to $2.2 million for the three months ended
March 31, 2000 from $703,000 for the three months ended December 31, 1999 and
from $61,000 for the three months ended March 31, 1999. Interest was derived
from cash and cash equivalent balances, representing primarily the unused
portion of the proceeds from our issuances of common shares, including in
particular, the proceeds received from our initial public offering in
February 2000. Our cash balances are primarily invested in short-term time
deposits and high quality commercial paper.
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EQUITY LOSSES OF AFFILIATE
The investment in Maptuit is accounted for using the equity method. Under
this method, we recognized a charge of $66,000, which reflects one-third of
Maptuit's losses for the period since our investment, and an amortization of
goodwill associated with our investment.
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NET LOSS
We recorded a net loss of $6.9 million for the three months ended March 31,
2000, compared to a net loss of $6.3 million for the three months ended
December 31, 1999 and a net loss of $1.6 million for the three months ended
March 31, 1999. Our loss per share, calculated using the weighted average number
of shares outstanding, was $0.20 for the three months ended March 31, 2000,
compared to a loss per share of $0.23 for the three months ended December 31,
1999 and a loss per share of $0.14 for the three months ended March 31, 1999.
Our loss increased as we invested heavily in building our infrastructure; and we
expect our net loss to continue to increase as we expand our application hosting
services and continue to invest in developing our Financial Services Platform.
In particular, our research and development expenses along with sales and
marketing expenses, increased to meet the required delivery schedules for our
products and to establish customer relationships.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations through issuances of common
shares, together with revenue from operations. In February 2000, we completed
our initial public offering of an aggregate of 6,900,000 of our common shares,
raising net proceeds of approximately $166.9 million.
Net cash used in operating activities was $1.2 million for the three months
ended March 31, 2000, compared to net cash used in operating activities of
$1.5 million for the three months ended December 31, 1999 and net cash provided
from operating activities of $630,000 for the three months ended March 31, 1999.
Net cash used in operating activities for the three months ended March 31, 2000
reflects our operating loss of $6.9 million offset by an equity in losses of
affiliate of $66,000, depreciation of $317,000, amortization of stock-based
compensation of $1.1 million and net changes in working capital of
$4.3 million.
Cash provided from financing activities was $165.7 million for the three
months ended March 31, 2000, compared to $40.0 million and nil for the three
months ended December 31, 1999 and March 31, 1999, respectively. These cash
flows largely reflect the proceeds received from issuances of our common shares.
Cash used in investing activities was $4.9 million for the three months
ended March 31, 2000, compared to $1.2 million for the three months ended
December 31, 1999 and $133,000 for the three months ended March 31, 1999. Cash
used in investing activities in the current period reflects our investment in
Maptuit and our acquisition of Yrless Internet Corporation, as well as purchases
of capital, intangible and other assets. We anticipate capital expenditures to
continue to increase as we invest heavily in our Financial Services Platform and
implement data centres to support our application hosting activities. We do not
anticipate that cash flows from investing activities will be significantly
impacted by our acquisition of ezlogin.com Inc., as this acquisition will be
made through the issuance of our common shares.
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We expect that the revenue from our operations and funds provided by our
initial public offering will be sufficient to cover our cash requirements for at
least the next 12 months. This includes our operating activities and investment
activities, and any further acquisitions we may pursue. We may require
additional financing, however, if we expand our operations at a faster rate than
currently expected, or if we seek to effect one or more significant
acquisitions.
IMPACT OF FOREIGN EXCHANGE RATE EXPOSURE
Substantially, all of our revenue is expected to be earned in U.S. dollars.
A significant portion of our expenses is incurred in Canadian dollars. Changes
in the value of the Canadian dollar relative to the U.S. dollar may result in
currency translation gains and losses, and could adversely affect our operating
results. To date, foreign currency exposure has been minimal. However, in the
future we intend to hedge all or a significant portion of our annual estimated
Canadian dollar expenses to minimize our Canadian dollar exposure. We are in the
process of implementing our currency strategy with respect to other foreign
currencies.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
The following factors could materially and adversely affect our future
operating results and could cause actual events to differ materially from those
predicted in forward-looking statements related to our business. For additional
factors, please see our filings with the U.S. Securities and Exchange Commission
and the Ontario Securities Commission, including our registration statement on
Form F-1, as amended.
We currently depend on the sale of a single product to generate most of our
revenue and we expect this dependence to continue for the foreseeable future.
However, we are looking to expand into other wireless opportunities, such as
bill payment and presentment, e-wallet services and e-commerce.
A large portion of our revenue is derived from the sale of our solution to a
limited number of financial institutions. For the three months ended March 31,
2000, five customers accounted for 100% of our revenues. Our sales efforts
target large financial institutions worldwide, which requires us to expend
significant resources educating prospective customers about the uses and
benefits of our product. Our sales cycle, which is subject to significant
fluctuations, typically ranges from four to six months, which may be longer due
to delays over which we have little or no control. However, we expect the
acquisition of Yrless to enable us to accelerate deployment of the 724 Solutions
Financial Services Platform, which will make it possible for financial
institutions to offer their wireless services through new carriers more rapidly.
Our success depends on financial institutions' acceptance of the Internet as
a viable means to deliver their services, in order to grow our customer base.
Our future revenue depends on consumers using the services that are based on our
solution. We expect that revenue under a large portion of our license agreements
will depend on the number of monthly subscribers to these services. To stimulate
consumer adoption of these services, we will be incurring upfront implementation
costs to enable our customers to market these services more quickly.
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We have not yet integrated public key infrastructure (PKI) into our
solution, and if we fail to do so, we may be competitively disadvantaged. Lack
of consumer confidence in the security of online financial transactions could
limit adoption of our solution. We expect that the use of PKI, an emerging
technology which facilitates user identity authentication and non-repudiation of
transactions, will be used by financial institutions' customers and by our
competitors. Consumers will not use online financial services if they are not
confident that financial transactions over the Internet can be undertaken
securely and confidentially. Although there is security technology currently
available for online transactions, many Internet users do not use the Internet
for commercial transactions because of continued security concerns. We expect to
incorporate PKI technology into our solution by the end of year 2000.
We are in the process of establishing our application hosting services,
which will require significant capital expenditures and other resources, and we
cannot assure that we will be able to implement these services on an effective,
cost-efficient or timely basis. Because our experience is primarily in the areas
of developing and implementing our software solution, we do not know what other
difficulties or risks we may encounter or be exposed to in the establishment and
operation of these facilities. We have chosen Exodus Communications to host our
application hosting operations because of its leading role in pioneering the
Internet data centre market. A leading provider of Internet systems and network
management solutions for more than 1,000 enterprises, Exodus is an experienced
provider of complex Internet hosting with advanced facilities.
SUBSEQUENT EVENTS AND OUTLOOK
Our objective remains to become the leading provider of an Internet
infrastructure for the secure delivery of financial services using a broad range
of Internet-enabled devices.
In 2000, we will continue to invest in our research and development
initiatives, and sales and marketing activities, in order to manage our growth
effectively and to expand our operational and customer support systems
worldwide.
We remain committed to our strategies to:
- Focus initially on leading financial institutions
- Accelerate adoption of our solution by consumers worldwide
- Accelerate adoption of our solution by financial institutions
- Expand the functionality of our platform
- Pursue selective acquisitions of companies and technologies to expand our
capabilities; and
- Adapt our platform for sectors in other industries such as insurance,
sales force management and logistics, and other wireless opportunities,
such as bill payment and presentment, e-wallet services and e-commerce.
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RESULTS OF OPERATIONS
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THREE MONTHS ENDED
MARCH 31, DECEMBER 31, MARCH 31,
2000 1999 1999
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(In 000's of U.S. dollars, except per
share amounts)
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REVENUE:
Product..................................................... $ 2,762 $ 383 $ 548
Less: Stock-based compensation related to product revenue... (248) (371) (531)
Services.................................................... 597 381 34
Net revenue................................................. 3,111 393 51
OPERATING EXPENSES:
Cost of services revenue.................................... 1,953 1,037 --
Research and development.................................... 4,423 2,598 1,093
Sales and marketing......................................... 2,449 1,468 207
General and administrative.................................. 2,218 1,726 283
Depreciation and amortization............................... 317 507 100
Stock-based compensation related to stock options........... 843 41 27
Total operating expenses.................................... 12,203 7,377 1,710
Loss from operations........................................ (9,092) (6,984) (1,659)
Interest income............................................. 2,237 703 61
Equity in losses of affiliate............................... (66) -- --
Net income (loss)........................................... $(6,921) $(6,281) $(1,598)
Basic and diluted net income (loss) per share............... $ (0.20) $ (0.23) $ (0.14)
Weighted-average shares used in computing basic and diluted
net income (loss) per share (in thousands)................ 34,037 27,557 11,429
EBITDA*..................................................... $(7,932) $(6,436) $(1,532)
</TABLE>
* Earnings before interest, taxes, depreciation and amortization, stock-based
compensation related to stock options, and before equity losses in
affiliate. EBITDA is presented here to provide additional information about
our ability to meet future capital expenditures and working capital
requirements. EBITDA is not a measure of financial performance under
generally accepted accounting principles.
12
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, DEC. 31, MARCH 31,
2000 1999 1999
---------- --------- ----------
As a Percentage of Net Revenue
<S> <C> <C> <C>
Revenue:
Product..................................................... 89% 97% 1,075%
Services.................................................... 19 97 67
Less: Stock-based compensation related to product revenue... (8) (94) (1,041)
Net revenue................................................. 100 100 100
Operating expenses:
Cost of services revenue.................................... 63 264 0
Research and development.................................... 142 661 2,143
Sales and marketing......................................... 79 374 406
General and administrative.................................. 71 439 555
Depreciation and amortization............................... 10 129 196
Stock-based compensation related to stock options........... 27 10 53
Total operating expenses.................................. 392 1,877 3,353
Loss from operations........................................ (292) (1,777) (3,253)
Interest income............................................. 72 179 120
Equity in losses of affiliate............................... (2) -- --
Net income (loss)......................................... (222)% (1,598)% (3,133)%
EBITDA*..................................................... (255)% (1,638)% (3,004)%
</TABLE>
13
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
March 31, 2000 Dec. 31, 1999 March 31, 1999
(Unaudited) (Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (note 2) $224,902 $65,287 $3,473
Accounts receivable -- trade, net of allowance for
doubtful accounts of nil (December 31, 1999 -- nil;
March 31, 1999 -- nil) 1,017 3,121 --
Prepaid expenses and other receivables 2,266 1,368 96
-------- ------- ------
228,185 69,776 3,569
Capital assets 3,253 2,366 893
Investment (note 4(a)) 684 -- --
Intangible and other assets (note 5) 3,055 1,100 --
-------- ------- ------
$235,177 $73,242 $4,462
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,638 $ 1,982 $ 253
Accrued liabilities 5,692 2,967 693
Deferred revenue, net of deferred stock-based compensation
of nil (December 31, 1999 -- $248; March 31,
1999 -- $1,361) 7,149 6,125 422
-------- ------- ------
$ 14,479 $11,074 $1,368
Shareholders' equity:
Share capital:
Authorized:
Unlimited common shares
Unlimited preferred shares
Issued and outstanding: 36,551,258 common shares
(December 31, 1999 -- 29,402,426 March 31, 1999 --
11,428,570) 252,991 84,762 7,752
Deferred stock-based compensation (8,687) (5,909) (206)
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
March 31, 2000 Dec. 31, 1999 March 31, 1999
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Accumulated deficit (23,606) (16,685) (4,452)
220,698 62,168 3,094
-------- ------- ------
$235,177 $73,242 $4,462
</TABLE>
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENT OPERATIONS
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 2000 Dec. 31, 1999 March 31, 1999
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Revenue:
Product $ 2,762 $ 383 $ 548
Less stock-based compensation related to product (248) (371) (531)
Services 597 381 34
------- ------- -------
$ 3,111 $ 393 $ 51
Operating expenses:
Cost of revenue 1,953 1,037 --
Research and development 4,423 2,598 1,093
Sales and marketing 2,449 1,468 207
General and administrative 2,218 1,726 283
Depreciation and amortization 317 507 100
Stock-based compensation related to stock options 843 41 27
------- ------- -------
$12,203 $ 7,377 $ 1,710
Loss from operations (9,092) (6,984) (1,659)
Interest income 2,237 703 61
Equity in losses of affiliate (66) -- --
Net loss $(6,921) $(6,281) $(1,598)
Basic and diluted net loss per share $ (0.20) $ (0.23) $ (0.14)
Weighted-average shares used in computing basic and
diluted net loss per share (in thousands) 34,037 27,557 11,429
Earnings before interest, taxes, depreciation and
amortization, stock-based compensation
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31, 2000 Dec. 31, 1999 March 31, 1999
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
related to stock options and equity in losses of affiliate $(7,932) $(6,436) $(1,532)
</TABLE>
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 2000 Dec. 31, 1999 March 31, 1999
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash flows provided by (used in):
Cash flows from operating activities:
Net loss $ (6,921) $(6,281) $(1,598)
Equity in losses of affiliate 66 -- --
Depreciation and amortization 317 507 100
Stock-based compensation 1,091 412 558
Change in operating assets and liabilities:
Accounts receivable 2,104 (856) 35
Prepaid expenses and other receivables (898) (870) (75)
Accounts payable (344) 1,584 17
Accrued liabilities 2,630 1,510 230
Deferred revenue 776 2,518 1,363
Cash flows provided by (used in) operating activities (1,179) (1,476) 630
Cash flows from financing activities:
Issuance of common shares, net of expenses 165,708 41,055 --
Deferred charges -- (1,100) --
Cash flows provided by financing activities 165,708 39,955 --
Cash flows from investing activities:
Purchase of capital assets (1,204) (1,236) (133)
Purchase of intangible and other assets (1,688) -- --
Investment in Maptuit (750) -- --
Acquisition of Yrless Internet Corporation (1,272) -- --
Cash flows used in investing activities (4,914) (1,236) (133)
Increase in cash and cash equivalents 159,615 37,243 497
Cash and cash equivalents, beginning of period 65,287 28,044 2,976
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31, 2000 Dec. 31, 1999 March 31, 1999
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash and cash equivalents, end of period $224,902 $65,287 $ 3,473
Supplemental disclosures of non-cash investing and
financing activities:
Net assets acquired from Yrless Internet Corporation $ (95) $ -- $ --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of 724 Solutions Inc. and its wholly owned subsidiaries
(collectively referred to as the "Company"). Intercompany transactions and
balances are eliminated on consolidation.
The condensed financial statements are stated in U.S. dollars, except as
otherwise noted. They have been prepared in accordance with Canadian
generally accepted accounting principles which conform, in all material
respects, with U.S. generally accepted accounting principles for all periods
presented.
The information furnished reflects, in the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the results of the interim periods presented. Interim
results are not necessarily indicative of results for a full year.
2. CASH AND CASH EQUIVALENTS
Cash consists of deposits with major financial institutions. Cash
equivalents consist of short-term deposits and high-grade commercial paper
with an original maturity of three months or less at the date of purchase.
As at March 31, 2000, cash equivalents accounted for approximately 77% of
the cash and cash equivalents balance and consisted of 88% in short-term
deposits and 12% in commercial paper.
3. STOCK-BASED COMPENSATION
The Company uses the intrinsic value method to account for stock-based
compensation. As such, deferred stock-based compensation is recorded if, on
the date of grant, the current fair value of an underlying common share
exceeds the exercise price per share. Deferred stock-based compensation is
recognized as an expense over the vesting period of the option or as a
reduction of revenue over the term of the related revenue contract.
17
<PAGE>
During the three months ended March 31, 2000, the Company recorded deferred
stock-based compensation related to employee stock options of $3,621,000
(March 31, 1999 -- nil; December 31, 1999 -- $5,800,000).
18
<PAGE>
4. ACQUISITIONS
(a) On March 8, 2000, the Company purchased a one-third interest in
Maptuit.com Inc. ("Maptuit"), a privately held Canadian company in the
business of developing directional mapping software and providing online
directional services, mapping services and spatial relational search
services to its customers, for cash consideration of $750,000.
The investment in Maptuit has been accounted for using the equity method.
Under the equity method, the original cost of the investment is adjusted for
the Company's share of post-acquisition income or losses, less dividends.
The excess of the cost of the shares of Maptuit over the Company's
proportionate interest in the net book value of Maptuit's net assets on the
date of acquisition amounted to approximately $677,000. This excess is being
amortized on a straight-line basis over three years.
(b) On March 17, 2000, the Company acquired all the outstanding common
shares of Yrless Internet Corporation ("Yrless") for total cash
consideration of approximately $1,272,000, including acquisition costs of
approximately $34,000. In addition, the Company is committed to pay
$4,588,000 in cash or common shares of the Company, or a combination
thereof, over the next three years. The payment of this future consideration
is contingent on the former shareholders of Yrless remaining as employees of
the Company.
The cash consideration paid has been allocated to the net assets acquired
based on their fair value and the excess of the purchase price over the fair
value of the net assets acquired has been recorded as goodwill and is being
amortized over three years. The contingent consideration will be recorded as
compensation expense only when the consideration becomes payable.
5. INTANGIBLE AND OTHER ASSETS
<TABLE>
<CAPTION>
March 31, December 31, March 31,
2000 1999 1999
<S> <C> <C> <C>
Goodwill (note 4(b)) $1,367 $-- $--
Acquired software 1,250 -- --
Deferred charges 438 1,100 --
$3,055 $1,100 $--
</TABLE>
Goodwill represents the excess of the purchase price over the fair value of
net assets acquired, and is being amortized on a straight-line basis over
three years. On an ongoing basis, management reviews the valuation and
amortization of goodwill, taking into consideration any events and
circumstances which might impair the fair value. Goodwill is written down to
fair value when decreases in value are considered to be other than
temporary, based upon expected cash flows of the acquired business.
During the period, the Company acquired certain software under a perpetual
license. This acquired software will be integrated into the Company's
product. The acquired software will be amortized on a straight-line basis
over three years.
19
<PAGE>
6. SEGMENTED INFORMATION
The Company operates in a single reportable operating segment, that is, the
design and delivery of an Internet infrastructure platform that enables
financial institutions to deliver financial information and services to a
range of Internet-enabled devices. The single reportable operating segment
derives its revenue from the sale of software and related services. As at
March 31, 2000, substantially all of the assets related to the Company's
operations were located in Canada. Net revenue is attributable to geographic
location based on the location of the customer, as follows:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
2000 1999 1999
<S> <C> <C> <C>
Net revenue by geographic locations:
United States $2,178 $ 127 $--
Canada 933 266 51
$3,111 $ 393 $ 51
</TABLE>
20
<PAGE>
7. RELATED PARTY TRANSACTIONS
The following table sets out the balances and transactions with shareholders
of the Company which have been recorded at the exchange amount:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
2000 1999 1999
<S> <C> <C> <C>
Related party balances:
Accounts receivable, net of allowance for doubtful
accounts $ 892 $3,121 $ --
Deferred revenue, net of deferred stock-based compensation
of nil (December 31, 1999 - $248; March 31,
1999 - $1,361) 7,056 6,125 442
Related party transactions:
Net revenue:
Product $2,514 $ 12 $ 17
Services 472 381 34
</TABLE>
8. INITIAL PUBLIC OFFERING
In February 2000, the Company issued 6,900,000 common shares through an
initial public offering at $26.00 per common share on the NASDAQ National
Market and The Toronto Stock Exchange for net proceeds of approximately
$166.9 million.
21
<PAGE>
CORPORATE INFORMATION
Head Office
Canada (HQ)
724 Solutions Inc.
4101 Yonge Street, Suite 702
Toronto, ON Canada M2P 1N6
Tel.: +1 (416) 226-2900
Fax.: +1 (416) 226-4456
[email protected]
www.724.com
Transfer Agent
Montreal Trust, Toronto
Auditors
KPMG LLP, Toronto
Investor and Public Relations
Ray McManus, Toronto
[email protected]
Share Information
Market Listings Symbol
Toronto Stock Exchange SVN
NASDAQ National Market SVNX
Annual Meeting
The Annual Meeting of Shareholders of 724 Solutions Inc. will be held on
May 31, 2000 at 11.00 am, at the News Theatre, 98 The Esplanade, Toronto,
Ontario, Canada
22
<PAGE>
BOARD OF DIRECTORS
GREGORY WOLFOND
Chairman and Chief Executive Officer
Toronto, Ontario
CHRISTOPHER ERICKSON
President
Toronto, Ontario
ANDRE BOYSEN
Chief Technology Officer
Toronto, Ontario
KERRY MCLELLAN
Chief Operating Officer
Westfield, New Brunswick
LLOYD F. DARLINGTON
Chief Technology Officer and General Manager, Bank of Montreal
Toronto, Ontario
JIM DIXON
Group Executive
Bank of America Technology and Operations
Atlanta, Georgia
MARTIN A. STEIN
President, Sonoma Mountain Ventures L.L.C
San Francisco, California
HARRI VATANEN
President, Sonera SmarTrust
And Senior Vice President,
Sonera Corporation
London, U.K.
ALAN YOUNG
Vice President, Direct Access and Distribution Technologies, e-Citi
New Canaan, Connecticut
23
<PAGE>
OFFICERS
KAREN BASIAN
Chief Financial Officer
MINA WALLACE
Executive Vice President, Field Operations
ALISTAIR RENNIE
Senior Vice President, Marketing
DAVID PASIEKA
Senior Vice President, Application Hosting
ROGER HORTON
Senior Vice President,
Application Development
24
