BAKKT HOLDINGS, INC. The following discussion and analysis of financial condition and results of operations should be read together with our audited consolidated financial statements and the related notes included under Item 8 of this Annual Report on Form 10-K (the "audited consolidated financial statements"). References in this section to "we," "us," "our," "Bakkt" or the "Company" and like terms refer to (i)Bakkt Opco Holdings, LLC and its subsidiaries (the "Predecessor") for the year endedDecember 31, 2020 and the period fromJanuary 1, 2021 throughOctober 14, 2021 (each referred to herein as a "Predecessor Period") and (ii)Bakkt Holdings, Inc. and its subsidiaries (the "Successor") for the period fromOctober 15, 2021 throughDecember 31, 2021 (the "Successor Period"), unless the context otherwise requires. Some of the information contained in this discussion and analysis or set forth elsewhere in this document, including information with respect to our plans and strategy for our business, includes forward-looking statements. Such forward-looking statements are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors detailed elsewhere in this Annual Report on Form 10-K.
Overview
Our mission is to power commerce by connecting the digital economy across asset
classes for consumers, business and institutions. The digital asset ecosystem is
broad, including cryptoassets, loyalty and rewards points, gift cards, in-game
assets, and non-fungible tokens ("NFTs"). We are working to unlock new ways to
participate in the growing digital economy by expanding access to, and improving
liquidity for, digital assets. We believe we are opportunistically positioned at
the center of this digital asset ecosystem, with approximately 2.6 million
transacting accounts on our platform
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in 2021. We define "transacting accounts" as unique accounts that perform
transactions on our platform each month, which is indicative of how users across
our platform use our services.
Through our institutional-grade platform, we offer four key pillars to our
partners and customers. These include: crypto services, through which we
enabling crypto buy and sell capabilities for platform partners, banks and
credit unions and other providers to provide to their customers, as well as
crypto solutions for institutions; crypto rewards, for partners to enable their
customers to earn rewards in or redeem existing rewards into crypto; digital
asset payments for paying with or getting paid in assets like crypto; and a wide
range of loyalty redemption services for large financial institutions, merchants
such as apple and travel and entertainment providers.
We believe that our platform is uniquely positioned to offer each of these four
pillars to our partners and institutions by utilizing a combination of three
complementary aspects - a digital asset marketplace, a loyalty redemption
service, and an alternative payment method.
•Digital Asset Marketplace. Our digital asset marketplace is designed to enable
participants to seamlessly transact in digital assets and has applications for
individual consumers, enterprises (whom we define as consumer-facing merchants,
retailers, and financial institutions), and institutional investors.
Intercontinental Exchange, Inc. ("ICE"), our controlling shareholder prior to
the Business Combination, has decades of experience building institutional
products and solutions. We leveraged that expertise to build an
institutional-grade custodian for bitcoin, Bakkt Trust Company LLC ("Bakkt
Trust "), which is regulated by the New York Department of Financial Services
("NYDFS"). This custodian, marketed as the Bakkt Warehouse , provides custody
services that anchor the first end-to-end regulated and physically-delivered
bitcoin futures and options contracts ("PDF Contracts"), which are traded on ICE
Futures U.S., Inc. ("IFUS") and cleared on ICE Clear US, Inc. ("ICUS"), and also
provides custody services to institutions and certain high net-worth individuals
on a standalone basis as approved by the NYDFS. Our custodian also operates as
the backbone of many of our consumer- and enterprise-focused offerings. For
example, it enables consumers to use our app to transact in bitcoin in
real-time. On November 2, 2021 , in accordance with our coin listing policy (as
approved by the NYDFS), we self-certified the addition of ether as a cryptoasset
that we support for consumer transactions, as described further below. In
addition, in the future, contingent upon achieving the necessary regulatory
approvals and/or partnering with an existing licensed broker-dealer, we plan to
add the ability to transact in securities such as derivatives, and ETFs. We
believe that our institutional-grade infrastructure underpins our ability to
expand and scale consumer solutions. We earn revenue in the digital asset
marketplace by providing standalone custody services for cryptoassets assets for
our institutional customers, which we recognize on a pro rata basis over the
term of the custody contract. Our standalone custody revenue is currently
immaterial. Separately, as a result of our Triparty Agreement with IFUS and ICUS
(the "Triparty Agreement"), we earn the net revenues for providing stand-ready
custody services to IFUS and ICUS in connection with the offering of PDF
Contracts. For more information, see Note 2 to our audited consolidated
financial statements.
•Loyalty Redemption. Leveraging our acquisition of Bridge2 Solutions (as
described below), our loyalty redemption capabilities support enterprises with
leading loyalty and rewards programs (which we call "loyalty partners"), such as
Citibank, Delta Air Lines, United Airlines, Choice Hotels, Wells Fargo Bank ,
Bank of America and Mastercard. While many loyalty partners have very popular
loyalty programs, the points that are outstanding to customers represent
material liabilities on the loyalty partners' balance sheets. Our redemption
capabilities, particularly our exclusive arrangements with leading consumer
brands, provide seamless and cost-effective alternatives for consumers to spend
their loyalty points and enable loyalty partners to reduce these financial
liabilities. We earn and recognize Loyalty Redemption revenue through a
combination of: (i) platform subscription fees, which are fixed fees charged for
access to our platform and customer support services, and which are recognized
on a straight-line basis over the related contract term as the customer receives
benefits evenly throughout the term of the contract; (ii) transaction fees for
processing transactions on our platform, which are recognized in the period in
which the related transaction occurs; (iii) revenue share fees, which are
rebates from third-party commerce merchants, and which are recognized in the
period in which the related transaction occurs; and (iv) service fees related to
the implementation and customization of new services on our loyalty platform,
which are recognized on a straight-line basis, beginning when the new service is
operational, over the longer of the remaining anticipated customer life and the
estimated useful life of our internally developed software. Our Loyalty
Redemption revenue represents substantially all of our current revenue. For more
information, see Note 2 to our audited consolidated financial statements.
•Alternative Payment Method. Our platform delivers consumer choice and
convenience with an alternative payment method that allows consumers to spend
the value of their digital assets with merchants in our ecosystem and also
enables merchants to gain access to consumers' increased spending power, tapping
into the trend for
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alternative payment methods. Merchants, such as Starbucks, that accept our
alternative payment method can displace transactions off existing payment card
infrastructure, which results in significant reductions in payment fees and,
over time, faster settlement. We earn and recognize alternative payment method
revenue through a merchant discount rate (or percent of the transaction tender)
at the time of each transaction and these transaction fees are reduced by
consideration payable to a customer. For more information, see Note 2 to our
audited consolidated financial statements.
Our Platform
Our platform is built to operate at the intersection of cryptoassets, loyalty
and payments, and offers partners the flexibility to choose some or all of our
capabilities, and the manner in which these capabilities are enabled for
consumers, based on their needs and objectives. Some partners may choose to
enable our capabilities directly in their experience, while others may want a
"ready-to-go" storefront and leverage capabilities such as our consumer app. Our
core platform and infrastructure is built to provide integrations for crypto
buy/sell trading, loyalty redemption, payments and exchange, and supports these
use cases regardless of where the consumer experience lives. Our
institutional-grade platform, born out of ICE, supports "know your customer"
("KYC"), anti-money laundering ("AML"), and other anti-fraud measures to combat
financial crime.
Key Factors Affecting Our Performance
Attractiveness of Platform
We primarily generate revenue when users of our platform buy, sell, convert,
spend and send digital assets through the platform, and our success depends in
part on transaction volume. Business growth will come from growing users and the
transaction fees associated with users buying, selling, converting and spending
with digital assets, and the margin earned in connection with consumer purchases
and the sale of cryptoassets. We will look to grow our base of active and
transacting users to grow these revenue streams.
In addition, growing partners on our platform increases our ability to grow
revenue streams. To date, management has been focused on building through
partners within a business-to-business-to-consumer ("B2B2C") model. Our goal is
to provide these partners opportunities to leverage our capabilities either
through their existing environment or by leveraging our platform. Expanding the
platform capabilities leveraged by our partner set, as well as expanding with
new partners, will be key to our business and revenue growth. We expect that
revenues related to loyalty redemption transactions, cryptoasset trades,
subscriptions and services will be significant drivers of our business. The
risks and uncertainties related to each such revenue generating activity are
largely the same. Specifically, to the extent we are unable to grow our partner
base and/or organically grow our active and transacting user base (who buy,
sell, convert and spend with digital assets, and from whom we can earn the
margin paid in connection with consumer purchases and sale of cryptoassets), or
to the extent the cost of such growth (including our average customer
acquisition cost) is greater than we anticipate, the corresponding growth of our
business may occur more slowly than we expect, or may not occur at all. Our
ability to execute on our business plan is dependent on successfully executing
on several key components of our business, principally including: (i) the
technological success of our platform; (ii) the integration of our platform with
the platforms of our partners; (iii) growth in the number and diversity of the
loyalty brands, associated merchants and retailers, and cryptocurrencies and
other digital assets that we support; and (iv) our resulting ability to create a
network effect with growth in active and transacting users.
Regulations in
We are subject to many complex, uncertain and overlapping local, state and
federal laws, rules, regulations, policies and legal interpretations
(collectively, "laws and regulations") in the markets in which we operate. These
laws and regulations govern, among other things, consumer protection, privacy
and data protection, labor and employment, anti-money laundering, money
transmission, competition, and marketing and communications practices. These
laws and regulations will likely have evolving interpretations and applications,
particularly as we introduce new products and services and expand into new
jurisdictions.
We are seeking to bring trust and transparency to digital assets. We will
progressively be subject to laws and regulations relating to the collection,
use, retention, security, and transfer of information, including the personally
identifiable information of our clients and all of the users in the information
chain. We have developed and frequently evaluate and update our compliance
models to ensure that we are complying with applicable restrictions.
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We continue to work with regulators to address the emerging global landscape for digital assets. As investment continues, the intersection of technology and finance will require ongoing engagement as new applications emerge. Digital assets and distributed ledger technology have significant, positive potential with proper collaboration between industry and regulators.
COVID-19 Impacts
InMarch 2020 , theWorld Health Organization declared the COVID-19 outbreak a global pandemic. The COVID-19 pandemic has adversely affected global economic activity and, in 2020, contributed to significant declines and volatility in financial markets. The COVID-19 pandemic had an impact on our business during the year endedDecember 31, 2020 , primarily in that it (i) decreased revenue from our loyalty and travel businesses, and (ii) impacted our ability to expand our relationships with existing loyalty partners, and to conclude relationships with new loyalty partners, whose businesses similarly have been adversely affected by the pandemic. For the year endedDecember 31, 2021 , our business operations have started to recover from the impacts of the pandemic, and revenue from the loyalty and travel business has also started to recover.
Business Combination
OnOctober 15, 2021 ,Bakkt (f/k/aVPC Impact Acquisition Holdings , aCayman Islands exempted company ("VIH")) and VIH completed the Business Combination contemplated by the Merger Agreement. Pursuant to the Merger Agreement, VIH acquired a majority voting interest inBakkt Opco Holdings, LLC ("Opco") through a series of mergers, with Opco becoming a direct subsidiary of VIH. In connection with the completion of the Business Combination, VIH changed its jurisdiction of incorporation from theCayman Islands to theState of Delaware and changed its name to "Bakkt Holdings, Inc. " The Business Combination resulted inBakkt continuing as the surviving entity and being organized as an umbrella partnership corporation, or "up-C," structure in which substantially all our assets and business are held by Opco and its subsidiaries, with the existing owners of Opco being considered as noncontrolling interests in the audited consolidated financial statements. Upon completion of the Business Combination, VIH was deemed the accounting acquirer and Opco the accounting acquiree. Under the acquisition method of accounting, VIH's assets and liabilities retained their carrying values and the assets and liabilities associated with Opco were recorded at their fair values measured as of the acquisition date. The excess of the purchase price over the estimated fair values of the net assets acquired was recorded as goodwill. In connection with the Business Combination, all outstanding membership interests and rights to acquire membership interests in Opco were exchanged for an aggregate of 208,200,000 Opco Common Units and an equal number of newly issued shares of our Class V common stock, par value$0.0001 per share ("Class V common stock"), which are non-economic, voting shares of the Company, of which 207,406,648 are outstanding and 793,352 reserved for issuance upon the exercise of a warrant agreement. Each Opco Common Unit, when coupled with one share of our Class V common stock is referred to as a "Paired Interest." Paired Interests may be exchanged for one share of our Class A common stock or a cash amount in accordance with theThird Amended and Restated Limited Liability Company Agreement of Opco, and the Exchange Agreement between the Company and certain holders of Bakkt Common Units, dated as ofOctober 15, 2021 . Following the Closing, the Company owned approximately 20.3% of the Opco Common Units and with the remaining Opco Common Units being owned by the equity owners of Opco prior to the Merger. As a result of the Business Combination, our financial results are broken out between the Predecessor periods (January 1, 2020 throughDecember 31, 2020 andJanuary 1, 2021 throughOctober 14, 2021 ) and the Successor period (October 15, 2021 throughDecember 31, 2021 ).
Our Corporate Structure
We own and consolidate entities formed during the year endedDecember 31, 2019 , includingBakkt Trust andBakkt Marketplace . We also own and consolidate entities that were acquired during the year endedDecember 31, 2019 , includingDACC Technologies, Inc. ,Digital Asset Custody Company, Inc. (collectively withDACC Technologies, Inc. , "DACC"), andBakkt Clearing, LLC ("Bakkt Clearing"), formerly known asRosenthal Collins Group, L.L.C. We continued to operate these entities through fiscal year 2021 and also acquired Bridge2 Solutions inFebruary 2020 .Bakkt Trust is aNew York limited-purpose trust company that is chartered by and subject to the supervision and oversight of the NYDFS. InSeptember 2019 ,Bakkt Trust , along with IFUS and ICUS, both of which are wholly-owned -60-
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subsidiaries of ICE, brought to market an institutional-grade, regulated infrastructure for trading, clearing, and custody services for bitcoin.Bakkt Trust acts as a qualified custodian for bitcoin, which enablesBakkt Trust to offer end-to-end regulated, physically-delivered bitcoin futures and options contracts to financial institutions and market makers. In addition,Bakkt Trust has been approved by the NYDFS to offer non-trading- related, standalone custody of bitcoin and ether to institutions and certain high net worth individuals in cryptoassets, subject to NYDFS regulatory oversight.
The below graphic illustrates the structure of the physically-delivered bitcoin futures and options and custody offerings.
[[Image Removed: bakkt-20211231_g1.jpg]]
Bakkt Marketplace has created an integrated platform that enables consumers and enterprises to transact in digital assets.Bakkt Marketplace users have a digital wallet that enables them to purchase, sell, convert, and or spend digital assets. Users can also use their digital wallet to spend fiat currency with various retailers and convert loyalty and rewards points into fiat currency.Bakkt Marketplace has received money transmitter licenses from all states throughout theU.S. where such licenses are required, has obtained aNew York State virtual currency license, and is registered as a money services business with theFinancial Crimes Enforcement Network of theUnited States Department of the Treasury .Bakkt -61-
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Trust's custody solution provides support to
[[Image Removed: bakkt-20211231_g2.jpg]]
Our Relationship with ICE and the Triparty Agreement
Prior to the consummation of the Business Combination, we were an indirect majority-owned subsidiary of ICE. ICE is a global market infrastructure provider with a history of developing and implementing leading technologies. ICE operates exchanges, clearinghouses, and listing venues for the financial markets alongside offering data-driven technology services to support the trading, lending, investment, risk management, and connectivity needs of customers. In building our platform, ICE and minority investors contributed capital and assets valued at approximately$483 million prior to the Business Combination, leveraging ICE's leading competency of creating and operating market infrastructure. Upon our formation, ICE made a cash capital contribution and granted us the right to access ICE's existing futures and clearing platforms. ICE also partners with us with respect to certain institutional product offerings. For instance, the PDF Contracts that are traded on IFUS and cleared on ICUS pursuant to the Triparty Agreement. In this regard,Bakkt Trust provides a stand-ready custody function that supports the trading and clearing services as required for the parties that trade PDF Contracts ("PDF Contract Traders") so that IFUS can execute its trading services and ICUS can clear and arrange for the settlement of the PDF Contracts.Bakkt Trust's obligation to provide a stand-ready custody function includes related promises such as: (i) the initial onboarding of PDF Contract Traders to the custody warehouse, which represents the commencement of the custody services; (ii) maintaining a system of accounts within its custody warehouse on behalf of IFUS and ICUS to ensure accurate, timely transfers of bitcoin at PDF Contract maturity (thereby mitigating ICUS's clearing risk and ensuring safe storage of bitcoin, including when PDF Contracts settle through physical delivery); (iii) standing ready to accept bitcoin deposits from PDF Contract Traders at any point between the execution and settlement of the PDF Contract; (iv) verifying account balances of PDF Contract Traders as their PDF Contracts approach expiration; (v) making transfers between PDF Contract Traders as instructed by ICUS when the PDF Contracts reach expiration; and (vi) permitting withdrawals of bitcoin as directed by PDF Contract Traders. Under the Triparty Agreement, IFUS and ICUS pay toBakkt Trust the trading and clearing fees collected by IFUS and ICUS with respect to those PDF Contracts net of -62-
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incentives and rebates. As is typical of new trading products, IFUS and ICUS have instituted such incentives and rebates in an effort to incentivize the trading volume of PDF Contracts. In particular, IFUS offers rebates to support market liquidity and trading volume, which provides qualified PDF Contract Traders with a discount to the applicable transaction fee.Bakkt is responsible for paying for all rebates and incentives, even if these amounts exceed the gross revenues from the Triparty Agreement. These incentives and rebates have resulted in negative revenue toBakkt under the Triparty Agreement.The Bakkt Warehouse was built on the principle that a truly institutional-grade custody operation is a crucial first step in broadening institutional acceptance of cryptoassets. As illustrated above, several institutional trading products, such as the PDF Contracts, require custody as an integral part of their value proposition, not necessarily because most such contracts go to expiration and require physical delivery (as many such contracts do not), but rather because, in the eyes of many institutional investors, the possibility of physical delivery at maturity makes those contracts a superior method for price discovery of the underlying asset. In our view, much of the historical reluctance of institutional investors to embrace these products is attributable to the lack of well-regulated, highly secure custody operations similar to those typical of more traditional financial products.The Bakkt Warehouse was built to solve this issue, and features the sophisticated security, insurance and regulatory features that institutional trading participants generally expect. However, the institutional cryptoasset market must further mature in order for us to begin achieving positive net revenue from our activities under the Triparty Agreement. Our cash-settled futures contracts are offered inSingapore pursuant to a similar arrangement with ICE subsidiaries. Pursuant to a separate triparty agreement among ICE Futures Singapore ("IFS"), ICE Clear Singapore ("ICS") andBakkt , IFS and ICS provide trade execution and clearing services to customers that trade the cash-settled futures contracts. As these contracts are settled in cash (rather than by physical delivery of bitcoin), no custody function is necessary; as such,Bakkt provides to IFS and ICS pricing data from its PDF Contracts and also licenses its name to IFS and ICS for use in marketing the cash-settled futures. In return, ICS and IFS pay toBakkt 35% of the net trading and clearing revenue that they earn with respect to these contracts. -63-
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Results of Operations
The following table is our consolidated statements of operations for the Successor period and the Predecessor periods (in thousands):
Successor Predecessor
January 1,
October 15, 2021
2021 through through Year ended
December 31, October 14, December 31,
2021 2021 2020
Revenues:
Net revenues (1) $ 11,481 $ 27,956 $ 28,495
Operating expenses:
Compensation and benefits 62,180 91,275 43,141
Professional services 3,034 5,175 5,751
Technology and communication 3,056 10,384 9,741
Selling, general and administrative 8,521 20,309 8,219
Acquisition-related expenses 1,603 24,793 13,372
Depreciation and amortization 5,422 9,620 8,159
Related party expenses (affiliate in Predecessor
periods)(2) 617 1,484 3,082
Impairment of long-lived assets 1,196 3,598 15,292
Other operating expenses 398 1,379 857
Total operating expenses 86,027 168,017 107,614
Operating loss (74,546) (140,061) (79,119)
Interest income (expense), net 11 (247) 123
Loss from change in fair value of warrant
liability (79,373) - -
Other income (expense), net 832 487 (218)
Loss before income taxes (153,076) (139,821) (79,214)
Income tax (expense) benefit (11,751) 602 (391)
Net loss $ (164,827) $ (139,219) $ (79,605)
Less: Net loss attributable to noncontrolling
interest (120,832)
Net loss attributable to Bakkt Holdings, Inc. (43,995)
Net loss per share attributable to Bakkt Holdings,
Inc.
Class A common stockholders per share:
Basic and diluted $ (0.81) (3) (3)
(1)The revenue for periods from October 15, 2021 through December 31, 2021 and
January 1, 2021 through October 14, 2021 , and the year ended December 31, 2020 ,
includes net revenues from related party of $0.1 million , and net revenues from
affiliate of $0.1 million and $(2.0) million , respectively.
(2)As a result of the Business Combination, ICE and its affiliates are no longer
our affiliates.
(3)Basic and diluted loss per share is not presented for the Predecessor periods
due to lack of comparability with the Successor period.
The comparability of our operating results for the periods from October 15, 2021 through December
31, 2021 and January 1, 2021 through October 14, 2021 as
compared to the fiscal year ended December 31, 2020 was
impacted by the Business Combination in October 2021 . We have prepared our
discussion of the results of operations by comparing the results of the combined
year ended December 31, 2021 , comprising the Successor period from October 15,
2021 through December 31, 2021 and the Predecessor period from January 1, 2021
through October 14, 2021 (together, the "combined 2021 period"), and the year
ended December 31, 2020 . We believe this approach provides the most meaningful
basis of comparison and is more useful than a separate analysis of the
Predecessor and Successor periods of 2021 in
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identifying current business trends for the periods presented. The amounts relating to the combined 2021 period included in our discussion below are not considered to be prepared in accordance withU.S. GAAP and have not been prepared as pro forma results under applicable regulations. This should not be viewed as a substitute for the results of operations of the Predecessor and Successor periods presented in accordance withU.S. GAAP.
Financial Summary
The combined 2021 period included the following notable items:
•Revenue increased 38%, primarily driven by higher transaction revenue in our Loyalty platform as COVID-19 impacts subsided and higher subscription and service revenue from expansion of services for an existing Loyalty customer; •Operating expenses increased 136%, primarily driven by expenses related to the closing of the Business Combination, increases in headcount to support the projected growth in our business and increased compliance and reporting requirements as a public company, and increased marketing expenses associated with the launch of our consumer platform; and •Net loss was impacted by$79.4 million warrant mark-to-market loss in the Successor period, which had no impact on cash. Revenue Successor Predecessor October 15, January 1, 2021 2021 Year through through ended December 31, October 14, December 31, ($ in thousands) 2021 2021 2020 $ Change(1) % Change(1) Net revenues$ 11,481 $ 27,956 $ 28,495 $ 10,942 38.4 %
(1)Change represents the combined 2021 period compared to the year ended
Net Revenues
Net revenues consist of transaction revenue and subscription and service revenue. Transaction revenue is net of rebates and liquidity payments under the Triparty Agreement, reductions in connection with the contribution agreement entered into betweenBakkt and ICE in connection with ICE's formation ofBakkt (the "Contribution Agreement"), and consideration payable to a customer pursuant to the Strategic Alliance Agreement (as defined below). Net revenues increased by$10.9 million , or 38.4%, for the combined 2021 period compared to the year endedDecember 31, 2020 . The increase was comprised of$9.0 million of increased transaction revenue and$1.9 million of increased subscription and service revenue. The increase in transaction revenue was driven by$6.2 million from higher customer activity in our loyalty redemption services business and$3.2 million from reduction in rebates and incentive payments associated with our digital asset marketplace, partially offset by$1.2 million from lower volume under the Triparty Agreement. The increase in subscription and service revenue was primarily related to the addition of new services for an existing loyalty customer. Operating Expenses Operating expenses consist of compensation and benefits, professional services, technology and communication expenses, selling, general and administrative expense, acquisition-related expenses, depreciation and amortization, affiliate expenses, impairment of long-lived assets, and other operating expenses. -65-
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Compensation and Benefits
Successor Predecessor
October 15, January 1,
2021 2021 Year
through through ended
December 31, October 14, December 31,
($ in thousands) 2021 2021 2020 $ Change(1) % Change(1)
Compensation and Benefits $ 62,180 $ 91,275 $ 43,141 $ 110,314 255.7 %
(1)Change represents the combined 2021 period compared to the year ended
Compensation and benefits expense include all salaries and benefits, compensation for contract labor, incentive programs for employees, payroll taxes, unit-based compensation and other employee related costs. Compensation and benefits expense is the most significant component of our operating expenses, and we expect that our compensation and benefits expense will continue to increase in absolute dollars as we continue to expand our business, as described below. Upon the consummation of the Business Combination onOctober 15, 2021 , one-third of the awards in the Equity Plan vested, which resulted in recognition of$77.8 million of incremental unit-based compensation expense in the combined 2021 period ($30.6 million in the Predecessor period and$47.2 million in the Successor period). The second and third tranches will vest on the one-year and two-year anniversary date of the transaction close, respectively. Going forward, we expect to recognize less compensation expense related to vesting of units issued prior to the Business Combination because a significant portion of the awards achieved vesting in connection with the closing of the Business Combination. Headcount has increased, and will continue to increase, across functions to further strengthen our service offerings and enhance our systems, processes, and controls. We intend to grant equity awards as part of the compensation package for new employees. We expect that our compensation and expenses will decrease as a percentage of our revenue over time. Compensation and benefits increased by$110.3 million , or 255.7%, for the combined 2021 period compared to the year endedDecember 31, 2020 . The increase was primarily due to increases of$16.7 million in additional salaries, wages and benefits,$4.9 million in contract labor for software development, and$84.4 million in non-cash compensation and incentive bonuses, which includes$77.8 million of incremental unit-based compensation expense resulting from the Business Combination. The majority of the increase in these costs, excluding the amounts related to the Business Combination, resulted from increases in headcount to support the projected growth in our business and increased compliance and reporting requirements as a public company. Professional Services Successor Predecessor October 15, January 1, 2021 2021 Year through through ended December 31, October 14, December 31, ($ in thousands) 2021 2021 2020 $ Change(1) % Change(1) Professional Services$ 3,034 $ 5,175 $ 5,751 $ 2,458 42.7 %
(1)Change represents the combined 2021 period compared to the year ended
Professional services expense includes fees for accounting, legal and regulatory fees. Professional services increased by$2.5 million , or 42.7%, for the combined 2021 period compared to the year endedDecember 31, 2020 . The increase was primarily due to increases of$2.0 million in professional and other fees and$0.8 million in audit and tax fees, which was partially offset by a decrease in legal fees by$0.3 million . -66-
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Technology and Communication
Successor Predecessor
October 15, January 1,
2021 2021 Year
through through ended
December 31, October 14, December 31,
($ in thousands) 2021 2021 2020 $ Change(1) % Change(1)
Technology and Communication $ 3,056 $ 10,384 $ 9,741 $ 3,699 38.0 %
(1)Change represents the combined 2021 period compared to the year ended
Technology and communication costs represent all non-headcount related costs to deliver technological solutions. Such costs principally include amounts paid for software licenses and software-as-a-service arrangements utilized for operating, administrative and information security activities, fees paid for third-party data center hosting arrangements, and fees paid to telecommunications service providers and for telecommunication software platforms necessary for operation of our customer support operations. These costs are driven by customer requirements, system capacity, functionality and redundancy requirements. Technology and communications expense also includes fees paid for access to external market data and associated licensing costs, which may be impacted by growth in electronic contract volume, our capacity requirements, changes in the number of telecommunications hubs, and connections with customers to access our electronic platforms directly. Technology and communications expense increased by$3.7 million , or 38.0%, for the combined 2021 period compared to the year endedDecember 31, 2020 . The increase was primarily due to an increase of$2.6 million in hardware and software license fees.
Selling, General and Administrative
Successor Predecessor
October 15, January 1,
2021 2021 Year
through through ended
December 31, October 14, December 31,
($ in thousands) 2021 2021 2020 $ Change(1) % Change(1)
Selling, General and
Administrative $ 8,521 $ 20,309 $ 8,219 $ 20,611 250.8 %
(1)Change represents the combined 2021 period compared to the year ended
Selling, general and administrative expenses include marketing, advertising, business insurance, rent and occupancy, bank service charges, dues and subscriptions, travel and entertainment, rent and occupancy, and other general and administrative costs. Our marketing activities primarily consist of web-based promotional campaigns, promotional activities with partners, conferences and user events, and brand-building activities. Selling, general and administrative expenses do not include any headcount cost, which is reflected in the compensation and benefits financial statement line item. Our selling, general and administrative expenses will continue to increase in absolute dollars to support the projected growth in our business and requirements of being a public company, including increased insurance premiums and disclosure processes. However, we expect these costs will decrease as a percentage of our revenue in future years as we gain improved operating leverage from our projected revenue growth. Selling, general and administrative costs increased by$20.6 million , or 250.8%, for the combined 2021 period compared to the year endedDecember 31, 2020 . The increase was primarily due to increases of$14.6 million in marketing expenses related to the launch of our consumer platform,$3.4 million in insurance expense, and$0.7 million in registration fees. The majority of marketing expenses are web-based promotional campaigns. With the closing of the Business Combination, we expect to increase marketing efforts as part of our broader growth initiatives, which is expected to result in increased selling, general and administrative expenses in future periods. -67-
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Acquisition-related Expenses
Successor Predecessor
October 15, January 1,
2021 2021 Year
through through ended
December 31, October 14, December 31,
($ in thousands) 2021 2021 2020 $ Change(1) % Change(1)
Acquisition-related expenses $ 1,603 $ 24,793 $ 13,372 $ 13,024 97.4 %
(1)Change represents the combined 2021 period compared to the year ended
Acquisition-related expenses increased by$13.0 million , or 97.4%, for the combined 2021 period compared to the year endedDecember 31, 2020 . Acquisition-related expenses for the combined 2021 period consist of fees for investment banking advisors, lawyers, accountants, tax advisors and public relations firms directly related to the Business Combination. Acquisition-related expenses for the year endedDecember 31, 2020 consist entirely of costs incurred in our acquisition of Bridge2 Solutions inFebruary 2020 , including approximately$9.6 million of accelerated expense for our incentive and participation units resulting from the issuance of Class C voting units in connection with the acquisition of Bridge2 Solutions. The amount and timing of acquisition-related expenses is expected to vary across periods based on potential transaction activities.
Depreciation and Amortization
Successor Predecessor
October 15, January 1,
2021 2021 Year
through through ended
December 31, October 14, December 31,
($ in thousands) 2021 2021 2020 $ Change(1) % Change(1)
Depreciation and amortization $ 5,422 $ 9,620 $ 8,159 $ 6,883 84.4 %
(1)Change represents the combined 2021 period compared to the year ended
Depreciation and amortization expense consists of amortization of intangible assets from business acquisitions, internally developed software and depreciation of purchased software and computer and office equipment over their estimated useful lives. Intangible assets subject to amortization consist primarily of acquired technology and customer relationships from the Business Combination and the Bridge2 Solutions acquisition. Depreciation and amortization increased by$6.9 million , or 84.4%, for the combined 2021 period compared to the year endedDecember 31, 2020 . The increase was primarily due to increases of$4.0 million related to the step-up in basis of the technology and customer relationships acquired in connection with the Business Combination and$2.8 million related to additional capitalized software development cost amortization.
Impairment of long-lived assets
Successor Predecessor
October 15, January 1,
2021 2021 Year
through through ended
December 31, October 14, December 31,
($ in thousands) 2021 2021 2020 $ Change(1) % Change(1)
Impairment of long-lived assets $ 1,196 $ 3,598 $ 15,292 $ (10,498) (68.7 %)
(1)Change represents the combined 2021 period compared to the year ended
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Impairment expense decreased by$10.5 million , or 68.7%, for the combined 2021 period compared to the year endedDecember 31, 2020 . During the combined 2021 period, we recorded impairment charges of$3.6 million in the Predecessor period to measure the fair value of a customer consideration asset at$0 after reassessing the future consideration expected to be received less cost of services from our relationship with a strategic partner and$1.2 million related to the termination of a software license agreement in the Successor period.
Loss from Change in Fair Value of Warrant Liability
Successor Predecessor
October 15,
2021
through January 1, 2021 Year
December 31, through ended
($ in thousands) 2021 October 14, 2021 December 31, 2020 $ Change(1) % Change(1)
Loss from change in fair value
of warrant liability $ (79,373) $ - $ - $ (79,373) n/m
(1)Change represents the combined 2021 period compared to the year ended
We recorded a loss of$79.4 million during the period fromOctober 15, 2021 throughDecember 31, 2021 for the change in fair value on the revaluation of our warrant liability associated with our public and private placement warrants. This is a non-cash charge and is driven by fluctuations in the market price of our warrants. Other income (expense), net Successor Predecessor October 15, January 1, 2021 2021 Year through through ended December October 14, December ($ in thousands) 31, 2021 2021 31, 2020 $ Change(1) % Change(1) Other income (expense), net$ 832 $ 487 $ (218) $ 1,537 n/m
(1)Change represents the combined 2021 period compared to the year ended
Other income (expense), net primarily consists of non-operating gains and losses and income from the sale of bitcoin outside the normal course of business. During the combined 2021 period, we had other income of$1.3 million as compared to other expense of$0.2 million for the year endedDecember 31, 2020 . During the combined 2021 period, we recorded income of$1.3 million for the extinguishment of the liability associated with the software license agreement in the Successor period and income of$1.0 million for the sale of cryptoassets outside of the normal course of business in the Predecessor. This income was partially offset by$0.6 million of foreign currency transaction losses.
Income tax (expense) benefit
Successor Predecessor
October 15, January 1,
2021 2021 Year
through through ended
December October 14, December
($ in thousands) 31, 2021 2021 31, 2020 $ Change(1) % Change(1)
Income tax (expense) benefit $ (11,751) $ 602 $ (391) $ (10,758) n/m
(1)Change represents the combined 2021 period compared to the year ended
Income tax expense in the successor period primarily consists of
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prospectively due to ongoing book-tax differences, which include, but are not
limited to, (i) differences between book and tax loss allocation from Opco to
the Company, (ii) mark-to-market activity related to warrants to purchase the
Company's stock, and (iii) exchanges of Opco common units (and the corresponding
shares of the Company's Class V common stock) for shares of the Company's Class
A common stock or cash in lieu of Class A common stock. In the predecessor
periods, Opco and its subsidiaries were classified as partnerships for U.S.
federal income tax purposes or other pass through entities resulting in minimal
impacts from income tax.
Supplemental Unaudited Pro Forma Financial operations
The following supplemental unaudited pro forma financial information for the years endedDecember 31, 2021 and 2020 presents the combined results of operations as if the VIH Business Combination and the acquisition of Bridge2 Solutions had occurred as ofJanuary 1, 2020 . Management believes the supplemental unaudited pro forma information presented below provides a meaningful comparison of operating results; however, it should not be viewed as a substitute for the historical financial results ofBakkt , VIH and Bridge2 Solutions. The supplemental unaudited pro forma financial information presented below should be read in conjunction with our historical audited consolidated financial statements for the periods fromOctober 15, 2021 throughDecember 31, 2021 andJanuary 1, 2021 throughOctober 14, 2021 and the year endedDecember 31, 2020 included in Item 8 of this Annual Report on Form 10-K. The supplemental unaudited pro forma financial information as presented below is for illustrative purposes and does not purport to represent what the results of operations would actually have been if the business combinations occurred as of the date indicated or what the results would be for any future periods. In addition, future results may vary significantly from those reflected in the supplemental unaudited pro forma financial information in the table below and should not be relied upon as an indication of any of our future results of operations. The unaudited pro forma results reflect the step-up amortization adjustments for the fair value of intangible assets acquired, acquisition-related expenses, nonrecurring post-combination compensation expense, unit-based compensation expense under the new capital structure and the related adjustment to the income tax provision. The pro forma information does not reflect any operating efficiencies, post-acquisition synergies or cost savings that we may achieve with respect to the combined companies. Year Ended December 31, 2021 2020 $ Change % Change (dollars in thousands) Bakkt gross revenue$ 1,029 $ 2,198 $ (1,169) (53.2 %) Bakkt contra-revenue (2,085) (4,477) 2,392 (53.4 %) VIH revenue - - - - % Bridge2 Solutions revenue 40,493 36,433 4,060 11.1 % Pro forma revenue$ 39,437 $ 34,154 $ 5,283 15.5 % Pro forma revenue increased by$5.3 million , or 15.5%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . The increase is primarily due to the$4.0 million increase in Bridge2 Solutions revenue resulting from an increase in travel and customers using more loyalty points as the economy recovered from the COVID-19 pandemic. The remaining increase is due to the$2.4 million reduction inBakkt contra-revenue which was partially offset by a$1.2 million decrease inBakkt gross revenue, both of which primarily resulted from a reduction in trading and clearing activity in the year endedDecember 31, 2021 . Year Ended December 31, 2021 2020 $ Change % Change (dollars in thousands) Pro forma net loss$ (198,467) $ (168,751) $ (29,716) 17.6 % Less: pro forma loss attributable to noncontrolling interest (165,136) (140,376) (24,760) 17.6 % Pro forma net loss attributable to Bakkt Holdings, Inc.$ (33,331) $ (28,375) $ (4,956) 17.5 % -70-
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Pro forma net loss increased by$29.6 million , or 17.5%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . The increase is primarily due to an$84.8 million increase in pro forma loss from change in fair value of warrant liability, partially offset by a$55.6 million decrease in pro forma acquisition-related expenses which resulted from a pro forma adjustment to recognize all VIH andBakkt transaction expenses associated with the Business Combination in the year endedDecember 31, 2020 .
Liquidity and Capital Resources
Since our inception, we have principally financed our operations through equity financings in the form of capital contributions from our members, and to a lesser degree, from customer revenues. OnSeptember 25, 2020 , VIH consummated the Initial Public Offering of 20,000,000 Units, generating gross proceeds of$200.0 million . Simultaneously with the closing of the Initial Public Offering, VIH consummated the sale of 6,000,000 Private Placement Warrants at a price of$1.00 per Private Placement Warrant in a private placement to the Sponsor, generating gross proceeds of$6.0 million . OnSeptember 29, 2020 , the underwriters notified VIH of their intention to partially exercise their over-allotment option onOctober 1, 2020 . As such, onOctober 1, 2020 , VIH consummated the sale of an additional 737,202 Units, at$10.00 per Unit, and the sale of an additional 147,440 private placement warrants, at$1.00 per Private Warrant, generating total gross proceeds of$7.5 million . Prior to the Business Combination,Bakkt had raised an aggregate of$482.5 million of capital, net of issuance costs, through the issuance of Class B and Class C voting units. In addition, in 2018, ICE contributed certain developed assets and rights to use exchange and clearing licenses enablingBakkt to commence operations. As ofDecember 31, 2021 , we had$391.4 million and$16.5 million of cash and cash equivalents and restricted cash, respectively, which amounts included the net proceeds raised in connection with the Business Combination, the amounts used to fund redemptions in connection with the Business Combination and the amounts received upon exercise of the public warrants through such date. Cash and cash equivalents consist of cash deposits at banks and money market funds. Restricted cash is held to satisfy certain minimum capital requirements pursuant to regulatory requirements. We intend to use our unrestricted cash to (i) increase our sales and marketing efforts, (ii) expand our research and product development efforts, and (iii) maintain and expand our technology infrastructure and operational support. In addition, we may in the future enter into arrangements to acquire or invest in complementary businesses, services, technologies or intellectual property rights. However, we have no agreements or commitments with respect to any such acquisitions or investments at this time. Our expected uses of the available funds from the Business Combination are based upon our present plans, objectives and business condition. We have not determined all of the particular uses for the available funds, and management has not estimated the amount of funds, or the range of funds, to be used for any particular purpose. As a result, our management retain broad discretion over the available funds. Our future cash requirements will depend on many factors, including our revenue growth rate, the timing and extent of hiring and associated overhead to support projected growth in our business, sales and marketing costs to drive revenue growth, and software development investments to continue adding features and functionality to our technology platforms to align with market needs. In 2021, we accelerated our hiring plans and increased our marketing and promotional efforts, which we expect to continue in the near future. We may also enter into arrangements to acquire or invest in complementary businesses, services, and technologies which will likely require us to increase our cash consumption.
In addition, we have evaluated the impact of the COVID-19 pandemic on our liquidity and capital needs, and we anticipate that its effects will be largely neutral.
Depending on the foregoing and other factors that may affect our business in the
future, we may be required to seek additional capital contributions or debt
financing in the future. In the event that additional financing is required from
outside sources, we may not be able to raise it on terms acceptable to us or at
all.
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The following table summarizes our cash flows for the periods presented:
Successor Predecessor
October 15,
2021 January 1,
through 2021 through Year ended
December 31, October 14, December 31,
2021 2021 2020
Net cash flows used in operating activities $ (83,387) $ (50,915) $ (30,940)
Net cash flows provided by (used in) investing
activities $ 27,259 $ (10,342) $ (7,929)
Net cash flows provided by (used in) financing
activities $ 256,925 $ (97) $ 37,487
Operating Activities
Since our inception, we have yet to achieve positive cash flow from operations.
Our primary uses of cash include compensation and benefits for headcount-related
expenses, investment in software and product development of our technology
platforms, most significantly our consumer app, and associated non-headcount
technology and communication cost to develop, operate and support our
customer-facing technology platforms.
Net cash used in operating activities of $134.3 million for the combined 2021
period was primarily related to our combined 2021 period net loss of $304.0
million , offset by non-cash charges of $193.8 million and changes in our
operating assets and liabilities of $24.1 million . The non-cash charges for the
combined 2021 period primarily consisted of loss from change in fair value of
warrant liability of $79.4 million , unit-based compensation of $78.8 million ,
depreciation and amortization of $15.0 million and impairment of long-lived
assets of $4.8 million . Net cash inflows from changes in our operating assets
and liabilities for the combined 2021 period resulted primarily from an increase
in accounts payable and accrued liabilities of $3.6 million and the return of a
deposit with our clearinghouse affiliate of $20.2 million , which were partially
offset by an increase in prepaid insurance of $31.5 million , an increase in
other assets and liabilities of $8.1 million and an increase in accounts
receivable of $7.7 million .
Net cash used in operating activities of $30.9 million for the year ended
December 31, 2020 is primarily attributable to our net loss of $79.6 million ,
offset by non-cash charges of $37.9 million and changes in our operating assets
and liabilities of approximately $10.7 million . Non-cash charges consisted of a
$15.3 million asset impairment, $11.6 million of unit-based compensation
expenses, and $8.0 million of depreciation and amortization. Changes in
operating assets and liabilities resulted from a $16.0 million increase in
accounts payable and accruals and an $11.0 million increase in deposits with
clearinghouse affiliates, offset by a $7.9 million decrease in amounts due to
affiliates, a $4.3 million decrease in deferred revenues and $2.8 million
decrease in other assets and liabilities, and $1.2 million decrease in operating
lease liabilities.
Investing Activities
Net cash flows provided by investing activities of $16.9 million for the
combined 2021 period primarily consisted of $30.8 million of cash acquired
through through the Business Combination and $1.8 million of proceeds from sale
of shares of affiliate stock, partially offset by $15.7 million of capitalized
costs of internally developed software. Capital expenditures were primary
related to capitalized expenses associated with internally developed software
for our technology platforms.
We used $7.9 million in investing activities for the year ended December 31,
2020 consisting of capitalized costs of internally developed software and other
capital expenditures. This amount was offset in part by $10.7 million of cash
acquired from our acquisition of Bridge2 Solutions and proceeds from the sale of
$2.0 million of short-term investments.
Financing Activities
Net cash flows provided by financing activities of$256.8 million for the combined 2021 period resulted from proceeds from PIPE investments and proceeds from the exercise of warrants amounting to$312.0 million and$37.1 million , respectively which is partially offset by cash outflow due to repurchase of redeemed Class A ordinary shares amounting to$84.5 million and also offset by payment of deferred underwriting fees amounting to$7.3 million . -72-
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Net cash flows provided by financing activities of$37.5 million for the year endedDecember 31, 2020 resulted from proceeds from issuance of our Class C ownership units of$37.8 million offset by$0.3 million of payments for capital leases during the year. Tax Receivable Agreement OnOctober 15, 2021 , we entered into a Tax Receivable Agreement with certain Bakkt Equity Holders. Pursuant to the Tax Receivable Agreement, among other things, holders of Bakkt Common Units may, subject to certain conditions, from and afterApril 15, 2022 , exchange such Common Units (along with a corresponding number of shares of our Common Stock), for Class A common stock on a one-for-one basis, subject to the terms of the Exchange Agreement, including our right to elect to deliver cash in lieu of Class A common stock and, in certain cases, adjustments as set forth therein.Bakkt will have in effect an election under Section 754 of the Internal Revenue Code for each taxable year in which an exchange of Bakkt Common Units for Class A common stock (or cash) occurs. The exchanges are expected to result in increases in the tax basis of the tangible and intangible assets ofBakkt . These increases in tax basis may reduce the amount of tax that we would otherwise be required to pay in the future. These increases in tax basis may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets. The Tax Receivable Agreement provides for the payment by us to exchanging holders of Bakkt Common Units of 85% of certain net income tax benefits, if any, that we realize (or in certain cases is deemed to realize) as a result of these increases in tax basis and certain other tax attributes ofBakkt and tax benefits related to entering into the Tax Receivable Agreement, including tax benefits attributable to payments under the Tax Receivable Agreement. This payment obligation is an obligation of the Company and not ofBakkt . For purposes of the Tax Receivable Agreement, the cash tax savings in income tax will be computed by comparing our actual income tax liability (calculated with certain assumptions) to the amount of such taxes that we would have been required to pay had there been no increase (or decrease) to the tax basis of the assets ofBakkt as a result ofBakkt having an election in effect under Section 754 of the Code for each taxable year in which an exchange of Bakkt Common Units for Class A common stock occurs and had we not entered into the Tax Receivable Agreement. Such increase or decrease will be calculated under the Tax Receivable Agreement without regard to any transfers of Bakkt Common Units or distributions with respect to such Bakkt Common Units before the exchange under the Exchange Agreement to which Section 743(b) or 734(b) of the Code applies. As ofDecember 31, 2021 , no such exchanges have occurred.
Contractual Obligations and Commitments
The following is a summary of our significant contractual obligations and
commitments as of
Payments Due by Period
Less than 1
year 1-3 years 3-5 years More than 5 years Total
Purchase obligations(1) $ 2,250 $ 8,750 $ 9,000 $ - $ 20,000
Future minimum operating lease
payments(2) (3,114) 3,715 3,696 11,817 16,114
Total contractual obligations (864) 12,465 12,696 11,817 36,114
(1)Represents minimum commitment payments under a four-year cloud computing arrangement. (2)Represents rental payments under operating leases with remaining non-cancellable terms in excess of one year. See Note 17 to our audited consolidated financial statements.
Additionally, we, through our loyalty business, have a purchasing card facility with a bank that we utilize for redemption purchases made from merchant partners as part of our loyalty redemption platform. Expenditures made using the purchasing card facility are payable monthly, are not subject to formula-based restrictions and do not bear interest if amounts outstanding are paid when due and in full. Among other covenants, the purchasing card facility requires that we maintain a month-end cash balance of$40.0 million . InJanuary 2021 , the purchasing card facility was extended toApril 15, 2022 in order to facilitate a long-term agreement on more favorable terms for us. -73-
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Non-GAAP Financial Measures
We use non-GAAP financial measures to assist in comparing our performance on a consistent basis for purposes of business decision-making by removing the impact of certain items that management believes do not directly reflect our core operations. We believe that presenting non-GAAP financial measures is useful to investors because it (a) provides investors with meaningful supplemental information regarding financial performance by excluding certain items that we believe do not directly reflect our core operations, (b) permits investors to view performance using the same tools that we use to budget, forecast, make operating and strategic decisions, and evaluate historical performance, and (c) otherwise provides supplemental information that may be useful to investors in evaluating our results. We believe that the presentation of the following non-GAAP financial measures, when considered together with the corresponding GAAP financial measures and the reconciliations to those measures provided herein, provides investors with an additional understanding of the factors and trends affecting our business that could not be obtained absent these disclosures.
Adjusted EBITDA
We present Adjusted EBITDA as a non-GAAP financial measure.
We believe that Adjusted EBITDA provides relevant and useful information, which is used by management in assessing the performance of our business. Adjusted EBITDA is defined as earnings before interest, income taxes, depreciation, amortization and certain non-cash and/or non-recurring items that do not contribute directly to our evaluation of operating results. Adjusted EBITDA provides management with an understanding of earnings before the impact of investing and financing transactions and income taxes, and the effects of aforementioned items that do not reflect the ordinary earnings of our operations. This measure may be useful to an investor in evaluating our performance. Adjusted EBITDA is not a measure of our financial performance under GAAP and should not be considered as an alternative to net income (loss) or other performance measures derived in accordance with GAAP. Our definition of Adjusted EBITDA may not be comparable to similarly titled measures used by other companies. In addition to the items above, Adjusted EBITDA as a non-GAAP financial measure also excludes interest income (expense) and other income (expense), and income tax (expense) benefit, as these items are not components of our core business operations. Non-GAAP financial measures like Adjusted EBITDA have limitations, should be considered as supplemental in nature and are not meant as a substitute for the related financial information prepared in accordance with GAAP. These limitations include the following: •Share-based and unit-based compensation expense, which has been excluded from Adjusted EBITDA because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations, has been, and will continue to be for the foreseeable future, a significant recurring expense in our business and an important part of our compensation strategy;
•the intangible assets being amortized, and property and equipment being depreciated, may have to be replaced in the future, and the non-GAAP financial measures do not reflect cash capital expenditure requirements for such replacements or for new capital expenditures or other capital commitments; and
•non-GAAP measures do not reflect changes in, or cash requirements for, our working capital needs.
Because of these limitations, the non-GAAP financial measures should be considered alongside other financial performance measures, including net loss and our other financial results presented in accordance with GAAP.
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The following table presents a reconciliation of net loss, the most directly
comparable GAAP operating performance measure, to our Adjusted EBITDA for each
of the periods indicated (in thousands):
Successor Predecessor
January 1, 2021
October 15, 2021 through through Year ended
December 31, 2021 October 14, 2021 December 31, 2020
Net loss (164,827) (139,219) (79,605)
Add: Depreciation and amortization 5,422 9,620 8,159
Add/(Less): Interest (income) expense (11) 247 (123)
Add/(Less): Income tax (benefit) 11,751 (602) 391
EBITDA (147,665) (129,954) (71,178)
Add: Acquisition-related expenses 1,603 24,793 13,372
Add: Share-based and Unit-based compensation expense 45,914 33,877 2,082
Add: Restructuring charges - - 588
Add: Impairment of long-lived assets 1,196 3,598 15,292
Add: Loss from change in fair value of warrant
liability 79,373 - -
Add: ICE transition services expense 617
Less: Cancellation of common units (192) - -
Less: Gain on extinguishment of software license
liability (1,301) - -
Less: Non-recurring bitcoin sale income, net - (1,024) -
Less: Transition services to Bakkt Clearing - - (196)
Adjusted EBITDA (20,455) (68,709) (40,040)
Adjusted EBITDA for the combined 2021 period decreased by $49.1 million or
122.7% as compared to the year ended December 31, 2020 . The decrease was
primarily due to a $34.0 million increase in compensation and benefits resulting
from an increase in headcount to support the projected growth in our business
and a $14.6 million increase in marketing expenses related to the launch of our
consumer platform.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP, which requires us to make estimates and apply judgments that affect the reported amounts. In our notes to the audited consolidated financial statements, we describe the significant accounting policies used in preparing the consolidated financial statements. Our management has discussed the development, selection, and disclosure of our critical accounting policies and estimates with the Audit Committee of our Board of Directors. The following items require significant estimation or judgement: Business Combinations We account for our business combinations using the acquisition accounting method, which requires us to determine the fair value of identifiable assets acquired and liabilities assumed, including any contingent consideration, to properly allocate the purchase price to the individual assets acquired and liabilities assumed and record any residual purchase price as goodwill in accordance with theFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 805, Business Combinations. We identify and attribute fair values and estimated lives to the intangible assets acquired and allocate the total cost of an acquisition to the underlying net assets based on their respective estimated fair values. Determining the fair value of assets acquired and liabilities assumed requires management's judgment and involves the use of significant estimates, including projections of future cash inflows and outflows, discount rates and asset lives. These determinations will affect the amount of amortization expense recognized in future periods. We base our fair value estimates on assumptions we believe are reasonable but recognize that the assumptions are inherently uncertain. -75-
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For business combinations effected through a common control transaction, we measure the recognized net assets of the acquiree at the carrying amounts of the net assets previously recognized by our related party. We reflect the operations of entities acquired through a common control transaction in our financial statements as of the first date in the reporting period or as of the date that the entity was acquired by our related party, as applicable. If the initial accounting for the business combination has not been completed by the end of the reporting period in which the business combination occurs, provisional amounts are reported to present information about facts and circumstances that existed as of the acquisition date. Once the measurement period ends, which in no case extends beyond one year from the acquisition date, revisions to the accounting for the business combination are recorded in earnings.
All acquisition-related costs, other than the costs to issue debt or equity securities, are accounted for as expenses in the period in which they are incurred.
Goodwill and intangible assets that have indefinite useful lives are accounted for in accordance with ASC 350, Intangibles -Goodwill and Other. We allocate the cost of an acquired entity to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the acquisition consideration transferred over the fair value of the net assets acquired, including other intangible assets, is recorded as goodwill.Goodwill is tested for impairment at the reporting unit level, and we are organized and operate as a single reporting unit.Goodwill and indefinite-lived intangible assets are tested at least annually or more frequently when events or circumstances occur that indicate that it is more likely than not that an impairment has occurred. In assessing goodwill and intangible assets for impairment, we first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. In the qualitative assessment, we may consider factors such as economic conditions, industry and market conditions and developments, overall financial performance and other relevant entity-specific events in determining whether it is more likely than not that the fair value of the reporting unit is less than the carrying amount. Should we conclude that it is more likely than not that the recorded goodwill and intangible assets amounts have been impaired, it would perform the impairment test. An impairment loss is recognized in earnings if the estimated fair value of a reporting unit or indefinite lived intangible asset is less than the carrying amount of the reporting unit or intangible asset. Significant judgment is applied when goodwill and intangible assets are assessed for impairment.
Identifiable intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives and are also reviewed at least annually for impairment or more frequently if conditions exist that indicate that an asset may be impaired.
We did not record any impairment charges related to goodwill and intangible assets during the periods fromOctober 15, 2021 throughDecember 31, 2021 andJanuary 1, 2021 throughOctober 14, 2021 , and the year endedDecember 31, 2020 , respectively.
Loyalty Redemption Platform Revenue Recognition
We host, operate and maintain a loyalty redemption platform connecting loyalty
programs to ecommerce merchants allowing loyalty point holders to redeem a
spectrum of loyalty currencies for other digital assets, merchandise and
services. Our customer in these arrangements is generally the loyalty program
sponsor. Our contracts related to our loyalty redemption platform consist of two
performance obligations: (1) access to our SaaS-based redemption platform and
customer support services and (2) facilitation of order fulfillment services. We
are the principal related to providing access to our redemption platform. We are
acting as the agent to facilitate order fulfillment services on behalf of the
loyalty program sponsor. Revenues generated from our loyalty redemption platform
are included in "Net revenues" include the following:
•Platform subscription fees: Monthly fixed fee charged to customers to access
the redemption platform and receive customer support services. We recognize
revenue for these fees on a straight-line basis over the related contract term
as the customer receives benefits evenly throughout the term of the contract.
These fees are allocated to our performance obligation to provide access to our
redemption platform, and thus are recognized on a gross basis. Revenue from our
platform subscription fees is included in "Subscription and services revenue" in
the disaggregation of revenue table by service type in Note 3 to our audited
consolidated financial statements.
•Transaction fees: Transaction fees are earned for most transactions processed
through our platform. These fees are allocated to our performance obligation to
provide order placement services on behalf of the loyalty program sponsor,
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and therefore are recognized net of the related redemption cost. We allocate transaction fees to the period in which the related transaction occurs. Revenue from our transaction fees is included in "Transaction revenue, net" in the disaggregation of revenue table by service type in Note 3 to our audited consolidated financial statements. •Revenue share fees: We are entitled to revenue share fees in the form of rebates from third-party commerce merchants and other partners which provide services facilitating redemption order fulfillment. We allocate revenue share fees to the period in which the related transaction occurs. Revenue from our revenue share fees is included in "Transaction revenue, net" in the disaggregation of revenue table by service type in Note 3 to our audited consolidated financial statements. •Service fees: We earn fees for certain software development activities associated with the implementation of new customers on our loyalty redemption platform and other development activities if a customer requests that we customize certain features and functionalities for their loyalty program. We also earn fees from providing call center services to customers. We recognize service fees as revenue on a straight-line basis, beginning when the internally developed software resulting from such implementation or other development activities are operational in our platform over the longer of the remaining anticipated customer life and 3 years, which represents the estimated useful life of our internally developed software. Implementation and development service fees are generally billed when the implementation and development activities are performed. We recognize deferred revenue when all such fees are billed. Revenue from our services fees is included in "Subscription and services revenue" in the disaggregation of revenue table by service type in Note 3 to our audited consolidated financial statements.
Deferred Revenue
Deferred revenue includes amounts invoiced prior to us meeting the criteria for revenue recognition. We invoice customers for service fees at the time the service is performed, and such fees are recognized as revenue over time as we satisfy our performance obligation. The portion of deferred revenue to be recognized in the succeeding twelve-month period is recorded as current deferred revenue, and the remaining portion is recorded as non-current deferred revenue. We have determined that these arrangements do not contain a significant financing component, and therefore the transaction price is not adjusted.
Warrants
We account for our ordinary share warrants in accordance with applicable
accounting guidance provided in ASC Topic 815, Derivatives and Hedging-Contracts
in Entity's Own Equity ("ASC Topic 815"), as either derivative liabilities or as
equity instruments depending on the specific terms of the warrant agreement. We
classify as equity any equity-linked contracts that (1) require physical
settlement or net-share settlement or (2) give us a choice of net-cash
settlement or settlement in our own shares (physical settlement or net-share
settlement). We classify as assets or liabilities any equity-linked contracts
that (1) require net-cash settlement (including a requirement to net-cash settle
the contract if an event occurs and if that event is outside our control) or (2)
give the counterparty a choice of net-cash settlement or settlement in shares
(physical settlement or net-share settlement). All Public and private placement
warrants issued by us were deemed to qualify for liability classification.
Impairment of Long-Lived Assets
Our long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. We also evaluate the period of depreciation and amortization of long-lived assets to determine whether events or circumstances warrant revised estimates of useful lives. When indicators of impairment are present, we determine the recoverability of our long-lived assets by comparing the carrying value of our long-lived assets to future undiscounted net cash flows expected to result from the use of the assets and their eventual disposition. If the estimated future undiscounted cash flows demonstrate the long-lived assets are not recoverable, an impairment loss would be calculated based on the excess of the carrying amounts of the long-lived assets over their fair value.
Unit-Based Compensation
The Successor period unit-based compensation expense relates to the replacement
incentive units and phantom units ("participation" units) granted during the
Predecessor period that were issued to employees as purchase consideration.
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The replacement incentive units and participation units were measured at fair value on the Closing Date, and we recognize expense in "Compensation and benefits" in the accompanying consolidated statements of operations and comprehensive loss over the requisite service period. Additionally, we recognize variable compensation expense for liability-classified participation units based on changes to the fair value of the awards at each reporting date. We elect to account for forfeitures as they occurred. See Note 11 to our audited consolidated financial statements for additional disclosures related to unit-based compensation. The Predecessor period unit-based compensation expense related to incentive units and participation units granted to employees and was measured at fair value on the date of grant and recognized as expense in "Compensation and benefits" in the accompanying consolidated statements of operations and comprehensive loss over the requisite service period, subject to acceleration if certain performance or market conditions were met. Additionally, we recognized variable compensation expense for liability-classified participation units based on changes to the fair value of the awards at each reporting date. The Predecessor elected to account for forfeitures as they occurred. See Note 11 to our audited consolidated financial statements for additional disclosures related to unit-based compensation. Use of Estimates The preparation of consolidated financial statements in conformity withU.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in our audited consolidated financial statements and accompanying notes. We base our estimates and assumptions on various judgments that we believe to be reasonable under the circumstances. The inputs into our estimates consider the economic implications of COVID-19 on our critical and significant accounting estimates. Additionally, subsequent toDecember 31, 2021 , there has been a military conflict inEastern Europe that may have an impact on our operations. As of the date of issuance, the conflict is still ongoing and thus there is uncertainty as to the ultimate impact to us. The significant estimates and assumptions that affect the financial statements may include, but are not limited to, those that are related to income tax valuation allowances, useful lives of intangible assets and property, equipment and software, fair value of financial assets and liabilities, determining provision for doubtful accounts, valuation of acquired tangible and intangible assets, the impairment of intangible assets and goodwill, and fair market value ofBakkt common units, incentive units and participation units. Actual results and outcomes may differ from management's estimates and assumptions and such differences may be material to our audited consolidated financial statements.
Recently Issued and Adopted Accounting Pronouncements
Recently issued and adopted accounting pronouncements are described in Note 2 to our audited consolidated financial statements.
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