Exodus Movement, Inc.: Form 10-Q for the period ended Mar 31, 2024

The following discussion and analysis of Exodus’ financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in this quarterly report. The following discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties. Actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors,” “Forward Looking Statements,” and in other parts of this quarterly report and the Form 10.

Overview of Our Business

We are engaged principally in the business of creating and distributing self-custodial wallets for digital assets. Our profitability is dependent on a number of factors including the pricing of digital assets, the volume of transactions and the quality of our third-party relationships.

Our revenues are primarily derived from digital asset related transactions and consist of fees from third party API agreements. Our expenses primarily consist of:

• Cost of revenues (primarily include software development, user support and security and wallet operations);
• Depreciation expense relating to software development; and
• General and administrative expenses (primarily include administrative, legal, financial operations, information technology services, marketing and advertising expenses).

Known Trends and Uncertainties

Operating Revenues - We have seen a significant increase in the number of users on the Exchange Aggregator in 2024 compared to prior periods. The change in market conditions can have a favorable or unfavorable impact depending on changing user base, market price and increasing interest in the digital asset ecosystem. These drivers may continue to improve the revenue earned as the markets continue to perform at increasing prices and number of users.

Cloud based infrastructure expense - We anticipate increased cloud infrastructure expenses as the platform continues to grow due to increased database capacity as a result of the continued expansion of our platform and new users.

Investment in human capital - As the Exodus platform continues to evolve and new services are introduced to the platform, we anticipate the need to add more team members to accommodate the growth in services which could materially increase compensation costs. This is expected to materially increase expenses in both cost of revenues and general and administrative expenses. Also, to promote compliance with the evolving regulatory environment, increased expense will be incurred to ensure the team is properly staffed to accommodate the evolving regulatory environment.

Marketing expenses - We have primarily focused on an organic growth-based marketing strategy. We continue to evaluate our marketing strategy and in the future may decide to refocus the current organic growth strategy in growing our user base to a more competitive approach and that may incur future expenses related to marketing. Any increased marketing efforts would increase expenses, and we may not be able to realize the anticipated revenue gain and increase in user base that would offset the expense over time.

Results of Operations

Results of operations for the three months ended March 31, 2024 and 2023 (in thousands):

Total revenue for the three months ended March 31, 2024 was $29.0 million compared to $13.3 million for the three months ended March 31, 2023, an increase of $15.7 million or 118%. This growth was largely driven by a $14.1 million increase in revenue from exchange related-activities, due primarily to an increase in monthly active users ("MAUs") and a 102% increase in volume processed by exchange providers. We define a monthly active user as any user with transaction history that opens our wallet in a given month. MAUs are a measure of our attraction and retention levels and the size of our global funded user community. Additionally, revenue from non-exchange-related activities such as staking, fiat onboarding, and other operations climbed by 227%, rising to $2.3 million for the three months ended March 31, 2024 from $0.7 million for the three months ended March 31, 2023. Our strategic focus remains on expanding our revenue-generating user base, improving app features, and expanding our presence in our other sector as provided in the Note 3 - Revenue Recognition. We believe that over the long term, interest in digital assets and digital asset markets will increase. However, during any given period, we cannot be certain that our MAU growth efforts will be effective or that interest in digital assets will increase. The top four API providers primarily drove exchange revenue of $21.2 million during the three months ended March 31, 2024 compared to the top five API providers generating $11.2 million in revenue during the three months ended March 31, 2023.

Cost of revenues increased $3.8 million, or 56%, in the three months ended March 31, 2024, when compared with the three months ended March 31, 2023. The increase was primarily driven by increases in employee compensation and benefit expense of $1.4 million as a result of increased headcount, cloud infrastructure services of $0.8 million that was due to increased database capacity as a result of the continued expansion of our platform and new users, $0.4 million of contractual obligations for API exchange affiliates, depreciation and amortization of $0.3 million, and lower capitalized labor of $0.7 million.

General and administrative expenses increased in the three months ended March 31, 2024 by $2.1 million, or 35%, compared to three months ended March 31, 2023. This increase was primarily due to increases legal and consulting expenses of $1.1 million, foreign currency expense of $1.0 million partially offset by decreased employee compensation and benefit expenses of $0.2 million.

Primarily driven by market volatility, the Company experienced a favorable fluctuation in the market price of digital assets held during the first quarter of fiscal year 2024. During the three months ended March 31, 2024, the Company recognized net realized gains from exchange of digital assets and net unrealized gains from remeasurement of digital assets of $4.0 million and $52.8 million, respectively. For the three months ended March 31, 2023, there was a gain on digital assets of $0.4 million, due to a gain on $1.2 million on assets sold for greater than their carrying value, partially offset by a loss of $0.8 million, primarily due to impairment of bitcoin.

Liquidity and Capital Resources

Overview

Our primary source of funds is from API fee revenues. Our primary use of funds is payment of our operating costs, which consist primarily of compensation and benefit expenses and security costs.

Source of Funds

The following table summarizes our cash flows for the periods indicated (in thousands):

Net Cash from Operating Activities

Net cash provided by operating activities for the three months ended March 31, 2024, was $0.5 million. We had net income of $54.8 million, $11.3 million deferred tax expense, $1.2 million in depreciation and amortization, $1.7 million in stock-based compensation and $1.9 million in changes to working capital, partially offset by $13.9 million in other operating activities settled in digital assets and USDC as discussed in Note 5 - Intangible Assets and a net gain on digital assets of $56.8 million primarily related gains caused by market fluctuations.

Net cash provided by operating activities for the three months ended March 31, 2023 was $1.3 million. The Company had net income of $0.8 million for the three months ended March 31, 2023, changes in working capital of $2.0 million, stock based compensation of $1.9 million, depreciation and amortization of $1.0 million, partially offset by $3.8 million of non-cash activities settled in digital assets and USDC as discussed in Note 5 - Intangible Assets and a net gain on digital assets of $0.4 million.

Net Cash from Investing Activities

Net cash used in investing activities for the three months ended March 31, 2024 was $9.6 million. This primarily consisted of a $29.8 million investment in treasury bills and digital assets held of $2.0 million, partially offset by $29.6 million of treasury bills redemption and disposal of digital assets held of $11.9 million.

Net cash used in investing activities for the three months ended March 31, 2023 was $3.8 million. This primarily consisted of a $22.0 million of treasury bills redemption, offset by $18.2 million of investments in treasury bills and $0.1 million purchases of fixed assets.

Net Cash from Financing Activities

Our primary financing activity for the three months ended March 31, 2024 amounted to $0.3 million. This consisted of $0.3 million of repurchased shares to pay employee withholding taxes as a part of our 2021 Equity Incentive Plan (the “2021 Plan”).

Our primary financing activities for the three months ended March 31, 2023 was $0.2 million primarily due to the repurchase of shares to pay employee withholding taxes as part of our 2021 Plan.

Total Digital Assets and Liquid Assets

The Company holds the following cash and cash equivalents (including treasury bills with a maturity date of less than three months), USDC, treasury bills with a maturity date of greater than three months, and digital asset holdings.

The digital asset holdings as of March 31, 2024 and December 31, 2023 were (in thousands):

17

The liquid asset holdings as of March 31, 2024 and December 31, 2023 were (in thousands):

Material Cash Requirements

We currently have no material commitments for capital expenditures. At this time, we currently believe that our cash on hand, as well as the sources of liquidity described above, will be sufficient to fund our operations through the next twelve months and thereafter for the foreseeable future.

Non-GAAP Financial Measure

Earnings before interest, taxes, depreciation and amortization ("EBITDA") and Adjusted EBITDA

In addition to our results determined in accordance with GAAP, we believe Adjusted EBITDA, a non-GAAP measure, is useful in evaluating our operating performance. We use Adjusted EBITDA to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that Adjusted EBITDA may be helpful to investors because it provides consistency and comparability with past financial performance. However, Adjusted EBITDA is presented for supplemental informational purposes only, has limitations as an analytical tool, and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate similarly titled non-GAAP measures, including Adjusted EBITDA, differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison.

Investors are encouraged to review the related GAAP financial measures and the reconciliation of Adjusted EBITDA to its most directly comparable GAAP financial measure, and not to rely on any single financial measure to evaluate our business. We calculate Adjusted EBITDA as net income, adjusted to exclude provision for or benefit from income taxes, depreciation and amortization, interest expense, crypto asset borrowing costs, stock-based compensation expense, impairment, unrealized gain or loss on foreign exchange, fair value gain or loss on derivatives, non-recurring legal reserves and related costs, and other loss.

The Company believes that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and Board of Directors. Management’s determination of the components of Adjusted EBITDA are evaluated periodically and based, in part, on a review of non-GAAP financial measures used by industry analysts.

The following table summarizes our adjusted EBITDA for the periods indicated (in thousands):

18

Critical Accounting Estimates

See “Critical Accounting Estimates” set forth under “Management’s Discussion and Analysis of the Financial Condition and Results of Operations” in the Form 10. There have been no material changes from those disclosed in the Form 10.

Market price risk of crypto assets

A large portion of our operating revenue generated from exchange providers on the Exodus Platform is received in Bitcoin. A decline in the market price of digital assets has had and could in the future have an adverse effect on the company's operations, the value of our digital assets, and our future operations and cash flows.

The market price of Bitcoin is impacted by a variety of factors and is determined primarily using data from various exchanges, over-the-counter markets and derivative platforms. The digital asset industry has been negatively impacted by market price volatility. Pricing may be the result of, and may continue to result in, speculation regarding future appreciation in the value of Bitcoin. There can be no assurance that we will be able to exchange our digital assets for U.S. dollars on a timely basis, if at all, or for a fair price. If the value of our digital assets declines, or if we experience difficulties converting our digital assets to U.S. dollars, we may not have sufficient liquidity to satisfy our liabilities, expenses and costs as they become due, which may negatively affect our business operations and financial condition.

Interest rate risk

Our exposure to changes in interest rates primarily relates to interest earned on our cash and cash equivalents and ultra short-duration US Treasury Bills.

Our investment policy and strategy related to our cash, cash equivalents, and treasury bills is to preserve capital and meet liquidity requirements without increasing risk. Our cash and cash equivalents and treasury bills consist of money market funds denominated in U.S. dollars, cash deposits, and ultra short-duration treasury bills and therefore the fair value of our cash, cash equivalents, and treasury bills would not be significantly affected by either an increase or a decrease in interest rates. A hypothetical 100 basis points increase or decrease in average interest rates applied to our daily balances held as of March 31, 2024 and March 31, 2023, would have resulted in a $0.6 million and $0.5 million increase or decrease, respectively, in interest earned on cash, cash equivalents, and treasury bills. The Federal Reserve has increased the Federal Funds Rate over 500 basis points since March 31, 2021 to control current levels of inflation and as of March 31, 2024, the Federal Funds Rate was 5.33%. As a result of these significant recent increases in interest rates, a decrease in interest rates is possible. A hypothetical 500 basis points increase or decrease in average interest rates applied to our daily balances held as of March 31, 2024 and March 31, 2023, which hypothetical basis point increase corresponds closely to the increase of the Federal Funds Rate since early 2021, would have resulted in a $3.2 million and $2.7 million increase or decrease, respectively, in interest earned on cash, cash equivalents, and treasury bills.

Foreign currency risk

Foreign currency transaction risk

Revenues, expenses, and financial results of our foreign subsidiaries are recorded in the functional currency of these subsidiaries. Our foreign currency exposure is primarily related to transactions denominated in Swiss Francs attributable to cash and cash equivalents, and other intercompany transactions where the transaction currency is different from a subsidiary’s functional currency. Changes in foreign exchange rates, and in particular a weakening of foreign currencies relative to the U.S. dollar may negatively affect our results of operations as expressed in U.S. dollars. We have experienced and will continue to experience fluctuations in our results of operations as a result of gains or losses on the settlement and the remeasurement of monetary assets and liabilities denominated in foreign currencies that are not the functional currency.

We recognized net foreign currency losses of $1.0 million for the three months ended March 31, 2024, respectively, compared to net foreign currency losses of less than $0.1 million for the three months ended March 31, 2023, respectively, in general and administrative expense, net in the condensed consolidated statements of operations and comprehensive income. If an adverse 10% foreign currency exchange rate change was applied to total monetary assets, liabilities, and commitments denominated in currencies other than the functional currencies at the balance sheet date, it would not have a material impact on our financial results.

We have not but may in the future enter into derivatives or other financial instruments in an attempt to hedge our exposure to foreign currency exchange risk. It is difficult to predict the impact hedging activities would have on our results of operations. Additionally, the volatility of exchange rates depends on many factors that we cannot forecast with reliable accuracy. Our international operations increase our exposure to exchange rate fluctuations and, as a result, such fluctuations could have a material impact on our future results of operations and cash flows.

Foreign currency translation risk

Fluctuations in functional currencies from our net investment in international subsidiaries expose us to foreign currency translation risk, where changes in foreign currency exchange rates may adversely affect our results of operations upon translation into U.S. dollars. We recognized losses on translation adjustments, net of tax, of $0.7 million for the three months ended March 31, 2024, compared to losses on translation adjustments, net of tax, of $0.1 million for the three months ended March 31, 2023, in the condensed consolidated statements of comprehensive loss. As of March 31, 2024 and 2023, a 10% increase or decrease on foreign currency exchange rates for translation purposes would not have a material impact on our financial results

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures which are designed to ensure that information required to be disclosed by the Company in the reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such is accumulated and communicated to Company’s management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management, with the participation of and under the supervision of our principal executive officer and principal financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of March 31, 2024. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of March 31, 2024 the Company’s disclosure controls and procedures were not effective due to the material weaknesses in internal control over financial reporting, as described below.

Material Weaknesses

During 2022, we identified errors in our previously reported financial information as of and for the year ended December 31, 2021. As a result of the errors that were identified, we have identified a material weakness in the Company’s control environment whereby the Company did not design and maintain effective internal control over financial reporting with respect to the expertise and quantity of its resources. Specifically, we did not effectively execute a strategy to hire, train, and retain a sufficient quantity of personnel with an appropriate level of training, expertise, and experience in certain areas important to financial reporting. In addition, we also identified a material weakness whereby we did not design and implement effective control activities based on the criteria established in the Committee of Sponsoring Organizations framework. Specifically, the control activities did not adequately (i) address relevant risks, (ii) provide evidence of performance, (iii) provide appropriate segregation of duties, or (iv) operate at a level of precision to identify all potentially material errors.

Remediation Plan

We are committed to remediating these material weaknesses as promptly as possible. Management is in the process of implementing its remediation plan. We have initiated and intend to continue to implement measures designed to improve our internal control over financial reporting to remediate the material weaknesses, including the following:

• We have hired personnel within our accounting function to allow for further segregation of reporting duties. We have strengthened our segregation of duties between the preparer and reviewer of controls related to financial accounting and reconciliation. We have implemented processes strengthening segregation of duties between those with access to book journal entries and those responsible for reviewing journal entries booked.
• We have formalized our internal controls environment and activities and have engaged with a third- party consultant to provide professional services to assist management with Sarbanes Oxley (“SOX”) readiness and assistance to help perform a risk assessment, and scoping of key systems and business processes, including a risk assessment at the financial statement assertion level to ensure that the level of precision of relevant controls is adequate to address the identified risks. These steps as part of phase one were completed as of December 31, 2023. We will continue to revise our risk assessment and scoping to rectify any deficiencies noted, enhance design and implement new controls if needed, expand education and training where necessary, update documentation, and add any necessary reviews by our management. We will continue to remediate the design appropriateness of certain specific controls and test the design of the remediated controls.

We believe the hiring of accounting personnel and an additional SOX readiness resource and the implementation of processes and controls to better identify and manage segregation of duties will remediate the identified material weaknesses.

Changes in Internal Control over Financial Reporting

Except as described above with respect to our remediation plan, there have been no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.