EZTrader Results Q1 2016
“Although there is a substantial doubt that the Company will continue as a going concern, the consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.” Form 10-Q (Quarterly Report)
EZTrader Results: On the 18th May EZTrader’s parent, EZTD Inc., a listed company on the OTCQX market, issued their unaudited financial report for the three months to March 31st, 2016. The report, combined with the ‘Contingencies’ in the Form 10-Q filed with the SEC on 17th May presents uncomfortable reading.
Transaction Volume and Active Customers
On the bright side transaction volume increased from $24.3m Q1 2015 to $52.8m Q1 2016 while active customers increased from 17,475 to 18,425 over the same time periods.
Transaction volume is the critical metric when assessing revenues (apart from revenues themselves) since a binary options operator should be looking at a fairly consistent margin based on their return they offer the client. Yet total revenues for the three months fell from $7.14m to $7.04m. The reason:
“The decrease for the three months ended March 31, 2016 is mainly attributable to a significant increase in withdrawals of customers as a result of new regulations imposed by our Cypriot regulator.” Form 10-Q
This excuse is interesting in its own right, but how can it be offered as a reason for lower revenues when transaction volume has increased so much?
And what about the reason itself? For years clients have complained about the difficulties they’ve had in withdrawing money from their accounts. Now it would appear that CySEC has taken steps to ensure that client monies are reimbursed in an honourable manner, so EZTrader expounds this law enforcement as a reason for poor operational performance!
Sales and Marketing
To achieve the 5.4% increase in active clients the sales and marketing costs increased by 31% from $5.22m to $6.85m. Q1 2015 to Q1 2016.
“The increase in sales and marketing expenses is attributable to the expansion of our business and increased marketing efforts, including expenses relating to employee payroll and payments to media agents and their affiliates.” Form 10-Q
In other words, there’s no more ‘low hanging fruit’, the market has wised-up.
The further concern here is that, far from attempting to focus on making the current client base profitable, there thrust is to spread their marketing efforts across a broader geographical space to include Japan, “….other Asian countries , the Gulf States and Australia which are all markets we believe will contribute to our growth.” Growth of transaction volume? Sure. Growth of financial losses? Probably.
There are no easy pickings in Japan or Australia anymore. Japan is recording lowest transaction volumes since regulated binary options became offered. To attempt to enter a market with already declining volumes, with a product that is inferior to or at least no better than the established competition’s, and a unique alien culture is a high risk strategy at the very least.
Research and Development
The instrument EZTrader offers can be boiled down to vanilla binary calls and puts, primarily at-the-money calls and puts commonly referred to as the ‘Over’ and the ‘Under’.
Offering solely vanilla calls and puts has probably had its day as EZTrader’s competitors are now offering other instruments such as touch options, ranges, plus a binary spread trade on specialist platforms. Arguably research and development needs to be ‘beefed up’ to provide a platform with a more interesting range of instruments.
Is this feasible within EZTrader? Not if this assessment of volatility (a critical input in pricing any option, conventional or binary) from the Form 10-Q is anything to go by:
“Some instruments are more sensitive to changes in volatility than others. For example, an at-the-money option would experience a larger percentage change in its fair value than a deep-in-the-money option.” Form 10-Q
At-the-money binary options are always worth about 0.5, irrespective of the volatility. This is because the market believes that at this asset price the asset price has a 50% chance of going up and a 50% chance of going down, volatility is irrelevant.
“Volatilities for certain combinations of tenor [time to expiry] and strike price are not observable.” Form 10-Q
They are observable, although this requires a specific method to do so.
“In addition, the fair value of an option with more than one underlying security [binary spread option] depends on the volatility of the individual underlying securities.” Form 10-Q
This is very true, yet the critical input in this example is the correlation coefficient of the two asset prices.
The above may all pale into insignificance if the SEC turns nasty:
“On January 11, 2016, the Company received a written “Wells Notice” from SEC staff (the “Staff”) indicating its preliminary determination to recommend that the SEC file an action against the Company for violations of certain federal securities laws primarily related to its binary options platform.” Form 10-Q
“If the Staff makes a recommendation to the SEC to file an action against the Company, the recommendations may involve a civil injunctive action, public administrative proceeding, and/or cease-and-desist proceeding. The SEC may also seek remedies that include an injunction and/or cease and desist order, disgorgement, pre-judgment interest, and civil money penalties.” Form 10-Q
Banc de Binary was hit by one of these actions which cost the company about $11m..
A legal proceeding is currently undergoing with Feyenoord, a Dutch football club, over the termination of a strategic partnership. Feyenoord instigated the proceedings.
The arbitral tribunal determined “…both parties share responsibility for this termination.” Form 10-Q
The upshot is that the tribunal ordered the Company to pay Feyenoord €512,500 plus €32,531 in arbitration costs. The Company is appealing “…to revert this decision.” Form 10-Q
Share Capital & Cash Flow
Some good news! Compagnie Financiere St. Exupery Sicav-Sif bought 1m EZTD shares at a price of $6 in a private placement, $6 being at a premium to the prevailing price being traded on the OTCQX. The price last night closed at $4.00 – $4.50. Never mind, the buyer also got 888,889 warrants with a strike price of $6.75 which expire on September 30th to soften the blow!
The $6m is not going to go far in the face of Q1 2016 net loss to the company of $3.37m. and if the Company is serious about expanding into Japan and the other geographic locations then the Company needs to raise a great deal more than $6m. With the market capitalization of approximately $16.5m it’s not clear where that extra cash is going to come from.
It is difficult to see a way forward for EZTD. With the share price languishing at $4.25 it is too low to see them onto Nasdaq where new sources of fundraising would have been possible. EZTD’s marketing budget has been living beyond its means for a while now and yet Shimon Citron is still talking about expanding the marketing operation. Time for a reality check………..