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EXHIBIT 99.1
724 Solutions
[Logo]
SECOND 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,
It has been another strong quarter for 724 Solutions, closing the first half of
2000 with revenue topping U.S. $7 million.
Second quarter 2000 brought an expansion of services offered by our customer
Bank of Montreal to include French language capabilities and service in Western
Canada. More recently, we signed two new licensing agreements with leading
institutions BBVA Bancomer in Mexico, and Wachovia Corporation in the U.S., and
Harris Bank became the first U.S. bank to offer wireless services to its one
million customers. With BBVA Bancomer, the 724 Solutions Financial Services
Platform (FSP) will be further expanded to meet the banking needs of
Spanish-speaking consumers in Mexico and the U.S. Meanwhile, the Wachovia
licensing agreement for retail and commercial banking and investment services
marks our company's entry into the corporate banking arena - furthering 724
Solutions' goal to meet the needs of our customers.
This has certainly been a busy and exciting time for the entire 724 Solutions
team. Looking to make the FSP available to even more financial institutions and,
ultimately, consumers, we teamed up with Corillian Corporation in a
joint-marketing agreement to offer medium-sized financial services providers a
seamless wired and wireless Internet banking services solution for Wireless
Application Protocol (WAP)-enabled phones.
The FSP functionality was further expanded through relationships forged with
companies such as Neomar - whose technology helps speed-up delivery of WAP-based
wireless financial services applications onto personal digital assistants;
Maptuit - with whom 724 Solutions will develop location-based services; and
SITEL Corporation - who help us offer valued multiple-language contact centre
services to our customers around the world. These partners not only help us
offer value-added functionality to the FSP and accelerate adoption, they also
raise the bar for wireless banking and investment services.
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During this quarter, 724 Solutions was also able to demonstrate the FSP's
readiness for next-generation devices operating on leading technologies such as
Microsoft's Windows-powered PocketPC platform. Furthering our relationship with
Ericsson, we also announced that the FSP is General Packet Radio Services
(GPRS)-compliant and ready for live trials after completing testing in
Ericsson's new Berkeley Wireless Centre.
We continue to build a talented pool of professionals within the 724 Solutions
team, having grown 34 percent during the quarter from 315 to 421 employees. Part
of this growth comes from the addition of experienced talent following the close
of 724 Solutions' acquisition of ezlogin.com, Inc. in June.
At the shareholders' meeting in May, three independent directors - Holger Kluge,
a former CIBC executive; Barry J. Reiter, chairman of the Toronto law firm
Torys' Technology Group; and Heather Reisman, founder and chief executive
officer of Indigo Books, Music and More - were appointed to the board of
directors, adding strong business insight and strategic value to our global
deployment initiatives.
Moving forward, the 724 Solutions team is positioned to continue raising the bar
in value-add by expanding the FSP to better respond to customer needs, and stake
its claim to new regions around the world. We are already off to a running start
with our recent announcements with CheckFree to provide bill presentment and
electronic billing through the Financial Services Platform, and with Certicom to
develop the first open and standards-based wireless PKI solution for the
financial services industry - not to mention Citibank Singapore's going live on
August 4th. Stay tuned for much more to come.
/s/ GREG WOLFOND
GREG WOLFOND
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
724 SOLUTIONS INC.
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724 SOLUTIONS INC.
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
SIX MONTHS ENDED JUNE 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, THE COMPANY CANNOT GUARANTEE FUTURE
RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS OR OTHER FUTURE EVENTS.
THE COMPANY IS UNDER NO DUTY TO UPDATE ANY OF ITS 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.
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 headquarters are in Toronto, Canada
and we have offices in London, San Francisco, Sydney, Tokyo, Mountainview
California, and Paris.
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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 have made great progress in executing our core strategies:
- Focus on leading financial institutions;
- Expand the functionality of our platform;
- Accelerate adoption of our solution:
- By working with device manufacturers and network operators and;
- Simplifying and reducing the cost of integrating end users;
- Pursue selective acquisitions of companies and technologies to expand our
capabilities and;
- Adapt our platform for other industry sectors such as insurance, sales force
management and logistics, and other wireless opportunities, such as bill
payment and presentment, e-wallet services and e-commerce.
RECENT DEVELOPMENTS
FOCUS ON LEADING FINANCIAL INSTITUTIONS
In July, we announced an agreement with BBVA Bancomer, Mexico's largest
financial group. The agreement will enable mobile wireless banking for BBVA
Bancomer's more than nine million banking customers throughout Mexico and
Spanish-speaking communities in the U.S. The 724 Solutions Financial Services
Platform (FSP) will allow BBVA Bancomer customers to use a wide range of
Internet-enabled devices such as mobile phones, personal digital assistants
(PDAs), and pagers to gain access to their real-time financial information,
including: account information and statements, transaction details, intra-bank
transfers, and bill payments, along with value-added content such as news,
weather and financial market updates. This service will be offered in both
Spanish and English.
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Wachovia Corporation, a leading financial holding company serving regional,
national and international markets with dual headquarters in Atlanta and
Winston-Salem, N.C., has licensed our technology and subscribed to our
application hosting service, to extend its real-time, 24-hour, comprehensive
electronic banking and financial services to a broad range of popular wireless
and consumer electronic devices. We plan to work cooperatively with Wachovia to
develop and deploy separate retail and commercial wireless financial services
offerings, each specially designed to meet the unique needs of the bank's
consumer and corporate customers. The agreement marks our first move into the
corporate banking arena. Wachovia has also has licensed our technology for
retail brokerage services.
We entered into a series of relationships with Corillian Corporation
(Corillian). Corillian, based in Beaverton, Oregon, is a provider of solutions
that enable banks, brokers, financial portals and other financial service
providers to rapidly deploy Internet-based financial services. In April, we
purchased approximately 2.9 percent of Corillian's common stock for $7.0 million
in cash. In May, we announced that we were teaming up with Corillian to offer
financial services providers a seamless wired and wireless Internet banking
services solution. The fully-scalable product will be based upon the 724
Solutions FSP and will enable wireless banking functionality for Wireless
Application Protocol (WAP)-enabled phones, in combination with Corillian's
Voyager eFinance platform. The product will be jointly marketed and we expect to
offer it in the fourth quarter of 2000.
EXPAND THE FUNCTIONALITY OF OUR PLATFORM
In June, we completed the acquisition of ezlogin.com, Inc. (ezlogin.com).
ezlogin.com is a leading provider of Internet infrastructure tools for
user-driven personalization. The acquisition of ezlogin.com will allow us to
offer single-password access to our financial institutions' end customers so
that they can have a personalized consolidated view of key financial accounts
and other information, regardless of what device they use to access the
Internet.
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In connection with this transaction, we issued 1,003,594 common shares at the
closing. In addition, we assumed the options that were outstanding under
ezlogin.com's stock option plan and, at the closing, these options were
converted into options to purchase 91,796 common shares of 724 Solutions. The
principal employees of ezlogin.com have agreed to continue their employment with
ezlogin.com, which will operate as a subsidiary of 724 Solutions under the
ezlogin.com name. The transaction has been accounted for using the purchase
method of accounting.
In July, we announced a development and co-marketing agreement with
CheckFree, a leading provider of financial electronic commerce services and
products. This agreement incorporates CheckFree's market and technology
leadership in electronic billing, payment and presentment (EBPP) with 724
Solutions' wireless financial services offering. CheckFree and 724 Solutions
will enable financial institutions to offer to their customers the ability to
receive and pay bills - such as telephone, utility, home loan, cable, credit
card and insurance bills - on various wireless Internet-enabled devices
including mobile phones and personal digital assistants. CheckFree currently
offers electronic billing and payment services from more than 150 web-sites,
including banks, brokerage firms, credit unions and portals. We expect to
offer wireless EBPP in the third quarter of 2000.
We are collaborating with Certicom Corp. (Certicom), a leading provider of
mobile e-commerce security, to develop and provide a Public Key Infrastructure
(PKI) portal solution, to be integrated into our FSP. PKI protects sensitive
data through encryption software and two keys: a public key for distribution to
other users, and a private key, which is kept and protected by the owner. We are
working with Certicom to develop an open and standards-based security solution
which will enable us to provide support for a broad array of PKI products,
services and technologies such as VeriSign's Wireless Trust Services and
Baltimore Technologies' UniCERT Certificate Management System.
We announced a cooperation agreement with Maptuit, a provider of
information-rich
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directions and routing services, to deliver wireless, location-based solutions
to the financial services industry. Under the agreement, we plan to work
together with Maptuit to develop and globally deploy integrated solutions
featuring personalization and customization. Initially, consumers will be able
to locate bank machines through Internet-enabled mobile phones and other
wireless devices, and receive directions to their selected location. In future
releases, consumers will be able to locate other facilities and services.
ACCELERATE ADOPTION OF OUR SOLUTION
In the second quarter of fiscal 2000, our FSP was available in both English and
French for Bank of Montreal's customers. In the near future we expect to offer
our FSP in Spanish, for BBVA Bancomer's customers and will continue to increase
the number of languages.
In addition, on July 18, 2000, Bank of Montreal introduced wireless banking and
investment services to its nearly one million retail customers in the United
States through its Chicago-based Harris Bank subsidiary.
In June, we announced that our FSP had successfully undergone testing within
Ericsson's General Packet Radio Services (GPRS) applications test environment,
known as GATE, and that the application is ready for live trials.
We acquired a 9.5 percent interest in Neomar Inc. (Neomar) for $3.5 million in
cash. Neomar is a provider of WAP-based wireless services for PDAs. In addition,
we licensed Neomar's WAP solution and incorporated it into our FSP. We believe
that these transactions will accelerate the development and global deployment of
secure WAP-based financial services applications for a variety of PDAs, making
it faster and easier for financial institutions to offer secure wireless banking
and brokerage services over some of the newest and most innovative devices,
including Research In Motion's (RIM) BlackBerry, PalmOS devices, the Handspring
Visor and PocketPC devices.
In June, we announced that we have chosen SITEL Corporation (SITEL), a leader in
global electronic customer relationship management (eCRM) solutions, to develop,
implement, and
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execute its contact center agent interface, and provide global customer service
support for our FSP. As a leader in providing outsourced telephone and
Internet-based customer service, we believe that SITEL will enable us to extend
our customer support for our FSP globally through Internet and traditional voice
channels. Under the agreement, SITEL will provide telephone, e-mail, and
Web-based customer service and technical support from contact centers throughout
the world. Through SITEL, we introduced a new value-added service and revenue
stream.
APPOINTMENT OF DIRECTORS
At our Annual and Special Meeting of Shareholders, we announced the appointment
of three new independent directors to our board. The new members are: Holger
Kluge, a former senior executive with the Canadian Imperial Bank of Commerce
with close to 40 years experience in the banking industry; Heather Reisman,
founder and Chief Executive Officer of Indigo Books, Music and More, a leading
Canadian retailer; and Barry J. Reiter, Chairman of the Technology Group at
Torys, a leading North American law firm. Each of our new board members bring a
wide array of business skills and experience which will add strategic value to
our global deployment.
ANALYSIS OF STATEMENT OF OPERATIONS
Our unaudited condensed consolidated financial statements are prepared in
accordance with Canadian generally accepted accounting principles, which in the
Company's 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 $4.0
million for the three months ended June 30, 2000 from $3.4 million for the three
months ended March 31, 2000. The increase in revenue in the second quarter over
the first quarter of 2000 is attributed to services revenue. Our revenue, before
the offset of stock-based
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compensation, increased to $7.3 million for the six months ended June 30, 2000
from $965,000 for the six months ended June 30, 1999. The increase in revenue
from June 30, 2000 compared to the same period in the prior year is attributed
to product revenue.
While we have experienced significant revenue growth in the United States, we
continue to concentrate on growing our customer base internationally. Net
revenue growth in Canada from June 30, 2000 compared to June 30, 1999 was due to
the fact that deferred stock-based compensation related to product revenue was
fully amortized in the first quarter of 2000. Over time, we expect to derive a
greater portion of our revenue from customers outside of North America.
PRODUCT REVENUE
Our product revenue, before the offset of stock-based compensation, decreased to
$2.6 million for the three months ended June 30, 2000 from $2.8 million for the
three months ended March 31, 2000. Our product revenue, before the offset of
stock-based compensation, increased to $5.4 million for the six months ended
June 30, 2000 from $931,000 for the six months ended June 30, 1999.
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.
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 the main portion of the payments under our license agreements up-front;
and second, we expect our revenue stream to vary with the number of our
customers' end users. Citigroup, Claritybank.com, BBVA Bancomer and Wachovia
have entered into license agreements using the variable license fee model, with
guaranteed minimum payments.
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RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal 2000 Six Months Ended
Three Months Ended June 30,
June 30 March 31 2000 1999
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(unaudited, in 000's of U.S. dollars,
except per share amounts)
<S> <C> <C> <C> <C>
Revenue:
Product $ 2,591 $ 2,762 $ 5,353 $ 931
Less: stock-based compensation
related to product - (248) (248) (902)
Services 1,377 597 1,974 34
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Net revenue 3,968 3,111 7,079 63
Operating expenses:
Cost of revenue 2,550 1,953 4,503 20
Research and development 6,545 4,423 10,968 2,418
Sales and marketing 3,315 2,449 5,764 509
General and administrative 5,395 2,218 7,613 835
Depreciation and amortization 2,034 317 2,351 228
Stock-based compensation
related to stock options 1,456 843 2,299 54
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Total operating expenses 21,295 12,203 33,498 4,064
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Loss from operations (17,327) (9,092) (26,419) (4,001)
Interest income 2,772 2,237 5,010 89
Equity in losses of affiliate (213) (66) (279) -
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Net loss $ (14,768) $ (6,921) $ (21,688) $ (3,912)
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Basic and diluted net
loss per share $ (0.40) $ (0.20) $ (0.61) $ (0.34)
Weighted-average number of
shares used in computing
basic and diluted net
loss per share (in thousands) 36,717 34,037 35,380 11,518
EBITDA* $ (13,837) $ (7,684) $ (21,521) $ (2,817)
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*EARNINGS (LOSS) BEFORE INTEREST, TAXES AND NON-CASH ITEMS SUCH AS DEPRECIATION
AND AMORTIZATION, AMORTIZATION OF STOCK-BASED COMPENSATION AND EQUITY IN LOSSES
OF 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.
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SERVICES REVENUE
Our services revenue was $1.4 million for the three months ended June 30, 2000
compared to $597,000 for the three months ended March 31, 2000. Services revenue
was $2.0 million compared to $34,000 for the six months ended June 30, 2000 and
June 30, 1999, respectively. These increases in services revenue are largely due
to the growth in the number of customers and these customers' demand for
consulting and customer support services to assist them as they deploy the 724
Solutions Financial Services Platform.
Services revenue is currently comprised of revenue from consulting,
implementation and maintenance fees. Consulting and implementation services are
usually performed under separate service agreements and revenue is generally
recognized as the services are performed. Customers are charged a fee based on
time and expenses.
We also receive revenue from maintaining and servicing our products for our
customers. 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. To date, Wachovia and Claritybank.com have signed agreements and some
of our customers have expressed interest in our hosting service. We will begin
to recognize application hosting revenue once customers have installed the 724
Solutions Financial Services Platform, and their services begin to run on our
data centres.
OPERATING EXPENSES
COST OF REVENUE
Cost of revenue was $2.6 million for the three months ended June 30, 2000,
compared to $2.0 million for the three months ended March 31, 2000. Cost of
revenue was $4.5
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million for the six months ended June 30, 2000, compared to $20,000 for the six
months ended June 30, 1999. These increases were 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 anticipate that our
cost of revenue will continue to increase 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.
Cost of revenue consists primarily of personnel costs associated with customer
support, training, implementation and consulting 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.
RESEARCH AND DEVELOPMENT
Research and development expenses increased to $6.5 million for the three months
ended June 30, 2000 from $4.4 million for the three months ended March 31, 2000.
Research and development expenses were $11.0 million for the first half of 2000
compared to $2.4 million for the first half of 1999. We anticipate that our
research and development expenses will continue to increase in absolute dollars
as we expand the functionality of the platform, integrate our acquisitions and
provide other features to enable our customers to offer additional value-added
services to their consumers.
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. In the second quarter of
2000, we hired a team of consultants who worked on the Bank of America
implementation.
SALES AND MARKETING
Sales and marketing expenses were $3.3 million, compared to $2.4 million for
the three months ended June 30, 2000 and March 31, 2000, respectively. For
the six months ended June 30, 2000 sales and marketing expenses were $5.8
million, compared to
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$509,000 in the prior year. The increase was primarily the result of costs
associated with the hiring and training of our sales and marketing personnel,
both domestically and internationally, as well as investments in marketing.
We also opened sales offices in Tokyo and Sydney in the first quarter of 2000
and have increased the number of sales personnel to manage our relationships
with larger customers.
GENERAL AND ADMINISTRATIVE
Our general and administrative expenses increased to $5.4 million for the three
months ended June 30, 2000 from $2.2 million for the three months ended March
31, 2000. Our general and administrative expenses increased to $7.6 million for
the six months ended June 30, 2000 from $835,000 for the six months ended June
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 a 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
acquisitions and corporate development activities.
DEPRECIATION AND AMORTIZATION
Total depreciation and amortization expense was $2.0 million for the three
months ended June 30, 2000, compared to $317,000 for the three months ended
March 31, 2000. Total depreciation and amortization expense was $2.4 million for
the six months ended June 30, 2000, compared to $228,000 for the six months
ended June 30, 1999. These increases were mainly due to the amortization of
$56.9 million of goodwill and acquired intangibles relating to the ezlogin.com
acquisition and increased capital spending on computer hardware and office
furniture, due to our increase in personnel. We expect to amortize goodwill
related to the ezlogin.com acquisition over 24 months.
AMORTIZATION OF DEFERRED STOCK-BASED COMPENSATION RELATED TO STOCK OPTIONS
Amortization of employee stock-based compensation was $1.4 million for the three
months ended June 30, 2000, compared to $843,000 for the three months ended
March 31, 2000.
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Amortization of employee stock-based compensation was $2.3 million for the six
months ended June 30, 2000, compared to $54,000 for the six months ended June
30, 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 is being
amortized on a straight-line basis over the vesting periods of these options.
The increases year over year are largely attributed to the amortization of
deferred stock-based compensation related to options that were granted from
October 1, 1999 to January 28, 2000. The remaining $11.9 million in deferred
stock-based compensation will be amortized over the next eleven quarters.
INTEREST INCOME
Interest income increased to $2.8 million for the three months ended June 30,
2000 from $2.2 million for the three months ended March 31, 2000. Interest
income increased to $5.0 million for the six months ended June 30, 2000 from
$89,000 for the six months ended June 30, 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.
EQUITY IN LOSSES OF AFFILIATE
Our investment in one-third-owned Maptuit is accounted for using the equity
method. Under this method, we recognized a charge of $213,000 for the three
months ended June 30, 2000, $66,000 for the three months ended March 31, 2000
and $279,000 for the six months ended June 30, 2000. These amounts reflect
one-third of Maptuit's losses for the period since our investment and
amortization of goodwill.
NET LOSS
We recorded a net loss of $14.8 million for the three months ended June 30,
2000, compared to a net loss of $6.9 million for the three months ended March
31, 2000. Our loss per share, calculated using the weighted average number of
shares outstanding, was $0.40 for the three months ended June 30, 2000, compared
to a
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loss per share of $0.20 for the three months ended March 31, 2000. For the six
months ended June 30, 2000 our net loss was $21.7 million or $0.61 per share,
compared to $3.9 million or $0.34 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
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 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 $165.7 million.
Net cash used in operating activities was $7.8 million for the three months
ended June 30, 2000 compared to $1.2 million for the three months ended March
31, 2000. For the six months ended June 30, 2000, net cash used in operating
activities was $9.2 million compared to net cash provided of $14,000 for the
same period ended June 30, 1999. Net cash used in operating activities for the
six months ended June 30, 2000 reflects our operating loss of $21.7 million
offset by equity in losses of affiliate of $279,000, depreciation of $2.4
million, amortization of stock-based compensation of $2.5 million and net
changes in working capital of $6.5 million.
Cash provided from financing activities was $165.7 million for the six months
ended June 30, 2000, compared to $2.0 million for the six months ended June 30,
1999. Cash flow in 2000 reflects the net proceeds of our initial public
offering.
Cash used in investing activities was $27.4 million for the three months ended
June 30, 2000 compared to $4.9 million for the three months ended March 31,
2000. For the six months ended June 30, 2000, cash used for
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investing activities was $32.1 million compared to $392,000 for the six months
ended June 30, 1999. Cash used in investing activities for the first half of
2000 reflects our investments in Corillian, Neomar and Maptuit, acquisitions of
Yrless Internet Corporation and ezlogin.com, purchase of short-term deposits, as
well as purchases of capital, intangible and other assets. Capital expenditures
for the six months ended June 30, 2000 were $5.8 million, and 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 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, which could affect our operating results.
However, in the future, we intend to implement a policy that best meets the
needs of our business.
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
Canadian Securities Administrators, including our Registration Statement on
Form F-1, as amended and, our Annual Report on Form 20-F, our Annual Information
Form and our 1999 Annual Report.
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, 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.
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 June 30,
2000, five customers accounted for substantially all 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. We expect that our acquisition of ezlogin.com will
facilitate the expansion of our Financial Services Platform to bring banks and
brokerages the added value they are seeking.
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.
17
<PAGE>
724 SOLUTIONS INC.
Condensed Consolidated Balance Sheets
(In thousands of U.S. dollars)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (note 2) $ 189,235 $ 65,287
Short-term deposits 10,110 -
Accounts receivable-trade, net of allowance
for doubtful accounts of nil
(December 31, 1999 - nil) 1,092 3,121
Prepaid expenses and other receivables 2,899 1,368
------------- -------------
203,336 69,776
Capital assets 7,801 2,366
Investments (note 4) 10,984 -
Intangible and other assets (note 5) 58,932 1,100
------------- -------------
$ 281,053 $ 73,242
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,706 $ 1,982
Accrued liabilities 6,435 2,967
Deferred revenue, net of deferred
stock-based compensation of nil
(December 31, 1999 - $248) 5,457 6,022
------------- -------------
17,598 10,971
Leasehold inducements 452 103
Shareholders' equity:
Share capital (note 8):
Authorized:
Unlimited common shares
Unlimited preferred shares
Issued and outstanding:
37,555,018 common shares
(December 31, 1999 - 29,402,426) 313,327 84,762
Deferred stock-based compensation (note 3) (11,949) (5,909)
Accumulated deficit (38,375) (16,685)
------------- -------------
263,003 62,168
------------- -------------
$ 281,053 $ 73,242
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
18
<PAGE>
724 SOLUTIONS INC.
Condensed Consolidated Statements of Operations (unaudited)
(In thousands of U.S. dollars, except per share amounts)
<TABLE>
<CAPTION>
Fiscal 2000 Six months ended
Three months ended June 30,
---------------------------- ----------------------------
June 30 March 31 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Product $ 2,591 $ 2,762 $ 5,353 $ 931
Less: stock-based compensation
related to product - (248) (248) (902)
Services 1,377 597 1,974 34
----------- ----------- ----------- -----------
3,968 3,111 7,079 63
Operating expenses:
Cost of revenue 2,550 1,953 4,503 20
Research and development 6,545 4,423 10,968 2,418
Sales and marketing 3,315 2,449 5,764 509
General and administrative 5,395 2,218 7,613 835
Depreciation and amortization 2,034 317 2,351 228
Stock-based compensation
related to stock options 1,456 843 2,299 54
----------- ----------- ----------- -----------
21,295 12,203 33,498 4,064
----------- ----------- ----------- -----------
Loss from operations (17,327) (9,092) (26,419) (4,001)
Interest income 2,772 2,237 5,010 89
Equity in losses of affiliate (213) (66) (279) -
----------- ----------- ----------- -----------
Net loss $ (14,768) $ (6,921) $ (21,688) $ (3,912)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Basic and diluted net loss per share $ (0.40) $ (0.20) $ (0.61) $ (0.34)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted-average number of shares
used in computing basic and
diluted net loss per share
(in thousands) 36,717 34,037 35,380 11,518
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Loss before interest, taxes, depreciation
and amortization, amortization of
stock-based compensation
and equity in losses of affiliate $ (13,837) $ (7,684) $ (21,521) $ (2,817)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</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 Six months ended
Three months ended June 30,
---------------------------- ----------------------------
June 30 March 31 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash flows provided by (used in):
Cash flows from operating activities:
Net loss $ (14,768) $ (6,921) $ (21,688) $ (3,912)
Items not involving cash:
Other non cash expenses 705 - 392 -
Equity in losses of affiliate 213 66 279 -
Depreciation and amortization 2,034 317 2,351 228
Stock-based compensation 1,456 1,091 2,547 956
Foreign exchange loss (gain) 431 (46) 385 -
Change in operating assets and liabilities:
Accounts receivable (75) 2,104 2,029 35
Prepaid expenses and
other receivables (361) (898) (1,259) (268)
Accounts payable 3,512 (344) 3,168 (44)
Accrued liabilities 743 2,630 3,468 822
Deferred revenue (1,691) 776 (916) 2,197
----------- ----------- ----------- -----------
Cash flows provided by (used in)
operating activities (7,801) (1,225) (9,244) 14
Cash flows from financing activities:
Issuance of common shares,
net of expenses - 165,708 165,708 1,953
----------- ----------- ----------- -----------
Cash flows provided by financing
activities - 165,708 165,708 1,953
Cash flows from investing activities:
Purchase of short term deposits (10,110) - (10,110) -
Purchase of capital assets (4,575) (1,204) (5,779) (392)
Purchase of intangible and other
assets (819) (1,468) (2,069) -
Investment in Neomar Inc. (3,500) - (3,500) -
Investment in Corillian Corporation (7,000) - (7,000) -
Investment in Maptuit.com Inc. - (750) (750) -
Acquisition of Yrless Internet Corporation - (1,272) (1,272) -
Acquisition of ezlogin.com, Inc. (1,431) (220) (1,651) -
----------- ----------- ----------- -----------
Cash flows used in investing activities (27,435) (4,914) (32,131) (392)
----------- ----------- ----------- -----------
Foreign exchange loss (gain) on cash
held in a foreign currency (431) 46 (385) -
Increase (decrease) in cash and
cash equivalents (35,667) 159,615 123,948 1,575
Cash and cash equivalents,
beginning of period 224,902 65,287 65,287 2,976
----------- ----------- ----------- -----------
Cash and cash equivalents,
end of period $ 189,235 $ 224,902 $ 189,235 $ 4,551
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Supplemental disclosures of non-cash
investing and financing activities:
Net assets acquired from
acquisitions $ 1,870 $ (95) $ 1,775 $ -
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
20
<PAGE>
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. 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 June 30, 2000, cash equivalents accounted for
approximately 78% of the cash and cash equivalents balance and consisted
of 66% in short-term deposits and 34% 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 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.
4. ACQUISITIONS:
(a) In June 2000, the Company acquired all of the outstanding
shares of ezlogin.com, Inc. (ezlogin.com), a privately held
company incorporated in California in the business of
providing Internet infrastructure tools for user-driven
personalization. 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
21
<PAGE>
of approximately $55.8 million was satisfied by the issuance
of 1,003,594 common shares of the Company and the assumption
of the existing ezlogin.com option plan which, if all options
outstanding under the plan are exercised, would result in the
issuance of an additional 91,796 common shares of the Company.
In addition, the company incurred $3.0 million in costs
related to the acquisition. The excess of the purchase price
over the fair value of the net tangible assets of ezlogin.com
at the date of acquisition of $56.9 million has been allocated
to goodwill and other intangible assets and will be amortized
over 24 months. Amortization expense of $1.2 million has been
recorded in the three month period ended June 30, 2000.
(b) In April 2000, the Company acquired 875,000 common shares
(representing approximately a 2.9% interest) in Corillian
Corporation (Corillian), a provider of eFinance solutions for
the Internet, for $7.0 million. In addition, the Company
announced its intention to partner with Corillian to provide
financial services providers with a seamless wired and
wireless Internet banking services solution based on the 724
Solutions Financial Services Platform in combination with
Corillian's eFinance Voyager platform. Corillian is a U.S.
publicly traded company on the NASDAQ exchange trading under
the symbol CORI. The investment is accounted for using the
cost method of accounting.
(c) In June 2000, the Company acquired a 9.5% interest in Neomar
Inc. (Neomar), a privately held company in the business of
providing Wireless Application Protocol (WAP)-based services
for personal digital assistants, for $3.5 million. In
addition, the Company has entered into a license agreement
with Neomar to license the WAP solution and incorporate it
into the Company's Financial Services Platform. The investment
is accounted for using the cost method of accounting.
5. INTANGIBLE AND OTHER ASSETS:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
June 30, December 31,
2000 1999
(unaudited)
-------------------------------------------------------------------------
<S> <C> <C>
Goodwill $ 54,213 $ -
Other 4,719 1,100
-------------------------------------------------------------------------
$ 58,932 $ 1,100
-------------------------------------------------------------------------
-------------------------------------------------------------------------
</TABLE>
22
<PAGE>
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 less than 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 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.
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. As at June 30, 2000, the majority 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>
------------------------------------------------------------------------------
Six months ended
--------------------------------
June 30, June 30,
2000 1999
(unaudited) (unaudited)
------------------------------------------------------------------------------
<S> <C> <C>
Net revenue by geographic locations:
United States $ 1,158 $ -
Canada 5,921 63
------------------------------------------------------------------------------
$ 7,079 $ 63
------------------------------------------------------------------------------
------------------------------------------------------------------------------
</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>
---------------------------------------------------------------------------------------
Six months ended
--------------------------------
June 30, June 30,
2000 1999
(unaudited) (unaudited)
---------------------------------------------------------------------------------------
<S> <C> <C>
Related party balances:
Accounts receivable, net of allowance
for doubtful accounts of nil $ 1,092 $ -
Deferred revenue, net of deferred
stock-based compensation of nil
(June 30, 1999 - $994) 5,457 1,296
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Related party transactions:
Net revenue:
Product $ 5,105 $ 29
Services 1,671 34
---------------------------------------------------------------------------------------
</TABLE>
8. COMMON SHARES
At June 30, 2000 and December 31, 1999 there were 3,956,348 and 2,867,930
options outstanding to acquire common shares of the Company,
respectively. Included in the June 30, 2000 options are options to
acquire 91,796 common shares of the Company relating to the options
assumed as part of the ezlogin.com acquisition.
24
<PAGE>
CORPORATE INFORMATION
<TABLE>
<S> <C>
HEADQUARTERS SHARE INFORMATION
Market Listings [Symbol]
Canada Toronto Stock Exchange [SVN]
724 Solutions Inc. NASDAQ National Market [SVNX]
4101 Yonge Street, Suite 702
Toronto, ON Canada M2P 1N6
Tel.: +1 (416) 226-2900 PUBLIC RELATIONS
Fax.: +1 (416) 226-4456 Ray McManus, Toronto
[email protected]
www.724.com INVESTOR RELATIONS
Monica Zaied, Toronto
[email protected]
TRANSFER AGENT
Montreal Trust Company of Canada, Toronto LEGAL COUNSEL
Ogilvy Renault, Toronto
AUDITORS
KPMG LLP, Toronto
</TABLE>
<PAGE>
BOARD OF DIRECTORS
<TABLE>
<S> <C>
GREGORY WOLFOND BARRY J. REITER
Chairman and Chief Executive Officer Chairman of the Technology Group and
Toronto, Ontario member of the Executive Committee of Torys
Toronto, Ontario
LLOYD F. DARLINGTON MARTIN A. STEIN
President and Chief Executive Officer, President, Sonoma Mountain Ventures L.L.C. San
Emfisys, Bank of Montreal Francisco, California
Toronto, Ontario
JAMES A. DIXON HARRI VATANEN
Group Executive, President, Sonera SmartTrust Ltd. and
Technology and Operations, Senior Vice President, Sonera Corporation
Bank of America, London, U.K.
Atlanta, Georgia
HOLGER KLUGE ALAN YOUNG
A former senior executive with CIBC with Vice President, Access Devices and
close to 40 years experience in the banking Distribution Technologies, e-Citi
industry New Canaan, Connecticut
Toronto, Ontario
HEATHER REISMAN
Founder and Chief Executive Officer
Indigo Books, Music and More
Toronto, Ontario
</TABLE>
<PAGE>
OFFICERS
<TABLE>
<S> <C>
GREGORY WOLFOND ALISTAIR RENNIE
Chairman and Chief Executive Officer Senior Vice President, Marketing/Product Line Management
CHRISTOPHER ERICKSON DAVID PASIEKA
President, General Counsel and Secretary Senior Vice President, Application Hosting
ANDRE BOYSEN ROGER HORTON
Chief Technology Officer Senior Vice President, Application Development
KERRY McLELLAN JEAN-NOEL LEBRUN
Chief Operating Officer Senior Vice President, Data Aggregation
KAREN BASIAN
Chief Financial Officer
MINA WALLACE
Executive Vice President, Field Operations
</TABLE>
<PAGE>
724 SOLUTIONS
[LOGO]
OUR LOCATIONS
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
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
