BAKKT HOLDINGS, INC. The following discussion and analysis of financial condition and results of operations should be read together with the accompanying consolidated financial statements and related notes. 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 three months endedMarch 31, 2021 (referred to herein as a "Predecessor Period") and (ii)Bakkt Holdings, Inc. and its subsidiaries (the "Successor") for the three months endedMarch 31, 2022 (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. Factors that could cause or contribute to such differences include, but are not limited to, those factors discussed above in "Cautionary Statement Regarding Forward-Looking Statements" and "Item 1A. Risk Factors."
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 0.7 million
transacting accounts on our platform for the three months ended March 31, 2022 .
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 and ether, 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. 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
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institutional customers, which we recognize on a pro rata basis over the term of the custody contract. 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. Our standalone custody revenue and revenue recognized under the Triparty Agreement are currently immaterial. For more information, see Note 2 to our audited consolidated financial statements included in our Form 10-K. •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 included in our Form 10-K. •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 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, when applicable. For more information, see Note 2 to our audited consolidated financial statements included in our Form 10-K. 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
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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. 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. During 2021, our business operations started to recover from the impacts of the pandemic. Our business operations have continued to recover in 2022 from the impacts of the pandemic, including revenue from the loyalty and travel business. Business Combination
On
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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, 2021 throughMarch 31, 2021 ) and the Successor period (January 1, 2022 throughMarch 31, 2022 ).
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 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. 35
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The below graphic illustrates the structure of the physically-delivered bitcoin futures and options and custody offerings.
[[Image Removed: bakkt-20220331_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 36
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rust's custody solution provides support to
[[Image Removed: bakkt-20220331_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. 37
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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
Three Months
Ended Three Months Ended
March 31, 2022 March 31, 2021
Revenues:
Net revenues(1) $ 12,532 $ 8,145
Operating expenses:
Compensation and benefits 35,088 15,233
Professional services 4,675 913
Technology and communication 4,358 2,786
Selling, general and administrative 9,435 6,109
Acquisition-related expenses 516 7,820
Depreciation and amortization 5,851 2,794
Related party expenses (affiliate in Predecessor period)(2) 367 471
Impairment of long-lived assets - -
Other operating expenses 728 429
Total operating expenses 61,018 36,555
Operating loss (48,486) (28,410)
Interest income (expense), net 61 (49)
Gain from change in fair value of warrant liability 2,428 -
Other income (expense), net (462) (338)
Loss before income taxes (46,459) (28,797)
Income tax benefit (expense) 3,138 (23)
Net loss $ (43,321) $ (28,820)
Less: Net loss attributable to noncontrolling interest (36,193)
Net loss attributable toBakkt Holdings, Inc.
(7,128)
Net loss per share attributable toBakkt Holdings, Inc. Class A common stockholders per share: Basic$ (0.12) (3) Diluted$ (0.14) (3) (1)The revenue for the three months endedMarch 31, 2022 and 2021 includes net revenues from related party of$20 and net revenues from affiliate of$(26) , 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 period due to lack of comparability with the Successor period.
Three Months Ended
Financial Summary
The three months ended
•Revenue increased$4.4 million , or 54%, primarily driven by strong transaction revenue from the loyalty redemption business; and •Operating expenses increased$24.5 million , or 67%, primarily driven by increases in non-cash compensation and headcount. 38
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Revenue
Successor Predecessor
Three Months Ended Three Months Ended
($ in thousands) March 31, 2022 March 31, 2021 $Change % Change Net revenues $ 12,532 $ 8,145$ 4,387 53.9 % Net Revenues
Net revenues consist of transaction revenue and subscription and service
revenue. Transaction revenue is net of incentives, rebates and liquidity
payments under the Triparty Agreement, reductions in connection with the
contribution agreement entered into between
Net revenues increased by$4.4 million , or 53.9%, for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 . The increase was comprised of$3.2 million of increased transaction revenue and$1.2 million of increased subscription and service revenue. The increase in transaction revenue was driven by$2.5 million from higher customer activity in our loyalty redemption services business. The increase in subscription and service revenue was primarily related to the addition of new services for an existing loyalty customer. Operating Expenses Operating expenses consist of compensation and benefits, professional services, technology and communication expenses, selling, general and administrative expense, acquisition-related expenses, depreciation and amortization, affiliate expenses, impairment of long-lived assets, and other operating expenses. Compensation and Benefits Successor Predecessor Three Months Ended Three Months Ended ($ in thousands) March 31, 2022 March 31, 2021 $ Change % Change Compensation and Benefits $ 35,088 $ 15,233
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. 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$19.9 million , or 130.3%, for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 . The increase was primarily due to increases of$4.0 million in additional salaries, wages and benefits,$1.5 million in contract labor for software development, and$12.6 million in non-cash compensation and incentive bonuses. As a newly public company, we issued restricted stock units ("RSUs") in the fourth quarter of 2021 that will vest in the second quarter of 2022. These awards accounted for$9.1 million of the total share-based compensation during the three months endedMarch 31, 2022 period. As we typically grant RSUs with a three-year vesting period, the impact of share-based compensation expenses is expected to be reduced in future periods. 39
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Professional Services
Successor Predecessor
Three Months Ended Three Months Ended
($ in thousands) March 31, 2022 March 31, 2021 $ Change % Change Professional Services $ 4,675 $ 913$ 3,762 412.0 % Professional services expense includes fees for accounting, legal and regulatory fees. Professional services increased by$3.8 million , or 412.0%, for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 . The increase was primarily due to increases of$1.1 million in professional and other fees,$1.9 million in audit and tax fees, and$0.8 million in legal fees.
Technology and Communication
Successor Predecessor
Three Months
Ended Three Months Ended
($ in thousands) March 31, 2022 March 31, 2021 $ Change % Change
Technology and Communication $ 4,358 $ 2,786 $ 1,572 56.4 %
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 $1.6 million , or 56.4%, for the three months ended March 31, 2022 compared to
the three months ended March 31, 2021 . The increase was primarily due to an
increase of $1.4 million in hardware and software license fees.
Selling, General and Administrative
Successor Predecessor
Three Months
Ended Three Months Ended
($ in thousands) March 31, 2022 March 31, 2021 $ Change % Change
Selling, General and Administrative $ 9,435 $ 6,109 $ 3,326 54.4 %
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.
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Selling, general and administrative costs increased by$3.3 million , or 54.4%, for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 . The increase was primarily due to increases of$4.0 million in insurance expense and$0.4 million in rent, partially offset by a reduction of marketing expenses of$1.7 million . The majority of marketing expenses are web-based promotional campaigns. We expect to increase marketing efforts as part of our broader growth initiatives, which is expected to result in increased selling, general and administrative expenses in future periods.
Acquisition-related Expenses
Successor Predecessor
Three Months
Ended Three Months Ended
($ in thousands) March 31, 2022 March 31, 2021 $ Change % Change
Acquisition-related expenses $ 516 $ 7,820 $ (7,304) (93.4 %)
Acquisition-related expenses decreased by $7.3 million , or 93.4%, for the three
months ended March 31, 2022 compared to the three months ended March 31, 2021 .
Acquisition-related expenses for the three months ended March 31, 2021 consist
of fees for investment banking advisors, lawyers, accountants, tax advisors and
public relations firms directly related to the Business Combination, which did
not recur during the three months ended March 31, 2022 . The amount and timing of
acquisition-related expenses is expected to vary across periods based on
potential transaction activities.
Depreciation and Amortization
Successor Predecessor
Three Months
Ended Three Months Ended
($ in thousands) March 31, 2022 March 31, 2021 $ Change % Change
Depreciation and amortization $ 5,851 $ 2,794 $ 3,057 109.4 %
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. Depreciation and amortization increased by $3.1 million , or 109.4%,
for the three months ended March 31, 2022 compared to the three months ended
March 31, 2021 . The increase was primarily due to increases of $3.2 million
related to the step-up in basis of the technology and customer relationships
acquired in connection with the Business Combination, partially offset by a
decrease of $0.1 million related to amortization of trade names during the three
months ended March 31, 2021 , which is no longer amortizable following the
Business Combination in 2021.
Gain from Change in Fair Value of Warrant Liability
Successor Predecessor
Three Months
Ended Three Months Ended
($ in thousands) March 31, 2022 March 31, 2021 $ Change % Change
Gain from change in fair value of
warrant liability $ 2,428 $ - $ 2,428 n/m
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We recorded a gain of$2.4 million during the three months endedMarch 31, 2022 for the change in fair value on the revaluation of our warrant liability associated with our public warrants. This is a non-cash gain and is driven by fluctuations in the market price of our warrants.
Other expense, net
Successor Predecessor
Three Months Ended Three Months Ended
($ in thousands) March 31, 2022 March 31, 2021 $ Change % Change
Other expense, net $ (462) $ (338) $ (124) 36.7 %
Other expense, net primarily consists of non-operating gains and losses. During
the three months ended March 31, 2022 , we had other expense of $0.5 million as
compared to other expense of $0.3 million for the three months ended March 31,
2021 . The increase in other expense of $0.1 million was primarily driven by
foreign currency transaction losses.
Income tax benefit (expense)
Successor Predecessor
Three Months
Ended Three Months Ended
($ in thousands) March 31, 2022 March 31, 2021 $ Change % Change
Income tax benefit (expense) $ 3,138 $ (23) $ 3,161 n/m
Income tax benefit during the three months ended
Liquidity and Capital Resources
Our predecessor principally financed its operations through equity financings in the form of capital contributions from its members and, to a lesser degree, from customer revenues. In addition, in 2018, ICE contributed certain developed assets and rights to use exchange and clearing licenses enablingBakkt to commence operations. In connection with the closing of the Business Combination, our predecessor's cash position was supplemented by$532.4 million , which included$325.0 million in proceeds from the closing of a private placement of shares of our Class A common stock and$207.4 million that had previously been held in trust. As ofMarch 31, 2022 , we had$355.2 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
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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. We continue to accelerate our hiring plans along with increasing 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.
The following table summarizes our cash flows for the periods presented (in
thousands):
Successor Predecessor
Three Months
Ended March 31, Three Months Ended
2022 March 31, 2021
Net cash flows used in operating activities $ (33,156) $ (974)
Net cash flows used in investing activities $ (3,122) $ (4,054)
Net cash flows provided by (used in) financing activities $ 1 $ (31)
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 platform, and associated non-headcount
technology and communication cost to develop, operate and support our
customer-facing technology platforms.
Net cash flows used in operating activities of $33.2 million for the three
months ended March 31, 2022 was primarily related to our net loss of $43.3
million and changes in our operating assets and liabilities of $4.0 million ,
offset by non-cash charges of $14.2 million . The non-cash charges for the
combined 2021 period primarily consisted of share-based compensation of $13.2
million and depreciation and amortization of $5.9 million , offset by a gain from
change in fair value of warrant liability of $2.4 million . Net cash outflows
from changes in our operating assets and liabilities for the three months ended
March 31, 2022 resulted primarily from an increase in accounts receivables of
$1.3 million , a decrease of accounts payable and accrued liabilities of $1.7
million and an increase in other assets and liabilities of $4.3 million , which
were partially offset by a decrease in prepaid insurance of $4.3 million .
Net cash flows used in operating activities of $1.0 million for the three months
ended March 31, 2021 is primarily attributable to our net loss of $28.8 million ,
offset by non-cash charges of $5.4 million and changes in our operating assets
and liabilities of approximately $22.5 million . Non-cash charges primarily
consisted of $1.3 million of unit-based compensation expenses and $2.8 million
of depreciation and amortization. Net cash inflows from changes in operating
assets and liabilities resulted from the return of a deposit with our
clearinghouse affiliate of $20.4 million , a $2.9 million increase in accounts
payable and accruals and a $1.1 million increase in other assets and
liabilities, which were partially offset by a $2.0 million decrease in amounts
due to affiliates.
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Investing Activities
Net cash flows used in investing activities of
Net cash flows used in investing activities of
Financing Activities
Net cash flows provided by financing activities of less than$0.1 million for the three months endedMarch 31, 2022 resulted from proceeds from the exercise of public warrants.
Net cash flows used in financing activities of less than
Tax Receivable Agreement
Concurrently with the completion of the Business Combination, 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 16, 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 ofMarch 31, 2022 , no such exchanges have occurred. 44
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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 More than 5
year 1-3 years 3-5 years years Total
Purchase obligations(1) $ 2,250 $ 8,750
(2,642) 5,537 5,765 14,536 23,196
Total contractual obligations
(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.
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. InApril 2022 , we further extended the maturity date of the purchasing card facility toAugust 12, 2022 . OnApril 7, 2022 , we entered into a corporate card services agreement with Bank of America to provide a new purchasing card facility. Total borrowing capacity under the facility is$35 million and there is no defined maturity date. 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. The purchasing card facility requires us to maintain a concentration account with the lender subject to a minimum liquidity maintenance requirement of$7.0 million as collateral along with the accounts receivable of our subsidiary, within the loyalty business.Bakkt Holdings, Inc. serves as the guarantor on behalf of our subsidiary under the commercial purchasing card facility.
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.
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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.
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
Three Months Ended Three Months Ended
March 31, 2022 March 31, 2021
Net loss (43,321) (28,820)
Depreciation and amortization 5,851 2,794
Interest (income) expense (61) 49
Income tax (benefit) expense (3,138) 23
EBITDA (40,669) (25,954)
Acquisition-related expenses 516 7,820
Share-based and Unit-based compensation expense 13,347 1,256
Gain from change in fair value of warrant liability (2,428) -
ICE transition services expense 367 -
Cancellation of common units (60) -
Adjusted EBITDA (28,927) (16,878)
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Adjusted EBITDA for the three months endedMarch 31, 2022 decreased by$12.0 million or 71.4% as compared to the three months endedMarch 31, 2021 . The decrease was primarily due to a$7.9 million increase in compensation and benefits resulting from an increase in headcount to support the projected growth in our business, a$3.8 million increase professional services including fees for accounting, legal and regulatory fees, and a$3.3 million increase in selling, general and administrative expenses to support the projected growth in our business and requirements of being a public company, including increased insurance premiums and disclosure processes.
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. We base our estimates on historical experience, as appropriate, and on various other assumptions that we believe to be reasonable under the circumstances. Changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows may be affected. Due to the COVID-19 pandemic and the military conflict inEastern Europe , there has been uncertainty and disruption in the global economy and financial markets, which requires us to make certain estimates and assumptions that affect the amounts reported in our consolidated financial statements. 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. We have assessed the impact and are not aware of any specific events or circumstances that required an update to our estimates and assumptions or materially affected the carrying value of our assets or liabilities as of the date of issuance of this Report. These estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions. For a description of our critical accounting policies and estimates, refer to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Form 10-K. There have been no material changes to our critical accounting policies and estimates since our Form 10-K.
Recently Issued and Adopted Accounting Pronouncements
Recently issued and adopted accounting pronouncements are described in Note 2 included in this Report.
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