Exodus Movement, Inc.: Form 10-Q for the period ended Sep 30, 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 in the business of creating and distributing self-custodial wallets for digital assets. Because a majority of our revenue is derived from services provided by API Providers to persons located outside the United States pursuant a transaction-based structure, 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 including software development, user support and security and wallet operations);
• Amortization expense relating to software development; and
• General and administrative expenses (primarily including administrative, legal, financial operations, information technology services, marketing and advertising expenses).

Based on the services offered and transactions conducted by API Providers, the following table shows the digital assets that are most material to our business by revenue.

Known Trends and Uncertainties

Cloud based infrastructure expense - Cloud infrastructure expenses increased by $0.6 million and $2.5 million for the three and nine months ended September 30, 2024, respectively, compared to the corresponding prior year period. We anticipate increased cloud infrastructure expenses as the platform continues to grow due to increased database capacity and new users.

Investment in human capital - Costs related to investment in human capital (including recruiting costs, salary, incentive and compensation costs) increased $2.7 million and $7.3 million for the three and nine months ended September 30, 2024, respectively, compared to the corresponding prior year period. As the Exodus platform continues to expand, we anticipate the need to add more team members to accommodate the growth in our business, which is expected to materially increase both cost of revenues and general and administrative expenses as a result of the impact on the human capital costs described above. Human capital costs are also expected to increase due to the need to add additional team members to address compliance with the evolving regulatory environment.

Marketing expenses – Marketing-related costs increased $0.8 million and $1.3 million for the three and nine months ended September 30, 2024, respectively, compared to the corresponding prior year period. The increase in both periods was primarily due to increased spending on website advertisements targeted at the crypto space and on social platforms. To date, 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, which would be expected to further increase marketing-related expenses.

Monthly Active Users

To measure user activity, we rely on the number of monthly active users (“MAUs”) of our Exodus Platform. We define an MAU as any user with transaction history in any month. A user has “transaction history” if, in the last 30 calendar days, the user performed any activity within the application such as opening their application to check digital asset prices, reading news, or accessing the services of our API Providers. A user will not have “transaction history” if it merely opens our wallet application without further action. MAUs provide a measurement of attraction and retention levels and user engagement by allowing management to compare “churn users,” defined as users who have been inactive on the Exodus Platform for three consecutive months, against “renewing users,” defined as users who have been active on the Exodus Platform for two consecutive months, and “new users,” defined as users new to the platform that month. Within each cohort of churn users, renewing users, and new users, we then identify the funded users to assess users’ ability to engage with the Exodus Platform. The term “funded users” refers to users whose wallet currently holds digital assets of value as determined by blockchain and pricing provider data. MAUs consist of both funded wallets and unfunded wallets. Because Exodus does not have accounts, users do not close an account or otherwise leave the platform. Therefore, churn users may become new users in the next month or at any point in the future as they re-engage with the platform. A positive MAUs percentage indicates that new and renewing users exceed churned users in a given month and that interest in the Exodus Platform is increasing. Management views increasing interest in the Exodus Platform over time as a key indicator of increasing revenue, especially for MAUs outside of the United States as the likelihood of revenue generating transactions increases as user interest increases.

Monthly active users were 1.6 million and 1.1 million as of September 30, 2024 and 2023, respectively, reflecting an increase of 0.5 million, or 40%. We believe the increase in MAUs was primarily attributable to a positive movement in consumer-related sentiment related to the cryptocurrency markets, leading to higher prices and increased trading activity. Our strategic focus remains on expanding our active user base, improving app features, and expanding our business-to-business partnerships. 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.

Results of Operations

Results of operations for the three and nine months ended September 30, 2024 and 2023 (in thousands):

Total revenue increased $8.1 million, or 68%, for the three months ended September 30, 2024, compared to the three months ended September 30, 2023. The increase was primarily driven by exchange aggregation revenue, which increased $6.9 million, or 62%, for the three months ended September 30, 2024, compared to the three months ended September 30, 2023. See Note 3 Revenue Recognition for further details. Additionally, non-exchange aggregation revenue increased $1.2 million, or 163%, for the three months ended September 30, 2024, compared to the three months ended September 30, 2023. For the three months ending September 30, 2024, revenue growth across all sources was primarily driven by an increase in user growth (as discussed under “Monthly Active Users” above) and expansion through our business-to-business partner initiatives. For the three months ended September 30, 2024, four API Providers accounted for more than 10% each of total revenue and collectively generated exchange aggregation revenue of $13.8 million. For the three months ended September 30, 2023, five API Providers accounted for more than 10% each of total revenue and collectively generated exchange aggregation revenue of $10.1 million. See Note 2 - Summary of Significant Accounting Policies, Concentration of Revenue.

Total revenue increased $33.8 million, or 89%, for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023. The increase was primarily driven by exchange aggregation revenue, which increased $29.3 million, or 83%, for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023. Additionally, non-exchange aggregation revenue increased $4.4 million, or 196%, compared to the nine months ended September 30, 2023. For the nine months ending September 30, 2024, revenue growth across all sources was primarily driven by an increase in user growth (as discussed under “Monthly Active Users” above) and expansion through our business-to-business partner initiatives. For the nine months ended September 30, 2024, four API Providers accounted for more than 10% each of total revenue and collectively generated exchange aggregation revenue of $50.6 million. For the nine months ended September 30, 2023, five API Providers accounted for more than 10% each of total revenue and collectively generated exchange aggregation revenue of $32.1 million. See Note 2 - Summary of Significant Accounting Policies, Concentration of Revenue.

Cost of revenues increased $3.6 million, or 46%, for the three months ended September 30, 2024, compared to the three months ended September 30, 2023. The increase was primarily due to a $1.1 million increase in team member compensation and benefit expense as a result of increased headcount, a $0.6 million increase in cloud infrastructure service costs due to increased database capacity needs as a result of the continued expansion of our platform and addition of new users, a $0.5 million increase in partner fee expense, a $0.2 million increase in subscription expenses, a $0.3 million increase in consulting expenses, a $0.5 million decrease in capitalized labor and a $0.2 million increase in software amortization expense.

Cost of revenues increased $11.1 million, or 51%, for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023. The increase was primarily due to a $3.7 million increase in team member compensation and benefit expense as a result of increased headcount, a $2.5 million increase in cloud infrastructure service costs due to increased database capacity needs as a result of the continued expansion of our platform and addition of new users, a $1.3 million increase in partner fee expense, a $0.6 million increase in subscription expenses, a $0.9 million increase in consulting expenses, a $0.6 million increase in software amortization expense and a $1.0 million decrease in capitalized labor.

General and administrative expenses increased $3.9 million, or 84%, for the three months ended September 30, 2024, compared to the three months ended September 30, 2023. The increase was primarily due to a $1.6 million increase in team member compensation and benefit expenses, a $1.5 million increase in legal and consulting expenses, a $0.8 million increase in meeting and travel expenses, a $0.7 million increase in marketing expenses, a $0.3 million increase in charitable donations and a $0.1 million increase in subscription expenses, partially offset by a $1.1 million decrease in foreign currency expense.

General and administrative expenses increased $11.0 million, or 75%, for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023. This increase was primarily due to a $3.5 million increase in team member compensation and benefit expenses, a $4.0 million increase in legal and consulting expenses, a $1.7 million increase in meeting and travel expenses, a $1.2 million increase in marketing expenses, a $0.3 million increase in subscription expenses, a $0.3 million increase in charitable donations and a $0.1 million increase in foreign currency expense.

During the three months ended September 30, 2024, the Company recognized net realized losses from exchange of digital assets of $0.7 million and net unrealized gains from remeasurement of digital assets of $0.4 million. Realized gains in 2023 were calculated using impaired balances compared to cost basis in 2024. For the three months ended September 30, 2023, the Company recorded a net impairment on digital assets of $0.4 million.

During the nine months ended September 30, 2024, the Company recognized net realized gains from exchange of digital assets of $5.1 million and net unrealized gains from remeasurement of digital assets of $34.1 million. For the nine months ended September 30, 2023, the Company recorded net gain on digital assets of $0.3 million.

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 mostly 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 (Used In) Provided By Operating Activities

Net cash used in operating activities for the nine months ended September 30, 2024, was $6.8 million. The Company had net income of $46.0 million, $6.8 million deferred tax expense, $5.3 million in stock-based compensation and $3.9 million in depreciation and amortization, $0.2 unrealized loss on investments offset by $3.5 million in changes to working capital, $39.2 million net gain on digital assets due to market fluctuations and $23.8 million in other operating activities settled in digital assets and USDC which consisted of $70.9 million in revenue, reduced by $16.7 million in expenses, $2.9 million in expenses primarily related to accrued payroll and $27.1 million in conversions to cash.

Net cash provided by operating activities for the nine months ended September 30, 2023, was $2.9 million. The Company had net income of $2.4 million, $3.4 million in depreciation and amortization, $4.7 million in stock based compensation and $2.4 million in changes to working capital, partially offset by $9.6 million in other operating activities settled in digital assets and USDC (as discussed in Note 5 - Intangible Assets) and net gain on digital assets of $0.3 million.

Net Cash Provided By (Used In) Investing Activities

Net cash provided investing activities for the nine months ended September 30, 2024 was $24.7 million. This primarily consisted of $74.8 million of treasury bill redemption and $26.1 million provided by disposal of digital assets held, partially offset by $73.3 million invested in treasury bills, $2.5 million used in purchase of digital assets, $0.2 million used in the purchase of fixed assets and $0.2 million used in the purchase of a domain name.

Net cash used in investing activities for the nine months ended September 30, 2023 was $10.5 million. This primarily consisted of $69.3 million used in investment in treasury bills, partially offset by $58.8 million provided by redemption of treasury bills.

Net Cash Used In Financing Activities

Net cash used in financing activities for the nine months ended September 30, 2024 was $2.7 million, which was used for the repurchase of shares of our common stock to pay employee withholding taxes as a part of our 2021 Plan.

Net cash used in financing activities for the nine months ended September 30, 2023 was $0.5 million, which was used for the repurchase of shares of our common stock to pay employee withholding taxes as part of the 2021 Plan.

Total Digital Assets and Liquid Assets

The following tables show the Company’s holdings of digital assets and cash and cash equivalents (including treasury bills with a maturity date of less than three months), USDC, and treasury bills with a maturity date of greater than three months.

The digital asset holdings as of September 30, 2024 and December 31, 2023 were (in thousands):

The liquid asset holdings as of September 30, 2024 and December 31, 2023 were (in thousands):

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.

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 digital assets

A large portion of our operating revenue generated from API providers is received in Bitcoin. A decline in the market price of digital assets 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 previously 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 U.S. Treasury Bills with maturities of approximately six months or less.

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 consist of money market funds denominated in U.S. dollars, cash deposits, and treasury bills acquired with less than three months to maturity. Treasury bills outside of cash and cash equivalents include amounts acquired with three months to twelve months to maturity. 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 September 30, 2024 and September 30, 2023, would have resulted in a $0.7 million and $0.6 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 September 30, 2024, the Federal Funds Rate was 4.83%. 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 September 30, 2024 and September 30, 2023, which hypothetical basis point increase corresponds closely to the increase of the Federal Funds Rate since early 2021, would have resulted in a $3.5 million and $2.8 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 $0.2 million and $0.1 million for the nine months ended September 30, 2024 and September 30, 2023, respectively, in general and administrative expense, net in the condensed consolidated statements of operations and comprehensive income (loss). 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 gains on translation adjustments, net of tax, of less than $0.1 million for the nine months ended September 30, 2024, compared to losses on translation adjustments, net of tax, of $0.1 million for the nine months ended September 30, 2023, in the condensed consolidated statements of comprehensive income (loss). As of September 30, 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 the 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 Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (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 Exchange Act, as of September 30, 2024. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 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 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 Update

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 what we believe to be a sufficient quantity of personnel who possess the necessary level of expertise, experience and training within our accounting function to allow for appropriate segregation of reporting duties. Specifically, we have strengthened our segregation of duties between the preparer and reviewer of controls related to financial accounting and completing reconciliations and 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 control 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 remediation activities were substantially completed as of December 31, 2023.

We will continue to revise our risk assessment and scoping to rectify any deficiencies noted, enhance the design of controls 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 of certain controls and test the design of the remediated controls.

We believe that the steps detailed above, are substantially implemented and once successfully tested, will remediate the identified material weaknesses. In addition, the Company has created an internal audit function that has completed a risk assessment and scoping analysis with respect to internal control over financial reporting for the year ending December 31, 2024. Management plans to continue to evaluate the risk assessment and scoping analysis each quarter to help monitor the Company’s internal control environment as well as to help effectively identify and address any deficiencies. The Company has also performed a fraud risk assessment to help identify and evaluate fraud risks that may impact business processes.

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 September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.