Exodus Movement, Inc. and Subsidiary

For the Quarterly Period Ended March 31, 2021

Table of Contents

Exodus Movement, Inc. and Subsidiary

You should read the following discussion and analysis of Exodus’ financial condition and results of operations together with the consolidated financial statements and related notes that are included elsewhere in this quarterly report. This discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties. Exodus’ 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,” “Information Regarding Forward Looking Statements,” and in other parts of Exodus’ Offering Circular dated April 9, 2021.

Overview of Our Business

Our mission is to ignite an exodus from the traditional banking system by empowering people to secure, manage and use their crypto assets. On December 9, 2015, we launched the Exodus Platform for holding and using their crypto assets, and every two weeks since our launch, we have released new updates that continued to develop, build on and improve the Exodus Platform.

We believe that crypto assets should be easy to use and easy to understand. Crypto assets have the potential to profoundly change the way society does business, manages its wealth and even looks at money itself—but unlocking these possibilities first requires that crypto assets be made accessible and engaging, without technical jargon or complexities obscuring the core features, benefits and uses of crypto assets.

We are relentlessly focused on delivering the best customer experience in the blockchain and crypto asset industry. We have built a platform that brings together a simple, elegant and intuitive interface with powerful functionality—including support for over 100 crypto assets, integrations with seven crypto-to-crypto exchanges and integrations with third-party applications, such as Compound Finance and SportX.

We operate in the financial technology subsector of the greater blockchain and crypto asset industry and our customers are both experienced people and entities familiar with this technology and those new to financial solutions powered by blockchain technology and crypto assets.

We built the Exodus Platform to give our customers the power to quickly secure, control, and manage their digital wealth. Our platform allows our customers to store and access their crypto assets in a secure environment that only they control on their desktop and mobile devices while delivering a simple, elegant and intuitive experience. The trustworthiness of your bank’s online portal without service windows and clunky interfaces, the speed of centralized crypto exchanges without the risk of third-party custody – our customers have the best of both worlds in Exodus. The Exodus Platform allows our customers to leverage the power of crypto assets in an easy and straightforward way, without compromising privacy or the security of their funds.

Components of Results of Operations

Exodus has entered into agreements with various third-party API providers whereby the provider is allowed to integrate their services into the Exodus Platform for use by users of the Exodus Platform. These integrations are known as APIs, and we earn revenue based on the API fees detailed in the associated API agreements. Most, but not all, of our revenue is earned on a transactional basis whereby users of the Exodus Platform access the services of the API providers through the API. Certain interactions generate API fees, and we track fees earned on a daily basis. Examples of services provided by API providers include cryptocurrency-to-cryptocurrency exchanges, fiat-to-cryptocurrency conversions, and cryptocurrency staking.

For transaction-based API fees, the transaction price is allocated per qualified interaction between the provider and the user and is paid by the provider. As each interaction occurs, we recognize revenue. With the majority of our revenue being transaction-based, our revenue can vary significantly based on the type and number of interactions that occur each day. We believe that there will be additional demand for the API services in the future as a greater number of people begin to use cryptocurrencies. We anticipate that proceeds from the API fees, if and when recognized as revenue under our current accounting policy (or if and when recognized as revenue under an appropriate future accounting policy) will continue to generate the majority of our revenue for the foreseeable future.

For non-transaction-based API fees, we recognize revenues based on when performance obligations in the underlying contracts have been identified, priced, allocated, and satisfied. No non-transaction-based fees were recognized until July 2020.

Exodus’ costs of revenues are classified as software development, customer support, and security and wallet operations.

Software Development

Software development expenses represent costs incurred by Exodus for the development of the Exodus Platform, individual API integrations, as well as our application ecosystem, and include: related salaries and costs, fees paid to consultants and outside service providers. Our application ecosystem is still under development, and there are significant hurdles to overcome before critical components of the ecosystem become operational. As a result, we expect our software development expenses to increase over the next several years as we accelerate improvements to the user experience and functionality of the wallet, integrate new APIs services, and develop the Exodus ecosystem.

Customer Support

Customer support includes related salaries and costs, and fees paid to consultants and outside service providers. Exodus views customer support as an integral part of its product offerings and made significant investments in this area in 2019 and 2020. Further investments in customer support are expected later in the development of the Exodus ecosystem.

Security and Wallet Operations

Security and wallet operations expenses consist of development operations and security related activities. As the Exodus application ecosystem is still under development, Exodus expects security and wallet operations expenses to increase over the next several years as we accelerate improvements to the user experience and functionality of the wallet. We continually explore and evaluate ways to make the Exodus Platform and ecosystem more secure.

Exodus’ operating expenses are classified as general and administrative, and advertising and marketing, depreciation and amortization, and impairment of digital assets.

General and Administrative

General and administrative expenses consist of administrative, compliance, legal, investor relations, and financial operations and foreign currency gain or loss. They include office expenses, meals and entertainment costs, software/applications for operational use, and other general and administrative expenses, including but not limited to technology subscriptions, travel, utilities, and vehicle expenses. These expenses account for a significant portion of our operating expenses. We anticipate that our general and administrative expenses will increase in the future to support our continued growth, regulatory compliance, and the costs associated with increased reporting requirements.

Advertising and Marketing

Advertising and Marketing expenses include marketing and business development related activities consisting primarily of advertising, corporate marketing, public relations, promotional items, events and conferences and fees paid for software applications used for advertising and marketing. We have traditionally focused on low cost marketing channels and word-of-mouth advertising. However, more sophisticated marketing strategies are being explored to increase our outreach efforts; as such corresponding investments in advertising and marketing are expected to increase significantly.

Comparison of the results of operations for the quarter ended March 31, 2021 and 2020

Revenue

Revenue for the quarter ended March 31, 2021 was $23.6 million compared to $2.9 million for the quarter ended March 31, 2020, an increase of $20.7 million or 706%. The increase in total revenue was primarily driven by revenue from the exchange aggregation of $20.2 million, with two customers individually generating increases in revenue of $13.1 million and $5.4 million. New products and services, such as consulting, fiat on-boarding, and staking were implemented in 2020 and account for $0.5 million of the increase.

Software Development Expense

Software development expenses for the quarter ended March 31, 2021 was $1.4 million compared to $0.8 million for the quarter ended March 31, 2020, an increase of $0.6 million or 82%. This growth was primarily due to $0.5 million of fiat onboarding expenses as well as an increase in hiring and associated compensation expenses of $0.04 million. This includes $0.2 million in general salary increases, which is offset by a decrease of $0.08 million of stock-based compensation and $0.1 million related to increased software capitalization due to change in development mix away from internal use projects.

Customer Support Expense

Customer support expenses for the quarter ended March 31, 2021 was $0.8 million compared to $0.3 million for the quarter ended March 31, 2020, an increase of $0.5 million or 134%. This growth was primarily due to an increase in hiring and the associated compensation expenses of $0.4 million.

Security and Wallet Operations Expense

Security and wallet expenses for the quarter ended March 31, 2021 was $1.3 million compared to $0.8 million for the quarter ended March 31, 2020, an increase of $0.5 million or 68%. This growth was primarily due to an increase in cloud infrastructure services expenditures of $0.3 million, in hiring and the associated compensation expenses of $0.07 million, and increased technology subscriptions of $0.13 million.

General and Administrative Expense

General and administrative expenses for the quarter ended March 31, 2021 was $1.5 million compared to $0.8 million for the quarter ended March 31, 2020, an increase of $0.7 million or 89%. This growth was primarily due to an increase in hiring and associated compensation expenses of $0.4 million and an increase in legal and professional services expenditures of $0.3 million. The growth was also due to increases in equipment expense of $0.1 million as well as increases in technology subscriptions, office expenses and employee programs of $0.05 million. increases in recruiting expenses of $0.2 million.  The increases were partially offset by foreign currency translation losses of $0.5 million.

Advertising and Marketing Expense

Advertising and marketing expenses for the quarter ended March 31, 2021 was $2.9 million compared to $0.1 million for the quarter ended March 31, 2020, an increase of $2.8 million or 2,273%. This growth was primarily due to an increase in marketing expenses of $2.5 million and an increase in hiring and associated compensation expenses of $0.2 million.

		Quarter ended March 31, (amounts in thousands)
		2021				2020				% Change
Depreciation and amortization		$	804			$	50				1,508	%

		Quarter ended March 31, (amounts in thousands)
		2021				2020				% Change
Interest income		$	76			$	13				485	%

Property and equipment, net, consisted of the following (in thousands):

		March 31, 2021				December 31, 2020
Computer equipment		$	445			$	294
Vehicles			255				255
Furniture and fixtures			18				18
Fixed assets, gross			718				567
Less:  accumulated depreciation			(213	)			(177	)
Property and equipment, net		$	505			$	390

Depreciation expense was less than $0.1 million for both quarters ended March 31, 2021 and 2020.

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Software assets, net, consisted of the following (in thousands):

		March 31, 2021				December 31, 2020
Internal use software		$	3,321			$	2,904
Website			53				53
Software assets, gross			3,374				2,957
Less:  accumulated amortization			(1,478	)			(709	)
Software assets, net		$	1,896			$	2,248

Amortization expense was approximately $0.8 million and less than $0.1 million for the quarters ended March 31, 2021 and 2020, respectively.

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In 2016 and 2017, the Company recorded Simple Agreements for Future Equity (“SAFEs”) totaling $0.5 million as long-term debt. Management has determined that no conversion to equity is likely due to:

 

 

As such, the Company valued only the debt component of the SAFEs and due to a lack of available inputs, fair market value was deemed to be the cost of the debt component. Until such time that one of the aforementioned events occurs, such SAFEs will remain classified as an outstanding liability for financial reporting purposes.

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Stock Based Compensation

Terms of our share-based compensation are governed by the 2019 Plan. The 2019 Plan permits the Company to grant non-statutory stock options, incentive stock options and other equity awards to Exodus employees, directors and consultants. The exercise price for options issued under the 2019 Plan is determined by the board of directors, but will be (i) in the case of an incentive stock option granted to an employee who owns stock representing more than 10% of the voting power of all classes of stock of Exodus, no less than 110% of the fair market value per share on the date of grant; or (ii) granted to any other employee, no less than 100% of the fair market value per share on the date of grant. The contractual life for all options issued under the 2019 Plan is 10 years. The 2019 Plan authorized grants to issue up to 3,000,000 options convertible into shares of authorized but unissued Class B common stock.

We calculate the fair value of stock-based compensation awards granted to employees and nonemployees

		Quarter Ended March 31, 2021				Quarter Ended March 31, 2020
Expected dividend yield			0.00	%			0.00	%
Expected stock-price volatility			51.65%- 57.21	%			51.65%- 55.05	%
Risk-free interest rate			0.27% - 1.76	%			1.58% - 1.76	%
Term of options			5.25				5.31
Stock price		$	2.39			$	4.78

using the Black-Scholes option-pricing method. If we determine that other methods are more reasonable, or other methods for calculating these assumptions are prescribed by regulators, the fair value calculated for our stock options could change significantly. Higher volatility and longer expected lives would result in an increase to stock-based compensation expense to non-employees determined at the date of grant.

The material factors incorporated in the Black-Scholes model in estimating the fair value of the options granted for the periods presented were as follows:

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The components of the income tax provision for the quarter ended March 31, 2021 and March 31, 2020 are as follows (in thousands):

Summary of current and deferred taxes		March 31,				March 31,
		2021				2020
U.S federal
Current		$	2,984			$	-
Deferred			(828	)			-
Foreign Current			220				-
Income tax provision		$	2,376			$	-

Effective income tax rate reconciliation		March 31, 2021				March 31, 2020
Federal statutory rate			21.0	%			21.0	%
Permanent tax benefit			-7.9	%			-2.8	%
Tax credits			-0.3	%			-2.0	%
Other			0.0	%			-3.5	%
Effective tax rate for income from continuing operations			12.8	%			12.7	%

Deferred tax assets (liabilities)		March 31, 2021				December 31, 2020
Prepaid expenses		$	(170	)		$	(813	)
Accounts receivable			(457	)			(428	)
Fixed assets			(69	)			(43	)
Capitalization software, net of amortization			(518	)			(472	)
Digital assets			118				97
Deferred revenue			12				16
Accounts payable			215				93
Accrued payroll and related expenses			224				143
Stock option expense			621				554
Net deferred tax liability		$	(24	)		$	(853	)

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and taxing strategies in making this assessment. Management believes it is more likely than not that the deferred tax assets will be realized. Accordingly, a full valuation allowance has not been established and deferred tax assets and related tax benefit have been recognized in the accompanying consolidated financial statements.

The Company has not identified any uncertain tax positions requiring a reserve as of March 31, 2021 and December 31, 2020.

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The Company is periodically involved in ordinary and routine litigation incidental to its business. The outcome of any such matters is not determinable as of the date of these consolidated financial statements.

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Management has evaluated subsequent events occurring after the consolidated balance sheet date through the date of May 28, 2021, the date for which the consolidated financial statements were available to be released. Based upon this evaluation, Management has determined that no subsequent events have occurred other than noted below.

Exodus closed its Regulation A Public Offering on May 5, 2021.  The Company issued up to 2,733,229 shares of Class A Common Stock and raised $75.0 million in gross proceeds, the maximum amount qualified under the Company’s Offering Circular dated April 9, 2021.