Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
Our
unaudited condensed consolidated financial statements are stated in United States Dollars (in thousands) and are prepared in accordance
with U.S. generally accepted accounting principles.
You
should read the following discussion of our financial condition and results of operations together with the unaudited condensed
consolidated financial statements and the notes to unaudited condensed consolidated financial statements included elsewhere in
this Quarterly Report on Form 10-Q.
Our
Company was incorporated under the laws of the State of Nevada on April 23, 2002. On June 3, 2015, the Company reincorporated
in Delaware. Effective as of January 26, 2015, we changed our name from EZTrader, Inc. to EZTD Inc.
We are engaged in
the business of offering online trading of binary options and forex, enabling trading on contracts for differences in shares,
indices, commodities and foreign exchanges. We conduct our operations and business with and through our wholly owned subsidiaries:
(a) Win Global Markets Inc. (Israel) Ltd., an Israeli company, (b) WGM Services Ltd., a company registered in Cyprus (“WGM”),
(c) EZ Invest Securities Ltd., a Japanese corporation, (d) SCGP Investments Limited, a Belizean company, (e) EZTD Australia PTY
Ltd., an Australian company, and (f) EZ Trader, Ltd., a company registered in Vanuatu. Trading is being offered by WGM on http://www.eztrader.com,
http://www.globaloption.com, and http://www.ezinvest.com. Information contained
on, or that can be accessed through, our websites does not constitute a part of this Quarterly Report on Form 10-Q, and we have
included our website addresses in this Quarterly Report on Form 10-Q solely as inactive textual references.
We
have developed and currently operate an online trading platform for retail customers to trade a wide range of binary options internationally
with more than 100 different assets including indices, international stocks, commodities and currency pairs (“Trading Platform”).
The Trading Platform enables retail customers
to trade binary options in more than 30 countries. The self-developed, proprietary Trading Platform is accessible from multiple
operating systems and the internet. The Trading Platform has been designed to be as intuitive and as easy to use as possible,
and is localized into eleven languages. We believe that our emphasis on technology, together with targeted online marketing strategy,
has helped to differentiate us from our competitors. Although our business focuses primarily on Europe and Japan, we would like
to expand in the United States using approved regulatory pathways.
We
conduct our operations from four offices which are located in Nicosia, Cyprus, Tel-Aviv, Israel, London, England and Tokyo, Japan.
We manage risk in a number of ways, in particular by limiting financial exposure to any individual customer to a relatively low
level as well as limiting exposure to any individual asset. We generate our revenues principally from the margin between winning
customers and losing customers. We do not charge customers a commission on trades.
In
February 2016, our Board of Directors and stockholders approved (1) an amendment to the Company’s certificate of Incorporation
to reduce the Company’s authorized Common Stock from 300,000,000 shares, with a par value of $0.001 per share, to 10,000,000
shares, with a par value of $0.03 per share, or the Amendment, and (2) a 1-for-30 reverse stock split of the Company’s issued
and outstanding shares of Common Stock, such that each 30 shares of Common Stock held by stockholders of record on April 7, 2016
was combined into one share of Common Stock, except to the extent that such actions resulted in any of the Company’s stockholders
holding a fractional share of Common Stock (in which instance, because such stockholder’s number of shares is not evenly
divisible by the 1:30 ratio, such stockholder is entitled to receive an additional fraction of a share of Common Stock to round
up to the next whole share), or the Reverse Stock Split.
The Board determined that it was in the best
interests of the Company and its stockholders to reduce the number of outstanding shares of its Common Stock as part of its intention
to list the Company’s shares of Common Stock on the NASDAQ and the corresponding requirements. In order to initially list
the Company’s shares on NASDAQ, its Common Stock must have a closing price of at least $3.00 per share. On November 16,
2016, the closing price of our Common Stock was $2.10 per share.
Selected
Financial Information
We calculate the average revenue per user,
or ARPU, by dividing the total revenues for the period by the total number of current active users. Current active users are defined
as customers who performed at least one deposit or one transaction within the past seven months from the reported period. We had
revenues net for the three months ended September 30, 2016 and 2015 of $4,545 and $6,947, respectively, while the number of active
users for those periods was 11,567 and 15,461, respectively. As a result, the ARPU for those periods was $393 and $449, respectively.
We
had revenues net for the nine months ended September 30, 2016 and 2015 of $16,509 and $19,492, respectively, while the number
of active users for those periods was 40,499 and 42,124, respectively. As a result, the ARPU for those periods was $408 and $463,
respectively. We measured these metrics in order to track the difference in ARPU and to change our marketing strategy accordingly,
if needed, during the year.
We
calculate the average user acquisition cost, or AUAC, which cost is included as part of our sales and marketing expenses, by dividing
the total acquisition costs by the total number of active users for any given period. Total acquisition costs for the three months
ended September 30, 2016 and 2015 were $1,637 and $3,723, respectively. As a result, the AUAC for those periods was $142 and $241,
respectively.
We had total acquisition costs for the nine months ended September 30, 2016 and 2015 of $9,499 and $9,931, respectively.
As a result, the AUAC for those periods was $235 and $236, respectively. We measured these metrics in order to track the difference
in AUAC and to change our marketing strategy accordingly, as needed, throughout the year.
We ascertain the return on investment, or
ROI, by dividing the ARPU by AUAC in order to track fluctuations in the ratio. The ROI for the three months ended September 30,
2016 was 2.78 as compared to an ROI of 1.87 for the three months ended September 30, 2015. The ROI for the nine months ended September
30, 2016 was 1.74 as compared to an ROI of 1.96 for the nine months ended September 30, 2015.
This
discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ
materially from those anticipated in these forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements”
in this Quarterly Report on Form 10-Q, and “Risk Factors” in our Form 10-K.
RESULTS
OF OPERATIONS FOR THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 COMPARED TO THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015
Revenues
and Cost of Revenues
During the three and nine months ended September
30, 2016 and 2015, we mainly generated revenues from our binary options business.
Total revenues for the nine months ended September
30, 2016 decreased by 15.3% to $16,509 from $19,492 in the nine months ended September 30, 2015. Total revenues for the three
months ended September 30, 2016 decreased by 34.58% to $4,545 from $6,947 for the three months ended September 30, 2015. The decreases
for the nine and three month periods ended September 30, 2016 are mainly attributable to a significant increase in withdrawals
of customers as a result of new regulations imposed by our Cypriot regulator, as well as a decrease in our marketing expenses
to improve ROI and re-focus on our core business in Europe.
Trading volume for the nine months ended September 30, 2016 and 2015 was $107.3 million
and $61.8 million, respectively. Trading volume for the three months ended September 30, 2016 and 2015 was $25.2 million and $21
million, respectively. Revenues as a percentage of trading volume for the nine months ended September 30, 2016 and 2015 was 15.4%
and 31.5%, respectively. Revenues as a percentage of trading volume for the three months ended September 30, 2016 and 2015 was
18.0% and 33.1%, respectively. These decreases are due to a decrease in our sales and marketing expenses to improve ROI.
The ARPU for the three months ended September
30, 2016 and 2015 was $393 and $449, respectively. The ARPU for the nine months ended September 30, 2016 and 2015 was $408 and
$463, respectively.
The AUAC for the three months ended September
30, 2016 and 2015 was $142 and $241, respectively. The AUAC for the nine months ended September 30, 2016 and 2015 was $235 and
$236, respectively.
The ROI for the three months ended September 30, 2016 and 2015 was 2.78 and 1.87, respectively. The ROI for
the nine months ended September 30, 2016 and 2015 was 1.74 and 1.96, respectively.
Sales
and Marketing
Our
sales and marketing expenses consist primarily of traffic acquisition costs, which are paid to our affiliate partners, media and
advertising companies, as well as compensation and related expenses for marketing personnel.
Total sales and marketing expenses for the
nine months ended September 30, 2016 increased by 7.5% to $16,261 from $15,132 for the nine months ended September 30, 2015. Selling
and marketing expenses for the three months ended September 30, 2016 decreased by 17.4 % to $4,625, compared to $5,601 for the
three months ended September 30, 2015. These changes in sales and marketing expenses are attributable to a decrease in user traffic
expenses in order to improve ROI in the three months ended September 30, 2016.
Research
and Development
Our
research and development expenses consist primarily of compensation and related expenses for our software development personnel,
outsourced labor and expenses for testing new versions of our software.
Research and development expenses for the
three months ended September 30, 2016 increased by 23.9% to $591 from $477 for the three months ended September 30, 2015. Research
and development expenses for the nine months ended September 30, 2016 increased by 12.5% to $1,531 from $1,361 for the nine months
ended September 30, 2015. These increases are mainly attributed to expenses related to improvement of our online trading platform.
General
and Administrative
Our
general and administrative expenses consist primarily of compensation and related expenses for executive, accounting, legal, human
resources and administrative personnel, professional fees and other general corporate expenses.
General
and administrative expenses for the nine months ended September 30, 2016 increased by 102.9% to $6,500 from $3,202 for the nine
months ended September 30, 2015. General and administrative expenses for the three months ended September 30, 2016 increased by
66.2% to $2,264 from $1,362 for the three months ended September 30, 2015. The increase for the nine months ended September 30,
2016 is mainly attributable to a significant increase in legal expenses, mainly due to the outcome of the arbitration related
to the Feyenoord as described in Note 5 to the Financial Statements included in Part I, Item 1 of this Quarterly Report on Form
10-Q, an increase in payroll, an increase in depreciation expenses due to investment in our platform, and additional costs due
to the expansion of operations in our Cyprus and Japanese offices, and the opening of new offices in London. The increase for
the three months ended September 30, 2016 is mainly attributable to expansion of operations in our Cyprus and Japanese offices,
and the opening of new offices in London.
In addition, we made a provision of $1,500,000 relating to a legal settlement
in connection with an SEC investigation as further described in Note 5B to the Financial Statements included in Part I, Item I
of this Quarterly Report on Form 10-Q. This matter has now been settled. See Note 8 to the Financial Statements included in Part
I, Item I of this Quarterly Report on Form 10-Q.
Financial
Expenses
Our financial expenses, net for the three
months ended September 30, 2016 were $93 compared to the financial expenses of $312 for the three months ended September 30, 2015.
Our financial expenses, net for the nine months ended September 30, 2016 were $1,483 compared to the financial expenses of $2,229
for the nine months ended September 30, 2015. The decrease in financial expenses for the three months ended September 30, 2016
are mainly due to the decrease of loan interest and variability in exchange rates. The decreases in financial expenses for the
nine months ended September 30, 2016 are mainly attributable to the grant of warrants recorded in the first half of 2015.
Net
Loss Attributable to the Company
Net loss attributable to the Company for the
nine months ended September 30, 2016 was $11,527 compared to a net loss of 3,711 for the nine months ended September 30, 2015.
Net loss for the three months ended September 30, 2016 was $3,220 compared to a net loss of $1,174 for the three months ended
September 30, 2015. Net loss per share from operations for the nine months ended September 30, 2016 and September 30, 2015 was
$2.49 and $1.16, respectively. Net loss per share from operations for the three months ended September 30, 2016 and September
30, 2015 was $0.64 and $0.36, respectively. Net loss for the three and nine months ended September 30, 2016 was mainly attributable
to legal expenses in advance of the settlement with the SEC, the settlement with Feyenoord and the expenses attributed to our
expansion into the Japanese market, which operation has yet to generate significant revenues to the Company.
Liquidity
and Capital Resources
We
require cash to fund our operations and we have experienced significant losses and negative cash flows in the recent past. Further,
our independent auditors modified their report for the years ended December 31, 2015 and 2014 to express substantial doubt as
to our ability to continue as a going concern. Since our inception, we have funded our operations primarily through the public
and private sales of our securities, revenues received from customers and otherwise. We had a decrease in issued and outstanding
shares of our common stock from 115,895,731 shares at December 31, 2015, to 5,181,948 at September 30, 2016, due to the Reverse
Stock Split, as further described in the “Overview” section of Part I, Item 2 of this Quarterly Report on Form 10-Q.
As of September 30, 2016, our total current
assets were $4,724 and our total current liabilities were $17,347. On September 30, 2016, we had an accumulated deficit of $52,417.
We currently finance our operations through revenues from our binary options business, and with funds provided by borrowings and
issuance of stock and warrant activities described below. We plan to continue raising funds in such ways in order to continue
our operations and to leverage our binary options business. There is no assurance, however, that we will be successful in raising
such funds.
On
March 31, 2016, we entered into a securities purchase agreement with Compagnie Financiere St. Exupery Sicav-Sif providing for
the issuance and sale by us to the purchaser, in a private placement, of an aggregate of 1,000,000 shares of our common stock
at a price of $6.00 per share, corresponding to an aggregate purchase price of $6,000,000, and a warrant to purchase up to an
additional 888,889 shares of our common stock at an exercise price of $6.75 per share, which is exercisable 6 months after the
closing.
On
January 29, 2016, the Company entered into a convertible loan agreement pursuant to which the lender loaned the Company the principal
amount of £1,000,000. The loan matures in January 2017, and bears an annual interest rate of 12%, to be paid together with
the outstanding principal in one lump sum. The loan is convertible into 249,967 shares of common stock of the Company upon either:
(i) the Company’s election to convert all or part of the principal amount of the Loan outstanding at such time, including
any accrued and unpaid interest into the converted common stock (or a pro rata portion thereof in case of partial conversion)
or (ii) the occurrence of an event of default under the convertible loan agreement.
On
February 16, 2016, one of the lenders under a prior convertible loan agreement dated October 29, 2013, by and among the Company
and certain Company shareholders, elected to convert €200,000 into 48,129 shares of common stock of the Company.
The Company entered into a convertible loan
agreement with Finandrea S.P.A., as lender, dated as of October 10, 2016, pursuant to which the lender loaned the Company the
principal amount of $1.1 million. The loan matures in October 2017, and bears an annual interest rate of 8%, to be paid together
with the outstanding principal in one lump sum. The loan is convertible into 160,025 shares of common stock of the Company. In
addition the Company issued to one of its investors 16,667 warrants at an exercise price of $6.00 per share, to expire 5 years
from the date of issuance.
On
October 27, 2016, the Company entered into a Subscription Agreement dated as of October 19, 2016 (the “Subscription Agreement”)
with WinnerOption Ltd., a company organized and existing under the laws of the State of Israel (“WinnerOption”), providing
for the issuance and sale by WinnerOption to the Company, in a private placement, of an aggregate of 4,996 Ordinary Shares of
WinnerOption stock, or approximately 19.99% of WinnerOption’s outstanding Ordinary Shares (collectively, the “Shares”)
valued at approximately $1,000,000, in exchange for the Company’s contribution of: (i) certain of its intellectual property
relating to social gaming technology, and (ii) payment of $276,000 in cash to WinnerOption at such times after the date of the
Subscription Agreement as determined by the Company in consultation with WinnerOption. As a result of its acquisition of the Shares,
the Company is subject to the terms of the Shareholders Agreement of WinnerOption (the “Shareholders Agreement”),
which includes customary terms and provisions governing the Company’s ownership of the Shares, including restrictions on
transferability of the Shares. The Shareholders Agreement also entitles the Company to designate one out of the four directors
to serve on WinnerOption’s board of directors.
Shimon
Citron, the Company’s CEO, is the current controlling shareholder and a director of WinnerOption. The terms of the transaction
between the Company and WinnerOption were approved by a Special Committee of the Company’s Board of Directors of which Mr.
Citron was not a member.
Net cash used in operating activities was
$4,971,000 during the nine months ended September 30, 2016 as compared to net cash used in operating activities of $1,123,000
in the nine months ended September 30, 2015 which resulted primarily from operating expenses of our binary options business, including
marketing expenses, employee wages, and depreciation expenses due to investment in our platform.
Net cash used in investing activities during
the nine months ended September 30, 2016 was $3,534,000, as compared to net cash used in investing activities during the nine
months ended September 30, 2015 of $1,149,000, mainly due to the purchase of $1,849,000 in fixed assets, investment in our platform,
and the increase in segregated client cash accounts of approximately $1,849,000.
Net cash provided by financing activities
during the nine months ended September 30, 2016 was $8,505,000 as compared to $2,272,000 provided by financing activities during
the nine months ended September 30, 2015, the resulting difference primarily from the issuance of shares and warrants in the amount
of approximately $5,850,000 in connection with the March 2016 securities purchase agreement, an increase of $1,998,000 due to
a line of credit granted by a bank, and an increase of $1,436,000 in proceeds received from convertible loans, offset by repayment
of approximately $1,330,000 of convertible and short term loans and a decrease of approximately $1,631,000 in prepayment on account
of shares.
Off-Balance
Sheet Arrangements
As
of September 30, 2016, we had no off balance sheet arrangements that have had or that we expect would be reasonably likely to
have a future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources.
Outlook
We
believe that our future success will depend upon our ability to enhance our binary options business. Although our current anticipated
levels of revenues and cash flow are subject to many uncertainties and cannot be assured, we believe that we have sufficient cash
to fund our operations for at least the next 12 months.