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EXHIBIT 99.1
724 Solutions
[Logo]
THIRD QUARTER REPORT 2000
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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.
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724 Solutions Inc.
Chairman's Letter
Fellow Shareholders,
Turning customers on, expanding our platform, signing new financial
institutions, pursuing strategic acquisitions and technology development - this
is not only the plan 724 Solutions laid out to its investors last January, it
reads like a re-cap of our third quarter 2000.
The continued growth of 724 Solutions has allowed the company to reach some very
important milestones this past quarter. Less than one year after the IPO, 724
Solutions has been added to The Toronto Stock Exchange's TSE 300 Composite Index
in the Industrial Products Group, the TSE 200 Index, and Standard and Poor's
S&P/TSE Canadian MidCap Index as of market close on September 19, 2000. This
announcement capped off what has been a tremendous quarter for the 724 Solutions
team.
July and August saw two more rollouts of wireless financial services powered by
the 724 Solutions Financial Services Platform (FSP). In the U.S., Bank of
America launched its initial rollout of wireless banking and brokerage services
in August to Private Bank clients in Dallas and Fort Worth, Texas, Baltimore,
Maryland; and Washington, D.C. In Asia, Citigroup moved forward in its
deployment of 724 Solutions' technology with Citibank Singapore's launch of
Citibank Alerts.
The FSP was also chosen for a market trial by KeyCorp, which plans to pilot
wireless banking services to its customers in the fourth quarter of this year.
KeyCorp and Bank of America are keeping our Application Hosting Group busy
managing both instances of the FSP within 724 Solutions data centres.
In mid-September, 724 Solutions acquired an important piece of the overall
company vision. The company is called Spyonit.com, Inc. and its notification
technology will allow us to fulfill our TELL ME WHEN vision. Spyonit.com allows
consumers to set-up "spies" to monitor the Internet for things that matter most
to them and send an alert to whatever access device they prefer. The addition of
this intelligent, personalized notification technology to the secure transaction
capabilities of the FSP will enable consumers the power of not only
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"TELL ME WHEN tickets are available to my favourite show," or "TELL ME WHEN my
favourite band releases their new album," or "TELL ME WHEN I can fly from
Toronto to San Francisco for less than $400," it will allow consumers to buy
those front-row tickets to the show, hold a copy of that album at the nearest
record store, and book that flight to San Francisco.
This quarter has also seen the launch of a new product for 724 Solutions called
LiveClips(TM). LiveClips is based on the technology acquired through
ezlogin.com, Inc. and represents an enhancement of the ezlogin.com, Inc.
aggregation technology as we gear it to the financial services industry. Home
Account, an Internet solutions provider to financial organizations, is
incorporating LiveClips' aggregation technology into its Canopy Central
Web-based financial service offering. MsMoney.com, a women's financial portal,
has also licensed LiveClips in order to offer its customers a consolidated view
of their Web-based accounts through its MyMsMoney online financial management
service, and Bank of Montreal has announced the addition of LiveClips to its
Veev service.
Some of our other significant development efforts include the release of our
latest version of the FSP - a version that enables our customers to quickly roll
out multi-lingual offerings and single sign-on capabilities - and our
joint-development initiatives with Certicom Corp. on a wireless PKI solution for
the financial services industry, and with CheckFree on wireless electronic bill
presentment and payment enablement.
Looking to year-end and beyond, 724 Solutions is continuing to gain momentum
through its support of strategic relationships and the build-out of its
world-class team. The expertise of key new members of the 724 Solutions team -
such as Chris Jarman, our recently appointed executive vice-president of mobile
commerce, and J. Robert S. Prichard, our newest independent director - is a
welcomed addition as we move towards expanding our offering.
/s/ Greg Wolfond
Greg Wolfond
Chairman and Chief Executive Officer
724 Solutions Inc.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis should be read in conjunction with our
unaudited condensed consolidated financial statements for the three months and
nine months ended September 30, 2000 and the accompanying notes. All financial
information is presented in U.S. dollars unless otherwise noted.
Some of the statements made in this document about our future results, levels of
activity, performance, goals or achievements or other future events constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause actual results or events to
differ materially from those anticipated in these forward-looking statements. In
some cases, forward-looking statements can be identified by the use of words
such as "may", "will", "should", "could", "expects", "plans", "intends",
"anticipates", "believes", "estimates", "predicts", "potential", or "continue"
or the negative or other variations of these words, or other comparable words or
phrases. Although we believe that the expectations reflected in these
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements or other future events. We are
under no duty to update any of our forward-looking statements after the date of
this document, other than as required by law. Undue reliance should not be
placed on forward-looking statements. See "Factors that May Affect Future
Results of Operations."
OVERVIEW
724 Solutions provides a wireless financial services infrastructure that enables
financial service providers to offer personalized and secure mobile banking,
investment, and m-commerce services, including aggregation and alert
notification technology, across a wide range of Internet-enabled wireless and
consumer electronic devices. We provide end-to-end customer support through our
global application hosting and contact centre services. Our headquarters are in
Toronto, Canada, and we have offices in London, San Francisco, Sydney, Tokyo,
Paris, Chicago and Mountainview California.
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On September 19, 2000, we were added to The Toronto Stock Exchange's TSE 300
Composite Index in the Industrial Products Group, the TSE 200 Index and Standard
and Poor's S&P/TSE Canadian MidCap Index.
Our objective is to be the leading provider of an Internet infrastructure for
the secure delivery of financial services using a broad range of
Internet-enabled devices.
We continue to make great progress in executing our core strategies:
- Expand our reach;
- Accelerate adoption of our solution:
- By working with device manufacturers and network operators
and;
- Simplifying and reducing the cost of integrating end-users;
- Expand the functionality of our platform;
- Adapt our platform for other industries and;
- Pursue selective acquisitions of companies and technologies to
expand our capabilities.
RECENT DEVELOPMENTS
EXPAND OUR REACH
NEW AGREEMENTS
KEYCORP PILOT AGREEMENT
In September 2000, we entered into a pilot agreement with KeyCorp, one of the
largest financial services companies in the United States, which will enable
KeyCorp to introduce interactive wireless banking services to its Internet
banking customers. KeyCorp's wireless banking services - enabled by the 724
Solutions Financial Services Platform (FSP) - will allow customers to access
real-time account information, transfer funds between accounts, pay bills and
access stock-market information on a variety of Internet-enabled wireless
devices such as digital mobile phones, pagers, and personal digital assistants,
such as Palm Pilots.
The test phase is scheduled for the fourth quarter of 2000. KeyCorp plans to
have our FSP hosted in the 724 Solutions data centre during this first phase.
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JOINT SALES INITIATIVES WITH SINA.COM
In October 2000, we entered into a new relationship with Sina.com (SINA), a
leading Internet media and services company for Chinese communities worldwide.
Under this agreement, we plan on engaging in joint sales activities targeting
each party's financial partners; creating an integrated wireless financial
offering by combining SINA's Web content with our FSP's banking or brokerage
modules; and wireless-enabling SinaMall, SINA's online shopping platform. We
believe that bundling SINA's content with our secure applications and
transactional capabilities creates an extremely attractive offering for the
growing Chinese-language wireless market.
LIVECLIPS DISTRIBUTOR AGREEMENT WITH PARKER'S EDGE
In October 2000, we entered into a distributor agreement with New Zealand based
Parker's Edge Limited, whereby they will be providing services related to our
LiveClips product. Parker's Edge provides financial portal solutions, including
Internet banking and data aggregation, to the Australian and New Zealand
marketplaces. We are excited about this relationship with Parker's Edge because
it extends the reach of our product to these new markets, enabling us to
capitalize on the growth in demand for financial institutions to provide
value-added services for their customers through account aggregation.
LIVECLIPS DISTRIBUTOR AGREEMENT WITH HOME ACCOUNT
In September 2000, we announced a new relationship with Home Account, a provider
of solutions to financial service companies looking to deliver financial
products and services via the Internet. This agreement will enable Home Account
to expand its CANOPY CENTRAL Web-based financial service solution using our
LiveClips' Personal Summary tool. LiveClips will provide Home Account's
customers with convenient access to a consolidated view of their Web-based
financial and other accounts. The service is expected to become available to
Home Account's customers in the fourth quarter of 2000 and it is being hosted in
724 Solutions' secure application hosting facility.
MS.MONEY.COM
In September 2000, we established a new relationship with MsMoney.com to deliver
access to a consolidated view of Web-based accounts to MsMoney.com's customers.
LiveClips will form the centerpiece of MyMsMoney - a new personalized online
financial management service for women. Using the LiveClips' Personal Summary
tool, the "My Accounts" selection on the MyMsMoney page
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will offer users a secure, top-level view of their personal account information
such as bank and credit card balances, incoming e-mails, airline frequent flyer
mileage, investment portfolio information and other specified data in one
location.
LiveClips enables the MyMsMoney service to allow users to access their existing
customized directory of more than 1,300 sites. Users can also take advantage of
the secure, single-login feature that eliminates the need to remember different
user IDs and passwords for online accounts. MyMsMoney is expected to be launched
before the end of 2000.
CUSTOMER MILESTONES
BANK OF AMERICA LAUNCHES WIRELESS BANKING AND BROKERAGE
In the third quarter of 2000, Bank of America launched its first wireless
banking and brokerage offering in the United States. Powered by our FSP, the
Bank of America wireless service will allow clients to conduct a variety of
secure, real-time banking transactions and access financial markets and
investment information on a range of mobile phones and Palm handheld devices and
organizers. The initial roll-out of this service will be available to Bank of
America Private Bank clients in Dallas and Fort Worth, Texas, Baltimore,
Maryland and Washington, D.C. Bank of America has announced that it plans to
roll out its wireless service to its customers in other U.S.
markets over the next 12 to 18 months.
BANK OF MONTREAL TEST-DRIVES LIVECLIPS WITH WIRELESS CUSTOMERS
In October 2000, Bank of Montreal (BMO) began a test market trial of our
LiveClips aggregation product. LiveClips will enable BMO's Veev service to offer
customers single sign-on access to a consolidated view of integrated financial
information. In addition, Veev is available on new access channels, including
carriers such as Rogers AT&T Wireless and the Clearnet PCS and Mike networks as
well as on two wireless computing devices from Research in Motion, thereby
extending its reach to additional customers.
LAUNCH OF ALERTS
Citigroup launched Citibank Alerts, a new wireless service in Singapore
providing consumers the ability to track their bank accounts
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and receive the latest news and stock market information through their Short
Message Service (SMS)-capable phones or Internet accounts. Citibank Alerts is
the first of the electronic products and services being implemented through our
relationship with Citibank.
ACCELERATE ADOPTION OF OUR SOLUTION
INTRODUCTION OF LIVECLIPS
In September 2000, we introduced our LiveClips product offering. LiveClips
builds on the technology acquired through our June 2000 purchase of ezlogin.com,
Inc. (ezlogin.com), by enhancing it from a security, functionality, and
technology standpoint. LiveClips is a comprehensive aggregation tool designed to
enable our customers to offer additional value to their consumers by providing
them wired or wireless access to a full suite of online accounts and other items
of personal interest. LiveClips enables users to access a variety of these
accounts by using a single user ID and password to sign-in to a secure and
easy-to-access location.
APPLICATION HOSTING SERVICES
In the third quarter of 2000, we have committed to provide application hosting
services to five of our major financial institution customers. We believe that
our application hosting services provide our customers with a fast, secure,
scalable and cost-effective way to enter the mobile banking market through the
hosted operation of our FSP. In the future, in addition to our FSP, we expect to
host other services such as our aggregation and notification technologies.
EXPAND THE FUNCTIONALITY OF OUR PLATFORM
ACQUISITION OF SPYONIT.COM, INC.
In September 2000, we completed the acquisition of Chicago-based Spyonit.com,
Inc. (Spyonit.com). Spyonit.com's infrastructure software monitors the Internet
for items of interest such as stock prices, product sales, or auction bids. When
appropriate content is detected, the Spyonit.com system delivers smart
notifications to the user through a variety of Internet-accessing devices, such
as digital mobile phones and personal digital assistants.
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Spyonit.com allows us to broaden the range of alert services that our FSP
supports, complements our LiveClips aggregation solution, and adds a compelling
standalone offering to our product portfolio. Spyonit.com's alert technology and
personnel will help provide the platform and expertise for our "Tell Me When"
offering - presenting consumers with personalized alerts on informational events
when they occur, and eventually enabling them to complete transactions based on
that information. We believe that this service will be attractive to financial
service providers because it can both encourage consumers to begin m-commerce
services, and encourage repeat usage.
Spyonit.com's technology will enable our FSP to support m-commerce alerts from
merchant Web sites and account alerts from financial institution data. In
addition, the Spyonit.com business unit will independently target other market
segments including media/news and entertainment, healthcare, portals, search
engines and other enterprise categories. We anticipate that, through these
services, we will benefit from cross-sell and up-sell opportunities through our
combined existing and future customer relationships.
The consideration paid in connection with this transaction consisted of $2.0
million in cash and the issuance of 1,041,616 of our common shares. The
principal employees of Spyonit.com have agreed to continue their employment with
Spyonit.com.
ENHANCEMENTS TO FSP
In the third quarter of 2000, we introduced an enhancement to our FSP. This
release focuses on providing our customers with more flexibility in reaching
their customers using devices that are gaining substantial consumer adoption
such as Wireless Application Protocol (WAP) phones and two-way pagers.
Recognizing the need to offer personalized services to customers, this
enhancement of our FSP features multi-byte character support, which enables our
FSP to deliver financial services in virtually any language. By reducing the
language barrier, we believe that this enhancement will facilitate end-user
adoption and acceptance of wireless technology for financial transactions.
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ADAPT OUR PLATFORM FOR OTHER INDUSTRIES
EXPANSION INTO M-COMMERCE
We have taken steps to fulfill key pieces of our m-commerce plan. In August
2000, Chris Jarman joined us as Executive Vice President, Mobile Commerce. Mr.
Jarman has substantial experience in directing initiatives in the m-commerce
area. In his most recent position, as MasterCard International's Senior Vice
President of Global Mobile Commerce, he directed MasterCard's plans for emerging
markets and new delivery channels. In his 20 years in the emerging technology
sector, he also led initiatives with ORGA Group of Companies and TSB Bank in the
UK.
In October 2000, we entered into an agreement with Brodia, a personal commerce
and payment infrastructure company, to enable interoperability between our FSP
and Brodia's mobile wallet services. The agreement is intended to extend the
capabilities of our financial services infrastructure software with a
gateway-level connection to Brodia's Identity Management System (IDMS). The
resulting service will allow consumers to securely access their credentials
stored in the IDMS, and securely perform transactions on a variety of
browser-enabled mobile devices accessing FSP-based financial services.
As we look at ways in which financial institutions and other financial
m-commerce and services providers may use our FSP to build on their customers'
trust, m-commerce is a natural extension of our banking and brokerage
capability. Additionally, we are able to offer other types of m-commerce
services to new customer segments as we have the capability to combine our new
aggregation and alerts notification technology with e-wallets.
APPOINTMENT OF DIRECTORS
In August 2000, we announced the appointment of J. Robert S. Prichard, Professor
of Law and President Emeritus of the University of Toronto, to our Board of
Directors. Mr. Prichard's appointment helps fulfill our commitment to
maintaining a board with several independent directors which will focus on
effective corporate governance.
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ANALYSIS OF STATEMENT OF OPERATIONS
Our unaudited condensed consolidated financial statements are prepared in
accordance with Canadian generally accepted accounting principles, which in our
case, conform in all material respects with U.S. generally accepted accounting
principles.
REVENUE
Our revenue, before the offset of stock-based compensation, increased to $6.1
million for the three months ended September 30, 2000 from $4.0 million for the
three months ended June 30, 2000 and increased to $13.4 million for the nine
months ended September 30, 2000 from $2.1 million for the nine months ended
September 30, 1999. These increases resulted primarily from service revenue
derived from our consulting services relating to our customers' deployment of
our FSP and implementation of our aggregation technology and higher product
revenue, reflecting new customers licensing our FSP.
PRODUCT REVENUE
Our product revenue, before the offset of stock-based compensation, increased to
$3.5 million in the third quarter of fiscal 2000 compared to $2.6 million for
the three months ended June 30, 2000. Our product revenue, before the offset of
stock-based compensation, increased to $8.8 million for the nine months ended
September 30, 2000 from $1.3 million for the nine months ended September 30,
1999. The increase from the nine months ended September 30, 2000 from the same
period in the prior year, is attributed to additional customers from which we
began to recognize revenue in fiscal 2000.
SERVICE REVENUE
Our service revenue increased to $2.6 million for the three months ended
September 30, 2000 from $1.4 million for the three months ended June 30, 2000.
Service revenue was $4.6 million compared to $788,000 for the nine months ended
September 30, 2000 and September 30, 1999, respectively. The quarter over
quarter growth was due primarily to the increase in consulting work performed
for our new and current customers as they deploy our Financial Services
Platform. In addition, in the third quarter of fiscal 2000, we received revenue
for consulting work related to the implementation and customization of our
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LiveClips offering. We anticipate that consulting revenue from this source will
continue as financial services providers seek to obtain services that we have
made available as a result of our June 2000 acquisition of ezlogin.com. In
addition to the above, the increase for the nine months ended September 30, 2000
over the nine months ended September 30, 1999 in our revenue from consulting
services is primarily the result of our customers seeking additional services of
this kind as they deploy our FSP.
Service revenue is derived from consulting services, maintaining and servicing
our products and application hosting. We have only recently begun to provide
application hosting services, however, we expect to see an increase in
application hosting revenue once customers have installed our FSP and their
services begin to run on our data centers.
OPERATING EXPENSES
COST OF REVENUE
Cost of revenue was $3.8 million for the three months ended September 30, 2000
compared to $2.6 million for the three months ended June 30, 2000. The increase
in the most recent quarter over the prior quarter was primarily related to
startup and implementation costs required to establish our application hosting
infrastructure. Cost of revenue was $8.3 million for the nine months ended
September 30, 2000, compared to $802,000 for the nine months ended September 30,
1999. This increase was primarily related to the addition of implementation and
customer service personnel to support our increase in customers. The increase in
cost of revenue also reflects amounts paid to third-party consultants and
software providers. We expect cost of revenue to increase in the near future as
we ramp up our application hosting group and establish hosting centers
worldwide.
Cost of revenue consists primarily of personnel costs associated with customer
support, training, implementation, consulting and hosting services, as well as
amounts paid to third-party consulting firms for those services and an
allocation of expenses for our facilities and administration. It also includes
software licensing expenses paid for integration of third-party software into
our FSP.
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RESEARCH AND DEVELOPMENT
Research and development expenses increased to $8.1 million for the three months
ended September 30, 2000 from $6.5 million for the three months ended June 30,
2000. Research and development expenses were $19.0 million for the nine months
ended September 30, 2000 compared to $4.4 million for the nine months ended
September 30, 1999. These increases are attributed to the expansion of the
functionality of our platform and costs associated with integrating ezlogin.com
and other acquired technology and the continued development of our LiveClips
product. We anticipate that our research and development expenses will increase
in the future as we continue to expand the functionality of our platform and
enhance the technologies that we purchased in connection with our previous
acquisitions.
Research and development expenses relate to the compensation of software
developers in connection with the continuing enhancement of our FSP and our
quality assurance and testing activities. These expenses also include
independent contractors and consultants, software licensing expenses, and
allocated operating expenses.
SALES AND MARKETING
Sales and marketing expenses were $3.6 million compared to $3.3 million for the
three months ended September 30, 2000 and June 30, 2000, respectively. For the
nine months ended September 30, 2000 sales and marketing expenses were $9.4
million compared to $1.1 million for the nine months ended September 30, 1999.
These increases were primarily the result of costs associated with the hiring
and training of our sales and marketing personnel, both domestically and
internationally, as well as the cost of additional marketing programs designed
to build brand awareness. We have increased the number of sales personnel to
manage our relationships with our major customers and to expand our business.
GENERAL AND ADMINISTRATIVE
Our general and administrative expenses decreased to $3.9 million for the three
months ended September 30, 2000 from $5.4 million for the three months ended
June 30, 2000. The decrease was mainly attributed to the fact that in the second
quarter of 2000 we incurred non-recurring costs due to the integration and
professional fees related to acquisitions and corporate development activities.
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Our general and administrative expenses increased to $11.5 million for the nine
months ended September 30, 2000 from $1.9 million for the nine months ended
September 30, 1999. The increase in general and administrative expenses
reflected our continued investment in increased staffing and related expenses
for the enhancement of the global infrastructure necessary to support our
growing business, including improved management information systems and our
increased utilization of outside professional service firms. The remainder of
the increase was due to non-recurring integration and professional fees related
to our acquisitions and corporate development activities.
DEPRECIATION AND AMORTIZATION
Total depreciation and amortization expense was $9.2 million for the three
months ended September 30, 2000 compared to $2.0 million for the three months
ended June 30, 2000. Total depreciation and amortization expense was $11.6
million for the nine months ended September 30, 2000 compared to $445,000 for
the nine months ended September 30, 1999. These increases were mainly due to the
amortization expense of $7.8 million, for the three months ended September 30,
2000 and $9.0 million for the nine months ended September 30, 2000 of goodwill
and acquired intangibles relating to the ezlogin.com acquisition completed in
June 2000 and the Spyonit.com acquisition completed in September 2000. We are
amortizing goodwill related to the ezlogin.com and Spyonit.com acquisitions over
24 months and 60 months respectively. Additional depreciation relating to
computer hardware purchased for our application hosting facilities accounted for
the remainder of the change.
AMORTIZATION OF DEFERRED STOCK-BASED COMPENSATION RELATED TO STOCK OPTIONS
Amortization of employee stock-based compensation was $1.6 million for the three
months ended September 30, 2000 compared to $1.5 million for the three months
ended June 30, 2000. Amortization of employee stock-based compensation was $3.9
million for the nine months ended September 30, 2000 compared to $124,000 for
the nine months ended September 30, 1999. The deferred stock-based compensation
mainly 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 is being amortized on a
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straight-line basis over the vesting periods of these options. The increases are
largely attributed to the amortization of deferred stock-based compensation
related to options that were granted between October 1, 1999 and March 31, 2000.
INTEREST INCOME
Interest income increased to $3.6 million for the three months ended September
30, 2000 from $2.8 million for the three months ended June 30, 2000. Interest
income increased to $8.6 million for the nine months ended September 30, 2000
from $341,000 for the nine months ended September 30, 1999. Interest was derived
from cash and cash equivalent balances and short-term investments, 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 the first quarter of 2000.
EQUITY IN LOSSES OF AFFILIATE
In the third quarter, our ownership in Maptuit decreased from 33.4 percent to
27.5 percent due to additional financing that Maptuit received from other
investors. Our investment in Maptuit is accounted for using the equity method.
Under this method, we recognized a net gain of $965,000 for the three months
ended September 30, 2000, compared to a charge of $213,000 for the three months
ended June 30, 2000 and a net gain of $686,000 for the nine months ended
September 30, 2000. These amounts reflect our share of Maptuit's losses for the
period since our investment, amortization of goodwill and the dilution gain as a
result of Maptuit's additional financing.
NET LOSS
We recorded a net loss of $19.4 million for the three months ended September 30,
2000 compared to a net loss of $14.8 million for the three months ended June 30,
2000. Our net loss per share, calculated using the weighted average number of
shares outstanding, was $0.51 for the three months ended September 30, 2000
compared to a net loss per share of $0.40 for the three months ended June 30,
2000. For the nine months ended September 30, 2000 our net loss was $41.1
million or $1.13 per share, compared to a net loss of $7.6 million or $0.57 per
share in the same period last year. 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
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services and continue to invest in developing our Financial Services Platform.
In particular, our research and development expenses and our sales and marketing
expenses increased to meet required product delivery schedules and to gain
market share. We continue to focus on our general and administrative expenses as
an area to gain efficiencies and economies of scale as we grow.
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 $165.7 million.
Net cash used in operating activities was $15.9 million for the three months
ended September 30, 2000 compared to $7.8 million for the three months ended
June 30, 2000. For the nine months ended September 30, 2000 net cash used in
operating activities was $25.2 million compared to $3.8 million for the same
period ended September 30, 1999. Net cash used in operating activities for the
nine months ended September 30, 2000 reflects our net operating loss of $41.1
million and our net gain in equity of affiliate of 686,000 offset by
depreciation and amortization of $11.6 million, amortization of stock-based
compensation of $4.1 million and net changes in working capital of $350,000.
Cash provided from financing activities was $165.7 million for the nine
months ended September 30, 2000, compared to $30.1 million for the nine
months ended September 30, 1999. Cash flow from financing activities in 2000
reflects the net proceeds of our initial public offering. Cash used in
investing activities, before the purchase of short-term investments, was $5.1
million for the three months ended September 30, 2000 compared to $17.3
million for the three months ended June 30, 2000. Cash used in investing
activities, before the purchase of short-term investments, for the nine
months ended September 30, 2000 was $27.2 million compared to $1.2 million
for the nine months ended September 30, 1999. At September 30, 2000,
short-term investments mainly consist of government debt and commercial paper
with a maturity term of no
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greater than one year. Cash used in investing activities, excluding the purchase
of short-term investments, for the first nine months of 2000 reflects our
investments in Corillian, Neomar and Maptuit, our acquisitions of Yrless
Internet Corporation, ezlogin.com and Spyonit.com, as well as purchases of
capital and other assets. Capital expenditures for the nine months ended
September 30, 2000 were $8.8 million. We anticipate capital expenditures to
continue to increase as we invest heavily in our Financial Services Platform and
implement data centers to support our application hosting activities.
We expect that the revenue from our operations, interest income and the funds
provided by our initial public offering will be sufficient to cover our cash
requirements for at least the next 12 months. 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 are 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, which could affect our operating results.
We also deal in other foreign currencies, however, we feel that their impact on
foreign exchange is negligible as only a small portion of our expenses are
incurred in those 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 described
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
Canadian Securities Administrators, including our Annual Report on Form 20-F and
our reports on Form 6-K, our Annual Information Form and our 1999 Annual Report,
in particular the statements under the caption "Risk Factors".
16
<PAGE>
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 our platform to capitalize on other
Internet-infrastructure opportunities such as data aggregation, alert
notification, bill payment and presentment and e-wallet services. Although we
have described in this document different services that we aim to develop or
provide, we cannot assure that we, either alone or with the parties we have
identified herein, will succeed in doing so. In particular, we only recently
began to provide application hosting services, and believe that we must do so in
an effective manner in order to retain our existing customers and to enhance our
reputation in the market for Internet-based solutions for financial services
providers.
A large portion of our revenue is derived from the license of our solution to a
limited number of financial institutions. For the three months ended September
30, 2000, four customers accounted for substantially all of our revenues. In
addition to financial institutions, we expect to increase our customer base
through services and products acquired through our acquisitions of ezlogin.com
and Spyonit.com. However in order to increase our revenues, we will need to
attract more customers and compete effectively against our existing and emerging
competitors. 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 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 offered by our
financial institution customers 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 up-front implementation costs to enable our
customers to market these services more quickly. If a large number of customers
do not subscribe to the services offered by our financial institution customers,
we will not be able to generate sufficient revenues to recover these costs.
17
<PAGE>
724 SOLUTIONS INC.
Condensed Consolidated Balance Sheets
(In thousands of U.S. dollars)
<TABLE>
<CAPTION>
September 30 December 31
2000 1999
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents (note 3) $ 19,915 $ 65,287
Short-term investments (note 3) 158,062 -
Accounts receivable-trade
net of allowance of $92 (December 31, 1999 - nil) 3,205 3,121
Prepaid expenses and other receivables 3,623 1,368
------------------------------
184,805 69,776
Capital assets 9,776 2,366
Investments 11,935 -
Intangible and other assets (note 5) 90,750 1,100
------------------------------
$ 297,266 73,242
------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 1,676 1,982
Accrued liabilities 8,199 2,967
Deferred revenue, net of deferred stock-based
compensation of nil (December 31, 1999 - $248) 4,135 6,022
------------------------------
14,010 10,971
Leasehold inducements 398 103
Shareholders' equity:
Share capital (note 8):
Authorized:
Unlimited common shares
Unlimited preferred shares
Issued and outstanding:
39,061,130 common shares
(December 31, 1999 - 29,402,426) 357,079 84,762
Deferred stock-based compensation (note 4) (16,419) (5,909)
Accumulated deficit (57,802) (16,685)
------------------------------
282,858 62,168
------------------------------
$297,266 73,242
------------------------------
------------------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
18
<PAGE>
724 SOLUTIONS INC.
Condensed Consolidated Statement of Operations (unaudited)
(In thousands of U.S. dollars, except per share amounts)
<TABLE>
<CAPTION>
Fiscal 2000 Nine Months Ended
Three Months Ended September 30,
September 30, June 30, 2000 1999
<S> <C> <C> <C> <C>
Revenue:
Product $ 3,482 $ 2,591 $ 8,835 $ 1,314
Less: stock-based compensation
related to product - - (248) (1,273)
Service 2,632 1,377 4,606 788
-----------------------------------------------------------
Net revenue 6,114 3,968 13,193 829
Operating expenses:
Cost of revenue 3,777 2,550 8,280 802
Research and development 8,065 6,545 19,033 4,360
Sales and marketing 3,632 3,315 9,396 1,106
General and administrative 3,879 5,395 11,492 1,883
Depreciation 1,313 684 2,314 445
Amortization of intangibles 7,917 1,350 9,267 -
Stock-based compensation related
related to stock options 1,555 1,456 3,854 124
-----------------------------------------------------------
Total operating expenses 30,138 21,295 63,636 8,720
-----------------------------------------------------------
Loss from operations (24,024) (17,327) (50,443) (7,891)
Interest income 3,633 2,772 8,643 341
Equity in income (losses) of affiliate 965 (213) 686 -
-----------------------------------------------------------
Net loss for the period $(19,426) $(14,768) $(41,114) $ (7,550)
-----------------------------------------------------------
-----------------------------------------------------------
Basic and diluted net
loss per share $ (0.51) $ (0.40) $ (1.13) $ (0.57)
Weighted-average number of shares
used in computing basic and diluted
net loss per share (in thousands) 37,961 36,717 36,246 13,301
-----------------------------------------------------------
-----------------------------------------------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
19
<PAGE>
724 SOLUTIONS INC.
Condensed Consolidated Statement of Cash Flows (unaudited)
(In thousands of U.S. dollars)
<TABLE>
<CAPTION>
Fiscal 2000 Nine Months ended
Three Months Ended September 30,
September 30 June 30 2000 1999
<S> <C> <C> <C> <C>
Cash flows provided by (used in):
Cash flows from operating activities:
Net loss for the period $ (19,426) $ (14,768) $ (41,114) $ (7,550)
Items not involving cash:
Other non cash expenses (171) 705 (65) -
Equity in income (losses) of affiliate (965) 213 (686) -
Depreciation and amortization 9,230 2,034 11,581 445
Stock-based compensation 1,555 1,456 4,103 1,397
Foreign exchange loss (gain) 266 431 651 -
Change in operating assets and liabilities:
Accounts receivable (2,113) (75) (84) (2,230)
Prepaid expenses and
other receivables (724) (361) (2,255) (477)
Accounts payable (4,030) 3,512 (306) 162
Accrued liabilities 1,765 743 5,233 994
Deferred revenue (1,322) (1,691) (2,238) 3,435
----------------------------------------------------------------
Cash flows provided by (used in) operating activities $ (15,935) $ (7,801) $ (25,180) $ (3,824)
Cash flows from financing activities:
Issuance of common shares, net of expenses (36) - 165,672 30,114
----------------------------------------------------------------
Cash flows provided by financing activities $ (36) $ - $ 165,672 30,114
Cash flows from investing activities:
Purchase of short term investments (147,952) (10,110) (158,062) -
Purchase of capital assets (2,998) (4,575) (8,777) (1,222)
Purchase of intangible and other assets (68) (819) (2,136) -
Investment in Neomar Inc. - (3,500) (3,500) -
Investment in Corillian Corporation - (7,000) (7,000) -
Investment in Maptuit.com Inc. - - (750) -
Acquisition of Yrless Internet Corporation - - (1,272) -
Acquisition of ezlogin.com, Inc. - (1,431) (1,651) -
Acquisition of Spyonit.com, Inc. (2,065) - (2,065) -
----------------------------------------------------------------
Cash flows used in investing activities $ (153,083) $ (27,435) $ (185,213) $ (1,222)
Foreign exchange loss (gain) on cash
held in a foreign currency (266) (431) (651) -
Increase (decrease) in cash and cash equivalents (169,320) (35,667) (45,372) 25,068
Cash and cash equivalents, beginning of period 189,235 224,902 65,287 2,976
Cash and cash equivalents, end of period $ 19,915 $ 189,235 $ 19,915 $ 28,044
Supplemental disclosures of non-cash
investing and financing activities:
Net assets acquired from acquisitions $ 82 $ 1,870 $ 1,837 $ -
----------------------------------------------------------------
Common shares issued upon acquisitions 1,041,616 1,003,594 2,045,210 -
----------------------------------------------------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
20
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
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. ACQUISITIONS:
On September 12, 2000, the Company acquired all of the outstanding shares
of Spyonit.com, Inc. (Spyonit.com), a privately held company incorporated
in Delaware which develops software to monitor the Internet and other
content sources for items of interest to end-users. The transaction has
been accounted for by the purchase method, with the results of operations
included in these financial statements from the date of acquisition. The
purchase price of approximately $40.0 million was satisfied by the
issuance of 1,041,616 common shares of the Company and $2.0 million in
cash. As part of the terms of purchase, up to 137,062 common shares of
the total common shares issued are subject to repurchase at a minimum
value if the vendors do not remain employees of the Company through
September 2003. In addition, the Company incurred $200,000 in costs
related to the acquisition. The excess of the purchase price over the
fair value of the net tangible assets of Spyonit.com at the date of
acquisition of $39.9 million has been allocated to goodwill and acquired
intangible assets and will be amortized over 60 months. Amortization
expense of the resulting goodwill and acquired intangible assets of
$400,000 has been recorded in the three month period ended September 30,
2000.
21
<PAGE>
3. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
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 September 30, 2000, cash equivalents accounted for
approximately 69% of the cash and cash equivalents balance and consisted
entirely of short-term deposits.
Short-term investments which consist of fixed income securities with a
maturity of three months or more, are recorded at their accreted value as
they are held to maturity.
4. 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 of the stock option or the subscription right, the
current deemed fair value for financial reporting purposes 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 stock option or as a reduction of revenue over the term of
the related revenue contract, as the case may be.
5. INTANGIBLE AND OTHER ASSETS:
<TABLE>
<CAPTION>
------------------------------------------------------------------------
September 30, December 31,
2000 1999
(unaudited)
------------------------------------------------------------------------
<S> <C> <C>
Goodwill $ 79,106 $ -
Other 2,326 1,100
Acquired technology 9,318 -
------------------------------------------------------------------------
$ 90,750 $ 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 a period of up to five 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 of the related asset. 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.
22
<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 wide range of Internet-enabled devices. The single
reportable operating segment derives its revenue from the sale of
software and related services. Information about the Company's
geographical net revenues and assets is set forth below:
NET REVENUES
<TABLE>
<CAPTION>
------------------------------------------------------------------------
Nine months ended
--------------------------------
September 30, September 30,
2000 1999
(unaudited) (unaudited)
------------------------------------------------------------------------
<S> <C> <C>
Net revenue by geographic locations:
Other North America $ 11,158 $ -
Canada 2,035 829
------------------------------------------------------------------------
$ 13,193 $ 829
------------------------------------------------------------------------
------------------------------------------------------------------------
</TABLE>
IDENTIFIABLE ASSETS
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30, 2000 December 31, 1999
(unaudited)
----------------------------------------------------------------------------------------------------------
Capital Assets Goodwill Capital Assets Goodwill
<S> <C> <C> <C> <C>
United States $ 1,412 $ 77,947 $ 41 -
Canada 8,300 1,159 2,325 -
International 64 - -
----------------------------------------------------------------------------------------------------------
$ 9,776 $ 79,106 $ 2,366 -
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
7. RELATED PARTY TRANSACTIONS:
The Company transacts with certain shareholders: Bank of Montreal, Wells
Fargo, Bank of America and Citicorp Strategic Technology Corporation. The
following table sets out the balances and transactions with these
shareholders, which have been recorded at the exchange amount:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
Nine months ended
----------------------------------
September 30, September 30,
2000 1999
(unaudited) (unaudited)
----------------------------------------------------------------------------------------
<S> <C> <C>
Related party balances:
Accounts receivable, net of allowance
for doubtful accounts of $92 $ 2,249 $ 750
Deferred revenue, net of deferred
stock-based compensation of nil
(September 30, 1999 - $619) 2,934 2,236
----------------------------------------------------------------------------------------
Related party transactions:
Net revenue:
Product $ 8,532 $ 41
Services 4,037 34
</TABLE>
8. COMMON SHARES
At September 30, 2000 and December 31, 1999 there were options
outstanding to acquire 3,876,137 and 2,867,930 common shares of the
Company, respectively.
24
<PAGE>
<TABLE>
<S> <C>
CORPORATE INFORMATION
HEADQUARTERS SHARE INFORMATION
Canada Market Listings [Symbol]
724 Solutions Inc. The Toronto Stock Exchange [SVN]
4101 Yonge Street, Suite 702 NASDAQ National Market [SVNX]
Toronto, ON Canada M2P 1N6
Tel.: +1 (416) 226-2900
Fax.: +1 (416) 226-4456 PUBLIC RELATIONS
[email protected] Ray McManus, Toronto
www.724.com
TRANSFER AGENT INVESTOR RELATIONS
Computershare Investor Services Monica Zaied, Toronto
Toronto [email protected]
AUDITORS CANADIAN LEGAL COUNSEL
KPMG LLP, Toronto Ogilvy Renault, Toronto
U.S. LEGAL COUNSEL
Morrison & Foerster LLP
New York, New York
BOARD OF DIRECTORS
GREGORY WOLFOND HEATHER REISMAN
Chairman and Chief Executive Officer Founder and Chief Executive Officer
724 Solutions Inc. Indigo Books & Music, Inc.
Toronto, Ontario Toronto, Ontario
LLOYD F. DARLINGTON BARRY J. REITER
President and Chief Executive Officer Chairman of the Technology Group and
Emfisys, Bank of Montreal member of the Executive Committee, Torys
Toronto, Ontario Toronto, Ontario
JAMES D. DIXON MARTIN A. STEIN
President, bankofamerica.com President, Sonoma Mountain Ventures LLC, San Francisco,
Bank of America Corporation California
Atlanta, Georgia
HOLGER KLUGE HARRI VATANEN
Former President, CIBC President and Chief Executive Officer
Toronto, Ontario Sonera SmartTrust Ltd.
London, England
J. ROBERT S. PRICHARD ALAN YOUNG
Professor of Law and Public Policy and President Vice President & Executive Director, Technology, e-Citi,
Emeritus, University of Toronto Citibank, N.A.
Toronto, Ontario New York, New York
</TABLE>
<PAGE>
<TABLE>
<S> <C>
OFFICERS
GREGORY WOLFOND MINA WALLACE
Chairman and Chief Executive Officer Executive Vice President, Field Operations
CHRISTOPHER ERICKSON ALISTAIR RENNIE
President, General Counsel and Secretary Executive Vice President, Marketing
ANDRE BOYSEN DAVID PASIEKA
Chief Technology Officer Senior Vice President, Application Hosting
KAREN BASIAN ROGER HORTON
Chief Financial Officer Senior Vice President, Application Development
CHRISTOPHER JARMAN RICHARD COSTOLO
Executive Vice President, Mobile Commerce Senior Vice President, Notification Services Spyonit
</TABLE>
<PAGE>
724 SOLUTIONS
[LOGO]
OUR LOCATIONS
CANADA (HQ)
724 Solutions Inc.
10 York Mills Rd., 3rd Floor
Toronto, ON Canada M2P 2G4
Tel.: +1(416) 226-2900
Fax.: +1(416) 226-4456
[email protected]
www.724.com
U.S.A.
1 Market, Steuart Tower 1475
San Francisco, CA USA 94105
Tel.: +1(415) 615-0724
Fax.: +1(415) 615-0195
[email protected]
U.K. & EUROPE
No. 1 Poultry, 2nd Floor
London, England EC2R 8JR
Tel.: +44-207-643-2245
Fax.: +44-207-643-2682
JAPAN
Kaymiyacho Mori Building
14th Floor, 4-3-20 Toranomon
Minato-ku, Tokyo, Japan
Tel.: +813 (5404) 3408
Fax.: +813 (5404) 3571
Mobile: 090-9316-9948
AUSTRALIA
Level 20, Tower 2 Darling Park
201 Sussex Street
Sydney 2000 Australia
Tel.: +(612) 9006-1000
Fax.: +(612) 9006-1430
EZLOGIN.COM, INC.
1927 Landings Drive
Mountainview, CA USA 94043
Tel.: +1(650) 526-3800
Fax.: +1(650) 526-3810
SPYONIT.COM, INC.
434 West Ontario, Suite 410
Chicago, Illinois 60610
Tel.: +(312) 642-9050
Fax.: +(312) 642-9051
