Notes to Consolidated Financial Statements
(Unaudited)
1.Organization and Description of Business
Organization
VPC Impact Acquisition Holdings (“VIH”) was a blank check company incorporated as a Cayman Islands exempted company on July 31, 2020. VIH was incorporated for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses or entities. VIH’s sponsor was VPC Impact Acquisition Holdings Sponsor, LLC (the “Sponsor”).
The registration statement for VIH’s Initial Public Offering was declared effective on September 22, 2020. On September 25, 2020, VIH consummated the Initial Public Offering of 20,000,000 units (the “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 warrants (the “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. On September 29, 2020, the underwriters notified VIH of their intention to partially exercise their over-allotment option on October 1, 2020. As such, on October 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.
Following the closing of the Initial Public Offering on September 25, 2020 and the partial exercise of the underwriter’s over-allotment on October 1, 2020, an amount of approximately $207.4 million ($10.00 per Unit) from the proceeds of the sale of the Units in the Initial Public Offering and the sale of the private placement warrants, net of transaction costs, was placed in a trust account (the “Trust Account”).
On October 15, 2021 (the “Closing Date”), VIH and Bakkt Opco Holdings, LLC (then known as Bakkt Holdings, LLC, "Opco") and its operating subsidiaries consummated a business combination (the “Business Combination”) contemplated by the Agreement and Plan of Merger entered into on January 11, 2021 (as amended, the “Merger Agreement”). In connection with the Business Combination, VIH changed its name to “Bakkt Holdings, Inc.” and changed its jurisdiction of incorporation from the Cayman Islands to the State of Delaware (the “Domestication”).
Unless the context otherwise provides, “we,” “us,” “our,” “Bakkt,” the “Company” and like terms refer (i) prior to the Closing Date, to Opco and its subsidiaries and (ii) after the Closing Date, to Bakkt Holdings, Inc. and its subsidiaries, including Opco.
Immediately following the Domestication, we became organized in an umbrella partnership corporation, or “up-C,” structure in which substantially all of our assets and business are held by Opco, and our only direct assets consist of common units in Opco (“Opco common units”), which are non-voting interests in Opco, and the managing member interest in Opco.
In connection with the Business Combination, a portion of VIH shares were exchanged for cash for shareholders who elected to execute their redemption right. The remaining VIH shares were exchanged for newly issued shares of our Class A common stock. Additionally, all outstanding membership interests and rights to acquire membership interests in Opco were exchanged for Opco common units and an equal number of newly issued shares of our Class V common stock. The existing owners of Opco other than Bakkt are considered noncontrolling interests in the accompanying consolidated financial statements (the “financial statements”). Refer to Note 4 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the U.S. Securities and Exchange Commission (the "SEC") on March 31, 2022 (the "Form 10-K") where the Business Combination is described in detail.
Our Class A common stock and warrants are listed on the New York Stock Exchange under the ticker symbols “BKKT” and “BKKT WS,” respectively.
Description of Business
We provide, or are working to provide, products and services in four key areas:
•Enabling Crypto Services. Our platform provides consumers, businesses and institutions easy access to crypto buy and sell capabilities.
•Fueling Crypto Rewards. We are in the process of enabling merchants of all sizes to offer loyalty and rewards to their customers in the form of crypto – either by earning crypto rewards, or by redeeming existing reward currencies, such as points or miles, into crypto.
•Paying with Digital Assets. We enable consumers to make everyday purchases using their existing rewards points or new assets like crypto.
•Powering Loyalty. We offer a full spectrum of content that retailers and financial institutions can make available to their customers when redeeming loyalty currencies. Our redemption solutions span a variety of rewards categories including merchandise (such as Apple products and services), gift cards, digital experiences and charitable giving. Our travel solution offers a retail e-commerce booking platform, as well as live-agent booking and servicing.
2.Summary of Significant Accounting Policies
Our accounting policies are as set forth in the notes of our Form 10-K.
Basis of Presentation
As a result of the Business Combination, we evaluated if VIH or Opco is the predecessor for accounting purposes. In considering the foregoing principles of predecessor determination in light of our specific facts and circumstances, we determined that Opco is the predecessor for accounting purposes. The financial statement presentation includes the financial statements of Opco as “Predecessor” for periods prior to the Closing Date and the financial statements of the Company as “Successor” for the period after the Closing Date, including the consolidation of Opco.
The accompanying unaudited interim consolidated financial statements are prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, the unaudited interim consolidated financial statements include the accounts of the Company and our subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. In addition, certain reclassifications of amounts previously reported have been made to the accompanying consolidated financial statements in order to conform to current presentation.
In the opinion of management, all adjustments (consisting of normal recurring accruals), considered necessary for a fair presentation have been included. The interim results for the six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022, or for any other future annual or interim period. These consolidated financial statements should be read in conjunction with the Company’s audited financial statements and accompanying notes thereto included in the Form 10-K.
Recently Adopted Accounting Pronouncements
Except as described below, for the six months ended June 30, 2022, there were no significant changes to the recently adopted accounting pronouncements applicable to us from those disclosed in Note 2 of our Form 10-K.
On March 31, 2022, the SEC issued Staff Accounting Bulletin ("SAB") Number 121 ("SAB 121"), which provides the SEC staff’s view that it would be appropriate for an entity that has an obligation to safeguard cryptoassets held for platform users to record a liability and corresponding asset on its balance sheet at the fair value of the cryptoassets. SAB 121 also added Section FF to SAB Topic 5 to include interpretive guidance for entities to consider when they have obligations to safeguard cryptoassets held for their platform users. We adopted the guidance in SAB 121 during the quarter ended June 30, 2022 with retrospective application as of January 1, 2022. Refer to footnote 17 for additional information.
3.Revenue from Contracts with Customers
Disaggregation of Revenue
We disaggregate revenue by service type and by platform, respectively, as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | Successor | | | Predecessor |
| Service Type | | Three Months Ended
June 30, 2022 | | | Three Months Ended
June 30, 2021 | | Six Months Ended
June 30, 2022 | | | Six Months Ended
June 30, 2021 |
Transaction revenue, net(a) | | $ | 7,032 | | | | $ | 3,542 | | | $ | 13,550 | | | | $ | 6,837 | |
| Subscription and service revenue | | 6,540 | | | | 4,944 | | | 12,554 | | | | 9,794 | |
| Total revenue | | $ | 13,572 | | | | $ | 8,486 | | | $ | 26,104 | | | | $ | 16,631 | |
(a)Amounts are net of incentives, rebates and liquidity payments, reductions related to the contribution agreement entered into between Bakkt and ICE in connection with ICE’s formation of Bakkt (“Contribution Agreement"), and consideration payable pursuant to an agreement with a strategic partner. These amounts consist of approximately $0.1 million and $0.4 million for the three and six months ended June 30, 2022, respectively. These amounts consist of approximately $0.7 million and $1.6 million for the three and six months ended June 30, 2021, respectively. Included in these amounts are amounts earned from related parties of less than $0.1 million for the three and six months ended June 30, 2022, and amounts earned from affiliates of less than $0.1 million for the three and six months ended June 30, 2021, respectively (Note 7).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | Successor | | | Predecessor |
| Platform | | Three Months Ended
June 30, 2022 | | | Three Months Ended
June 30, 2021 | | Six Months Ended
June 30, 2022 | | | Six Months Ended
June 30, 2021 |
Digital asset marketplace(b) | | $ | 54 | | | | $ | 117 | | | $ | 133 | | | | $ | 204 | |
| Loyalty redemption platform | | 13,374 | | | | 8,853 | | | 26,110 | | | | 17,382 | |
Alternative payment platform(c) | | 144 | | | | (484) | | | (139) | | | | (955) | |
| Total revenue | | $ | 13,572 | | | | $ | 8,486 | | | $ | 26,104 | | | | $ | 16,631 | |
(b)Amounts are net of incentives, rebates and liquidity payments and reductions related to the Contribution Agreement of less than $0.1 million for the three and six months ended June 30, 2022, and approximately $0.1 million and $0.4 million for the three and six months ended June 30, 2021, respectively.
(c)Amounts are net of incentives and consideration payable pursuant to an agreement with a strategic partner of $0.1 million and $0.4 million for the three and six months ended June 30, 2022, respectively, and $0.6 million and $1.2 million for the three and six months ended June 30, 2021, respectively.
We have one reportable segment to which our revenues relate.
Deferred Revenue
Contract liabilities consist of deferred revenues for 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 its performance obligation. Contract liabilities are classified as “Deferred revenue, current” and “Deferred revenue, noncurrent” in our consolidated balance sheets. The activity in deferred revenue for the six months ended June 30, 2022 and 2021, respectively, was as follows (in thousands):
| | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Six Months Ended
June 30, 2022 | | | Six Months Ended
June 30, 2021 |
| Beginning of the period contract liability | $ | 9,448 | |
| | $ | 8,385 | |
| Revenue recognized from contract liabilities included in the beginning balance | (2,542) | |
| | (2,342) | |
| Increases due to cash received, net of amounts recognized in revenue during the period | 1,026 | |
| | 1,676 | |
| End of the period contract liability | $ | 7,932 | |
| | $ | 7,719 | |
Remaining Performance Obligations
As of June 30, 2022, the aggregate amount of the transaction price allocated to the remaining performance obligations related to partially completed contracts is $23.9 million, comprised of $16.0 million of subscription fees and $7.9 million of service fees that are deferred. We recognize our subscription fees as revenue over a weighted-average period of 41 months (ranges from 2 months – 51 months) and our service fees as revenue over approximately 2 years.
As of June 30, 2021, the aggregate amount of the transaction price allocated to the remaining performance obligations related to partially completed contracts is $25.5 million, comprised of $17.8 million of subscription fees and $7.7 million of service fees that are deferred. We will recognize our subscription fees as revenue over a weighted-average period of 14 months (ranges from 6 months – 60 months) and our service fees as revenue over approximately 3 years.
Contract Costs
For the three and six months ended June 30, 2022, we incurred no incremental costs to obtain and/or fulfill contracts with customers. For the three and six months ended June 30, 2021, we incurred $0.3 million incremental costs to obtain and/or fulfill contracts with customers.
4.Goodwill and Intangible Assets, Net
Changes in goodwill consisted of the following (in thousands):
| | | | | |
| Successor |
| Balance as of December 31, 2021 | $ | 1,527,118 | |
| Foreign currency translation | — | |
| Balance as of June 30, 2022 | $ | 1,527,118 | |
| | | | | |
| Predecessor |
| Balance as of December 31, 2020 | $ | 233,429 | |
| Foreign currency translation | (38) | |
| Balance as of June 30, 2021 | $ | 233,391 | |
No goodwill impairment charges have been recognized in the periods presented.
Intangible assets consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Successor |
| June 30, 2022 |
| Weighted Average Useful Life (in years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Licenses | Indefinite | | $ | 241,320 | | | $ | — | | | $ | 241,320 | |
| Trademarks / trade names | Indefinite | | 39,470 | | | — | | | 39,470 | |
| Technology | 4.2 | | 67,310 | | | (11,444) | | | 55,866 | |
| Customer relationships | 8 | | 44,970 | | | (3,973) | | | 40,997 | |
| Total | | | $ | 393,070 | | | $ | (15,417) | | | $ | 377,653 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Successor |
| December 31, 2021 |
| Weighted Average Useful Life (in years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Licenses | Indefinite | | $ | 241,320 | | | $ | — | | | $ | 241,320 | |
| Trademarks / trade names | Indefinite | | 39,470 | | | — | | | 39,470 | |
| Technology | 4.2 | | 67,310 | | | (3,415) | | | 63,895 | |
| Customer relationships | 8 | | 44,970 | | | (1,186) | | | 43,784 | |
| Total | | | $ | 393,070 | | | $ | (4,601) | | | $ | 388,469 | |
Amortization of intangible assets for the three and six ended June 30, 2022 was $5.4 million and $10.8 million, respectively, and is included in “Depreciation and amortization” in the statements of operations. Amortization of intangible assets for the three and six ended June 30, 2021 was $1.6 million and $3.2 million, respectively, and is included in “Depreciation and amortization” in the statements of operations.
Estimated future amortization for definite-lived intangible assets as of June 30, 2022 is as follows (in thousands):
| | | | | |
| June 30, 2022 |
| Year ending December 31: | |
| Remainder of 2022 | $ | 10,995 | |
| 2023 | 21,811 | |
| 2024 | 21,871 | |
| 2025 | 18,896 | |
| 2026 | 7,628 | |
| Thereafter | 15,662 | |
| Total | $ | 96,863 | |
5.Consolidated Balance Sheet Components
Accounts Receivable, Net
Accounts receivable, net consisted of the following (in thousands):
| | | | | | | | | | | | | | |
| Successor |
| June 30, 2022 | | | December 31, 2021 |
| Trade accounts receivable | $ | 17,018 | | | | $ | 11,404 | |
| Unbilled receivables | 3,753 | | | | 5,448 | |
| Other receivables | 1,283 | | | | 1,500 | |
| Total accounts receivable | 22,054 | | | | 18,352 | |
| Less: allowance for doubtful accounts | (210) | | | | (210) | |
| Total | $ | 21,844 | | | | $ | 18,142 | |
Other Current Assets
Other current assets consisted of the following (in thousands):
| | | | | | | | | | | | | | |
| Successor |
| June 30, 2022 | | | December 31, 2021 |
| Prepaid expenses | $ | 7,668 | | | | $ | 4,784 | |
| Total | $ | 7,668 | | | | $ | 4,784 | |
Property, Equipment and Software, Net
Property, equipment and software, net consisted of the following (in thousands):
| | | | | | | | | | | | | | |
| Successor |
| June 30, 2022 | | | December 31, 2021 |
| Internal-use software | $ | 11,292 | | | | $ | 3,550 | |
| Purchased software | 99 | | | | 17 | |
| Office furniture and equipment | 92 | | | | 19 | |
| Other computer and network equipment | 4,898 | | | | 2,991 | |
| Leasehold improvements | 6,770 | | | | 277 | |
| Property, equipment and software, gross | 23,151 | | | | 6,854 | |
| Less: accumulated amortization and depreciation | (1,865) | | | | (733) | |
| Total | $ | 21,286 | | | | $ | 6,121 | |
For the three and six months ended June 30, 2022, depreciation and amortization expense related to property, equipment and software amounted to approximately $0.7 million and $1.1 million, respectively, of which $0.2 million and $0.3 million, respectively, related to amortization expense of capitalized internal-use software placed in service. For the three and six months ended June 30, 2021, depreciation and amortization expense related to property, equipment and software amounted to approximately $1.4 million and $2.5 million, respectively, of which $1.2 million and $2.1 million, respectively, related to amortization expense of capitalized internal-use software placed in service.
Deposits with Clearinghouse
Deposits with clearinghouse, noncurrent, consisted of the default resource contribution (Note 7). The default resource contribution amounted to approximately $15.2 million as of each of June 30, 2022 and December 31, 2021.
On January 19, 2021, ICE Clear US, Inc. ("ICUS") self-certified a rule change with the CFTC, reducing Bakkt Trust Company LLC's ("Bakkt Trust") financial contribution to the ICUS guaranty fund to approximately $15.2 million from $35.4 million. Following the two-week self-certification period, in which no comments were received from the CFTC, ICUS proceeded with the reduction. On February 3, 2021, ICUS returned $20.2 million to Bakkt Trust. The default resource contribution includes less than $0.1 million of cash margins held with ICUS.
Other Assets
Other assets consisted of the following (in thousands):
| | | | | | | | | | | | | | |
| Successor |
| June 30, 2022 | | | December 31, 2021 |
| Operating lease right-of-use assets (Note 16) | 21,231 | | | | 11,239 | |
| Other | 2,914 | | | | 2,640 | |
| Total | $ | 24,145 | | | | $ | 13,879 | |
Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consisted of the following (in thousands):
| | | | | | | | | | | | | | |
| Successor |
| June 30, 2022 | | | December 31, 2021 |
| Accounts payable | $ | 13,592 | | | | $ | 10,646 | |
| Accrued expenses | 18,016 | | | | 20,130 | |
| Purchasing card payable | 18,025 | | | | 17,698 | |
| Salaries and benefits payable | 11,694 | | | | 13,349 | |
| Other | 4,246 | | | | 2,267 | |
| Total | $ | 65,573 | | | | $ | 64,090 | |
Other Current Liabilities
Other current liabilities consisted of the following (in thousands):
| | | | | | | | | | | | | | |
| Successor |
| June 30, 2022 | | | December 31, 2021 |
| Participation units liability, current (Note 10) | $ | 538 | | | | $ | 2,027 | |
| Current maturities of operating lease liability | 1,034 | | | | 615 | |
| Other | 545 | | | | 1,075 | |
| Total | $ | 2,117 | | | | $ | 3,717 | |
Other Noncurrent Liabilities
Other noncurrent liabilities consisted of the following (in thousands):
| | | | | | | | | | | | | | |
| Successor |
| June 30, 2022 | | | December 31, 2021 |
| Participation units liability, non-current (Note 10) | $ | 540 | | | | $ | 2,027 | |
| Operating lease liability, noncurrent (Note 16) | 21,850 | | | | 10,647 | |
| Total | $ | 22,390 | | | | $ | 12,674 | |
6.Tax Receivable Agreement
On October 15, 2021, we entered into a Tax Receivable Agreement ("TRA") with certain Opco Equity Holders. Pursuant to the TRA, among other things, holders of Opco common units may, subject to certain conditions, from and after April 16, 2022, exchange such Paired Interests 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. Opco will have in effect an election under Section 754 of the Internal Revenue Code for each taxable year in which an exchange of Opco 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 of Opco. 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 TRA provides for the payment by us to exchanging holders of Opco 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 related to entering into the TRA, including tax benefits attributable to payments under the TRA. This payment obligation is an obligation of the Company and not of Opco. For purposes of the TRA, 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 to the tax basis of the assets of Opco as a result of Opco having an election in effect under Section 754 of the Code for each taxable year in which an exchange of Opco common units for Class A common stock occurs and had we not entered into the TRA. Such change will be calculated under the TRA without regard to any transfers of Opco common units or distributions with respect to such Opco common units before the exchange under the Exchange Agreement to which Section 743(b) or 734(b) of the Code applies. As of June 30, 2022, 17,554,639 Opco common units were exchanged for Class A common stock. Refer to Note 13 regarding the contingency related to the TRA.
7.Related Parties
ICE Management and Technical Support
In December 2018, we entered into an intercompany services agreement with ICE to provide management and technical support services. For the three and six months ended June 30, 2021, expenses of $0.5 million and $0.9 million, respectively, have been recorded in connection with this agreement and are reflected as “Related party expenses (affiliate in Predecessor periods)” in the statements of operations. Prior to the Business Combination, ICE also made various payroll distributions and payments to vendors on behalf of Opco and made unitary state income taxes on behalf of DACC Technologies, Inc., and Digital Asset Custody Company, Inc. (collectively with DACC Technologies, Inc., “DACC”). We recorded no expense during the three and six months ended June 30, 2022 under this agreement.
Upon consummation of the Business Combination, we entered into a Transition Services Agreement (“TSA”) with ICE, which superseded the intercompany services agreement pursuant to which ICE will provide insurance, digital
warehouse, data center, technical support, and other transition-related services in exchange for quarterly service fees to be paid by us. We recognized $0.3 million and $0.6 million of expense related to the TSA for the three and six months ended June 30, 2022, respectively, which is reflected as “Related party expenses (affiliate in Predecessor periods)” in the statements of operations and “Due to related party (affiliate in Predecessor period)” in the balance sheets.
Triparty Agreement
The Triparty Agreement provides for ICE Futures U.S., Inc. ("IFUS") to list for trading one or more digital currency futures and/or options contracts, and for ICUS to serve as the clearing house to provide central counterparty and ancillary services for such contracts. The Triparty Agreement also governs our physically-delivered bitcoin futures and options contracts (“PDF Contracts”). Refer to Note 8 to our consolidated financial statements included in our Form 10-K for additional description of the Triparty Agreement. On July 21, 2022, we entered into an amendment to the Triparty Agreement, which specified certain marketing obligations of the Parties and revised the revenue allocation among the Parties to an equal rate as between Bakkt, on the one hand, and IFUS and ICUS, on the other hand. The Triparty Agreement does not currently have a material effect on the consolidated financial statements.
We recognized revenues related to the Triparty Agreement of less than $0.1 million for each of the three and six months ended June 30, 2022, net of rebates and incentive payments (contra-revenue) of less than $0.1 million for the three and six months ended June 30, 2022. We recognized revenues related to the Triparty Agreement of approximately $0.1 million and $0.4 million for the three and six months ended June 30, 2021, net of rebates and incentive payments (contra-revenue) of $0.1 million and $0.4 million for the three and six months ended June 30, 2021.
The Triparty Agreement also required Bakkt Trust to make, and, subject to certain limits, to replenish as needed a $35.4 million default resource contribution to ICUS, to be used by ICUS in accordance with the ICUS rules. As described in Note 5, the contribution requirement was reduced to $15.0 million in 2021. The contribution is included in the “Deposits with clearinghouse” noncurrent balance. Interest earned on the contribution, net of certain fees and costs, is paid to Bakkt Trust from ICUS. We did not earn any interest for the three and six months ended June 30, 2022 and 2021.
Prior to the Business Combination, we also recognized a capital contribution for the cost of the trading and clearing services provided by IFUS and ICUS pursuant to the Contribution Agreement, which reduced revenue attributable to the Triparty Agreement by $0.2 million and $0.3 million for the three and six months ended June 30, 2021 (Note 9), respectively. We did not recognize a material reduction in revenue related to this capital contribution for the three and six months ended June 30, 2022.
As of June 30, 2022 and December 31, 2021, we had approximately $0.6 million and approximately $0.6 million, respectively, reflected as “Due to related party” in the balance sheets related to the TSA and Triparty Agreement. As of June 30, 2022, we had no amount recorded within “Accounts receivable, net” in the balance sheets related to the Triparty Agreement, and as of December 31, 2021, we had less than $0.1 million recorded.
Other Contractual Relationships with ICE
Prior to the withdrawal of Bakkt Clearing’s ICUS membership on May 20, 2020, Bakkt Clearing was required to hold shares of ICE stock for ICUS membership privileges. These shares were carried at cost basis and evaluated periodically for impairment. In connection with the withdrawal of Bakkt Clearing’s ICUS membership, these shares were remeasured at fair value, with unrealized gains and losses being reflected as “Other income (expense), net” in the statements of operations. In June 2021, we sold all of our shares of ICE stock. During the three and six months ended June 30, 2021, we recorded a realized loss on the sale of shares of affiliate stock of approximately $0.1 million which is included in “Other expense, net”. We did not recognize a loss on the sale of shares of affiliate stock during the three and six months ended June 30, 2022.
8.Warrants
As of June 30, 2022, there were 7,140,829 public warrants outstanding. Public warrants may only be exercised for a whole number of shares. No fractional shares will be issued upon exercise of the public warrant. Each warrant entitles its holders to purchase one share of Class A common stock at an exercise price of $11.50 per share. The public warrants became exercisable on November 15, 2021. The public warrants will expire on October 15, 2026, or earlier upon redemption or liquidation. We may redeem the outstanding warrants when various conditions are met, such as specific stock prices, as detailed in the specific warrant agreements. The warrants are recorded as a liability and reflected as “Warrant liability” in the balance sheets.
During the three and six months ended June 30, 2022, we received less than $0.1 million in proceeds from the exercise of the public warrants. We recognized a gain from the change in fair value of the warrant liability during the three and six months ended June 30, 2022, of $10.3 million and $12.7 million, respectively.
9.Stockholders’ Equity
Preferred Stock
We are authorized to issue 1,000,000 shares of preferred stock with a par value of $0.0001 per share. The holders of a series of preferred stock shall be entitled only to such voting rights as shall expressly be granted thereto by the Certificate of Incorporation (including any certificate of designation relating to such series of preferred stock). As of June 30, 2022, no shares of preferred stock have been issued.
Common Stock
Class A Common Stock
We are authorized to issue 750,000,000 shares with a par value of $0.0001 per share. Each holder of Class A common stock is entitled to one vote for each share of Class A common stock held of record by such holder on all matters on which stockholders generally or holders of Class A common stock as a separate class are entitled to vote, including the election or removal of directors (whether voting separately as a class or together with one or more classes of our capital stock). As of June 30, 2022, there were 75,343,724 shares of Class A common stock issued and outstanding.
Dividends
Subject to preferences that may be applicable to any outstanding preferred stock, the holders of shares of Class A common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by our Board out of funds legally available therefor.
Liquidation
In the event of any voluntary or involuntary liquidation, dissolution or winding up of our affairs, the holders of Class A common stock are entitled to share ratably in all assets remaining after payment of our debts and other liabilities, subject to prior distribution rights of preferred stock or any class or series of stock having a preference over the Class A common stock, then outstanding, if any.
Class V Common Stock
We are authorized to issue 250,000,000 shares with par value $0.0001 per share. These shares have no economic value but entitle the holder to one vote per share. 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 the Third Amended and Restated Limited Liability Company
Agreement of Opco and the Amended and Restated Exchange Agreement. Holders of Paired Interests become eligible on April 16, 2022 under the Exchange Agreement, dated October 15, 2021, to exchange their Paired Interests for Class A common stock or, at our election, cash in lieu thereof. As of June 30, 2022, there were 188,438,938 shares of Class V common stock issued and outstanding.
Following the expiration of the six-month lock-up period on April 16, 2022, holders of Paired Interests exchanged an aggregate of 17.5 million Paired Interests for our Class A common stock, and the Company did not elect to settle any such exchanges in cash.
Dividends
Dividends shall not be declared or paid on the Class V common stock.
Liquidation
In the event of any voluntary or involuntary liquidation, dissolution or winding up of our affairs, the holders of Class V common stock shall not be entitled to receive any of our assets.
Restrictions
In the event that any outstanding share of Class V common stock ceases to be held directly or indirectly by a holder of a Opco common units, such share will automatically be transferred to us and cancelled for no consideration. We will not issue additional shares of Class V common stock after the effectiveness of the Certificate of Incorporation other than in connection with the valid issuance or transfer of Opco common units in accordance with Opco’s Third Amended and Restated Limited Liability Company Agreement (the “LLC Agreement”).
Noncontrolling Interest
Bakkt Holdings, Inc. is the sole managing member of Opco and, as a result, consolidates the financial results of Opco. The Company reports a noncontrolling interest representing the economic interest in Opco held by the other members of Opco. 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 redeemed for a cash amount in accordance with the Third Amended and Restated Limited Liability Company Agreement of Opco and the Amended and Restated Exchange Agreement. In connection with any redemption or exchange, the Company will receive a corresponding number of Opco common units, increasing the Company's total ownership interest in Opco. Changes in our ownership interest in Opco while we retain a controlling interest in Opco will be accounted for as equity transactions. As such, future redemptions or direct exchanges of Opco common units by the noncontrolling members of Opco will result in a change in ownership and reduce the amount recorded as noncontrolling interest and increase additional paid-in capital.
The following table summarizes the ownership interest in Bakkt Opco Holdings, LLC as of June 30, 2022 and December 31, 2021.
| | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Opco
Common Units | Ownership % | | Opco
Common Units | Ownership % |
| Opco common units held by Bakkt Holdings, Inc. (Class A Common Stock) | 75,343,724 | | 29 | % | | 57,164,388 | | 22 | % |
| Opco common units held by noncontrolling interest holders (Class V Common Stock) | 188,438,938 | | 71 | % | | 206,271,792 | | 78 | % |
| Total Opco common units outstanding | 263,782,662 | | 100 | % | | 263,436,180 | | 100 | % |
The weighted average ownership percentages for the applicable reporting periods are used to attribute net loss and other comprehensive loss to Bakkt Holdings, Inc. and the noncontrolling interest holders. The noncontrolling interest holders' weighted average ownership percentage for the three and six months ended June 30, 2022 was 72.5% and 75.2%, respectively.
The following table summarizes the effects of changes in ownership of Bakkt Opco Holdings, LLC on the Company's equity during the three and six months ended June 30, 2022 (in thousands).
| | | | | | | | | | | |
| Successor |
| Three Months Ended
June 30, 2022 | | Six Months Ended
June 30, 2022 |
| Net loss attributable to Bakkt Holdings, Inc. | $ | (3,897) | | | $ | (11,026) | |
| Other comprehensive loss: | | | |
| Unrealized loss on foreign currency translation adjustment | (105) | | | (64) | |
| Unrealized losses on available-for-sale securities | (4) | | | (4) | |
| | | |
| Transfers from noncontrolling interests: | | | |
| Increase in additional paid-in capital as a result of the exchange of Opco common units | 152,235 | | | 152,235 | |
| | | |
| Total effect of changes in ownership interest on equity attributable to Bakkt Holdings, Inc. | $ | 148,229 | | | $ | 141,141 | |
The following table summarizes redemptions of Opco common units activity during the three and six months ended June 30, 2022. There were no exchanges prior to the expiration of the six-month lock-up period on April 16, 2022.
| | | | | | | | | | | |
| Successor |
| Three Months Ended
June 30, 2022 | | Six Months Ended
June 30, 2022 |
| Exchanges of Opco common units: | | | |
| Number of Opco common units exchanged by noncontrolling interest holders | 17,554,639 | | | 17,554,639 | |
| Opco common units received by Bakkt Holdings, Inc. | 17,554,639 | | | 17,554,639 | |
| | | |
| Issuance of Class A common stock: | | | |
| Shares of Class A common stock issued in connection with exchanges of Opco common units | 17,554,639 | | | 17,554,639 | |
| | | |
| Cancellation of Class V common stock: | | | |
| Shares of Class V common stock surrendered and canceled | 17,554,639 | | | 17,554,639 | |
Members’ Equity
Prior to the Business Combination, Opco had three classes of voting units – Class A, Class B and Class C voting units – and incentive units granted under the Opco Incentive Equity Plan (the “Opco Plan”) (Note 10).
In connection with the Business Combination, the Opco equity holders converted 400,000,000 Opco Class A voting units, 192,453,454 Opco Class B voting units, and 270,270,270 Opco Class C voting units to 189,933,286 shares of Class V common stock on a pro rata basis. Additionally, we issued 17,473,362 shares of Class V common stock related to the outstanding Opco incentive units.
Issuance of Class B Warrant
On February 19, 2020, Opco issued a warrant to a strategic partner to purchase 15,000,000 of Opco’s Class B voting units (“Class B Warrant”), at an exercise price of $1.00 per unit, exercisable upon issuance, that expires 3 years from issuance.
On April 6, 2021, the strategic partner elected to net exercise its Class B Warrant in exchange for 9,953,454 of Class B voting units.
Issuance of Class C Warrant
In May, 2020, Opco issued a warrant to a minority investor to purchase 3,603,600 of Opco’s Class C voting units (“Class C Warrant”), at an exercise price of $1.11 per unit. Refer to Note 10 to our consolidated financial statements included in our Form 10-K where the Class C Warrant is described in detail.
In connection with the Business Combination, the modified warrant units automatically converted into the right to purchase 793,352 Paired Interests in Opco at an exercise price of $5.04 per Paired Interest. As of June 30, 2022, 172,055 modified warrant units have vested but have not been exercised, and the remaining 621,297 warrant units have not vested or been exercised. As of June 30, 2021, no warrant units had vested or been exercised. No expenses were recorded during the three and six months ended June 30, 2022 and 2021, since the service conditions were not probable of being met in those periods.
10.Share-Based and Unit-Based Compensation
2021 Incentive Plan
Our 2021 Omnibus Incentive Plan (the “2021 Incentive Plan”) became effective on the Closing Date with the approval of VIH’s shareholders and the Board of Directors. The 2021 Incentive Plan allows us to make equity and equity-based incentive awards to employees, non-employee directors and consultants. There are 25,816,946 shares of Class A common stock reserved for issuance under the 2021 Incentive Plan which can be granted as stock options, stock appreciation rights, restricted shares, restricted stock units (RSUs), performance stock units (PSUs), dividend equivalent rights and other share-based awards. No award may vest earlier than the first anniversary of the date of grant, except under limited conditions.
Share-Based Compensation Expense
During the three and six months ended June 30, 2022, we granted 2,323,402 and 9,292,472 RSUs, respectively, to employees and directors of Bakkt and Bakkt Trust. During the three and six months ended June 30, 2022, we granted 26,606 and 4,891,984 PSUs, respectively, which represents 100% of the target award. The majority of these grants were related to initial employment agreements for executives, which were approved by the Compensation Committee of the Board of Directors. We recorded $21.2 million of share-based compensation expense for the six months ended June 30, 2022, which is included in “Compensation and benefits” in the statements of operations.
Unrecognized compensation expense as of June 30, 2022 was $45.1 million for the RSUs and PSUs. The unrecognized compensation expense will be recognized over a weighted-average period of 2.46 years.
RSU and PSU Activity
The following tables summarize RSU and PSU activity under the 2021 Incentive Plan for the six months ended June 30, 2022 (in thousands, except per unit data):
| | | | | | | | | | | | | | | | | | | | | | | |
| Successor |
| RSUs and PSUs | Number of RSUs and PSUs | | Weighted Average Remaining Contractual Term (years) | | Weighted Average Grant Date Fair Value | | Aggregate Intrinsic Value |
| Outstanding as of December 31, 2021 | 2,142 | | | | | $ | 9.18 | | | |
| Granted | 14,184 | | | | | $ | 4.05 | | | $ | 57,389 | |
| Forfeited | (995) | | | | | | | |
| Outstanding as of June 30, 2022 | 15,331 | | | 2.46 | | $ | 4.71 | | | |
| Vested as of June 30, 2022 | 1,182 | | | | | | | |
During the six months ended June 30, 2022, we recorded $1.7 million of share-based compensation expense related to the accelerated vesting for certain employees. The expense was partially offset by the reversal for forfeitures of $0.8 million during the six months ended June 30, 2022, primarily comprised of $0.4 million related to an executive resignation.
The fair value of the RSUs and PSUs is based on the closing price of our common stock on the grant date.
Performance stock units provide an opportunity for the recipient to receive a number of shares of our common stock based on our performance during fiscal year 2022, 2023 and 2024, as measured against objective performance goals as determined by the Board. The actual number of units earned may range from 0% to 150% of the target number of units depending upon achievement of the performance goals. PSUs vest in three equal annual installments, subject to a catch-up provision over the three annual performance targets. Upon vesting, each performance stock unit equals one share of common stock of the Company. We accrue compensation expense for the PSUs based on our assessment of the probable outcome of the performance conditions.
Opco Plan
Preferred incentive units and common incentive units (collectively, “incentive units”) represent an ownership interest in Opco and are entitled to receive distributions from Opco, subject to certain vesting conditions. Participation units, issued directly by Opco to Opco Plan participants, do not represent an ownership interest in Opco but rather provide Opco Plan participants the contractual right to participate in the value of Opco, if any through a cash payment upon the occurrence of certain events following vesting of the participation units. Refer to Note 11 to our consolidated financial statements included in our Form 10-K where the modifications to the Opco Plan are described in detail.
Upon consummation of the Business Combination, the 76,475,000 outstanding preferred incentive units and 23,219,745 outstanding common incentive units were converted into 17,473,362 Successor common incentive units, and the 10,811,502 outstanding participation units were converted into 1,197,250 Successor participation units. Contemporaneously with the conversion, approximately one-third of the awards in the Opco Plan vested. In November 2021, we made total payments of $5.2 million to settle the vested participation units. The second and third one-third tranches will generally vest on the one-year and two-year anniversary date of the closing, respectively, although under the terms of the Opco Plan, employees who are terminated without cause after the Closing Date will vest in the unvested portion of their awards immediately upon their termination date.
Unit-Based Compensation Expense
Unit-based compensation expense for the six months ended June 30, 2022, was as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Successor |
| Type of unit | Compensation Expense | | Statement of Operations and Comprehensive Loss Classification | | Balance Sheet Classification |
| Common incentive unit | $ | 2,106 | | | Compensation and benefits | | Noncontrolling interest |
| Participation unit | (2,978) | | | Compensation and benefits | | Other noncurrent liabilities |
| Total | $ | (872) | | | | | |
Unit-based compensation expense for the six months ended June 30, 2021, was as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Predecessor |
| Type of unit | Compensation Expense | | Statement of Operations and Comprehensive Loss Classification | | Balance Sheet Classification |
| Preferred incentive unit | $ | 1,014 | | | Compensation and benefits | | Mezzanine equity |
| Common incentive unit | 726 | | | Compensation and benefits | | Mezzanine equity |
| Participation unit | 772 | | | Compensation and benefits | | Other noncurrent liabilities |
| Total | $ | 2,512 | | | | | |
Unrecognized compensation expense as of June 30, 2022 was approximately $3.1 million and less than $0.1 million for common incentive units and participation units, respectively. The unrecognized compensation expense will be recognized over a weighted-average period of 1.29 years.
Unit Activity
The following tables summarize common incentive unit activity under the Opco Plan for the six months ended June 30, 2022 (in thousands, except per unit data):
| | | | | | | | | | | | | | |
| Successor |
| Common Incentive Units | Number of Common Incentive Units | Weighted Average Remaining Contractual Term (years) | Weighted Average Grant Date Fair Value | Aggregate Intrinsic Value |
| Outstanding as of December 31, 2021 | 16,339 | | 1.79 | $ | 6.30 | | $ | 133,240 | |
| Granted | — | | | | |
| Forfeited | (279) | | | $ | 6.30 | | |
| Outstanding as of June 30, 2022 | 16,060 | | 1.29 | $ | 6.30 | | $ | 130,969 | |
| Vested as of June 30, 2022 | 11,533 | | | | $ | 94,049 | |
The following tables summarize preferred incentive unit and common incentive unit activity under the Opco Plan for the six months ended June 30, 2021 (in thousands, except per unit data):
| | | | | | | | | | | | | | |
| Predecessor |
| Preferred Incentive Units | Number of Preferred Incentive Units | Weighted Average Remaining Contractual Term (years) | Weighted Average Grant Date Fair Value | Aggregate Intrinsic Value |
| Outstanding as of December 31, 2020 | 76,475 | | 6.75 | $ | 0.42 | | $ | 88,711 | |
| Granted | — | | | | |
| Forfeited | — | | | | |
| Outstanding as of June 30, 2021 | 76,475 | | 6.5 | $ | 0.42 | | $ | 141,058 | |
| Vested as of June 30, 2021 | — | | | | |
| | | | | | | | | | | | | | |
| Predecessor |
| Common Incentive Units | Number of Common Incentive Units | Weighted Average Remaining Contractual Term (years) | Weighted Average Grant Date Fair Value | Aggregate Intrinsic Value |
| Outstanding as of December 31, 2020 | 26,833 | | 6.75 | $ | 0.43 | | $ | 25,760 | |
| Granted | — | | | | |
| Forfeited | — | | | | |
| Outstanding as of June 30, 2021 | 26,833 | | 6.5 | $ | 0.43 | | $ | 25,760 | |
| Vested as of June 30, 2021 | — | | | | |
There were no participation units granted during the three and six months ended June 30, 2022 and 2021. As of June 30, 2022 and December 31, 2021, the total number of participation units outstanding were 0.5 million and 0.7 million, respectively. The fair value of the participation units as of June 30, 2022 and December 31, 2021 was 1.1 million and 4.1 million, respectively. Participation units are settled in cash and the balance is recorded within other current liabilities and other noncurrent liabilities as described in Note 5.
The outstanding units under the Opco Plan were issued prior to the Business Combination and the plan was frozen upon execution of the merger agreement. No future units can be granted under this plan.
Determination of Fair Value
The fair value of incentive and participation units granted is calculated through a Monte Carlo simulation based on various outcomes. Opco determined that a Monte Carlo simulation was an appropriate estimation model because of the market condition associated with the vesting of the units. The determination of the fair value of the units is affected by Opco’s stock price and certain assumptions such as Opco’s expected stock price volatility over the term of the units, risk-free interest rates, and expected dividends, which are determined as follows:
•Expected term – The expected term represents the period that a unit is expected to be outstanding.
•Volatility – Opco has limited historical data available to derive its own stock price volatility. As such, Opco estimates stock price volatility based on the average historic price volatility of comparable public industry peers.
•Risk-free interest rate – The risk-free rate is based on the U.S. Treasury yield curve in effect on the grant date for securities with similar expected terms to the term of Opco’s incentive units.
•Expected dividends – Expected dividends is assumed to be zero as Opco has not paid and does not expect to pay cash dividends or non-liquidating distributions.
•Discount for lack of marketability – an estimated two-year time to exit Predecessor awards and the six-month lock-up restriction on Successor awards is reflected as a discount for lack of marketability estimated using the Finnerty model.
11.Net Loss per share
Basic earnings per share is based on the weighted average number of shares of Class A common stock issued and outstanding during the Successor period. Diluted earnings per share is based on the weighted average number shares of Class A common stock issued and outstanding and the effect of all dilutive common stock equivalents and potentially dilutive share-based awards outstanding during the Successor period. For the Successor period, there is no difference in the number of shares used to calculate basic and diluted shares outstanding due to our net loss position. The potentially dilutive securities that would be anti-dilutive due to our net loss are not included in the calculation of diluted net loss per share attributable to controlling interest. The anti-dilutive securities are included in the table below.
The following is a reconciliation of the denominators of the basic and diluted per share computations for net loss (in thousands, except share and per share data):
| | | | | | | | | | | |
| Successor | | Successor |
| Three Months Ended
June 30, 2022 | | Six Months Ended
June 30, 2022 |
| Net Loss per share: | | | |
| Numerator – basic and diluted: | | | |
| Net loss | $ | (27,641) | | | $ | (70,962) | |
| Less: Net loss attributable to noncontrolling interest | (23,744) | | | (59,936) | |
| Net loss attributable to Bakkt Holdings, Inc. – basic | (3,897) | | | (11,026) | |
| Net loss and tax effect attributable to noncontrolling interests | — | | | (35,007) | |
| Net loss attributable to Bakkt Holdings, Inc. – diluted | $ | (3,897) | | | $ | (46,033) | |
| | | |
| Denominator – basic and diluted: | | | |
| Weighted average shares outstanding – basic | 71,226,366 | | | 64,234,239 | |
| Effect of dilutive securities: | | | |
| Opco common units | — | | | 194,673,108 | |
| Weighted average shares outstanding – diluted | 71,226,366 | | | 258,907,347 | |
| | | |
| Net loss per share – basic | $ | (0.05) | | | $ | (0.17) | |
| Net loss per share – diluted | $ | (0.05) | | | $ | (0.18) | |
Potential common shares issuable to employee or directors upon exercise or conversion of shares under our share-based and unit-based compensation plans and upon exercise of warrants are excluded from the computation of diluted earnings per common share when the effect would be anti-dilutive.
The following table summarizes the total potential common shares excluded from diluted loss per common share as their effect would be anti-dilutive:
| | | | | |
| Successor |
| As of June 30, 2022 |
| RSUs and PSUs | 14,149,624 | |
| Public warrants | 7,140,829 | |
| Opco warrants | 793,352 | |
| Opco unvested incentive units | 4,527,603 | |
Opco common units (1) | 183,911,335 | |
| Total | 210,522,743 | |
| |
(1) Opco common units were anti-dilutive for the three months ended June 30, 2022. The Opco common units were dilutive for the six months ended June 30, 2022 as reflected in the weighted average shares outstanding – diluted share count above. |
12.Capital Requirements
Bakkt Trust is subject to certain regulatory capital requirements imposed by the New York State Department of Financial Services ("NYDFS"). These capital requirements require Bakkt Trust to maintain positive net worth at the greater of $15.0 million or the sum of the required percentage established for transmitted assets, cold wallet, and hot wallet custody assets. As of June 30, 2022 and 2021, Bakkt Trust had determined that $16.5 million, respectively should be set aside to satisfy these, which is reflected as “Restricted cash” in the balance sheets.
Bakkt Clearing was registered as a futures commission merchant (“FCM”) with the Commodity Futures Trading Commission (“CFTC”) and was a member of the National Futures Association (“NFA”). Bakkt Clearing was subject to CFTC Regulation 1.17, and the NFA capital requirements. Under these requirements, it was generally required to maintain “adjusted net capital” equivalent to the greater of $1.0 million or the sum of 8 percent of customer and noncustomer risk maintenance margin requirements on all positions, as defined. On May 20, 2022, we withdrew Bakkt Clearing's registration in the CFTC and membership in the NFA, which was effective on June 20, 2022. Accordingly, as of June 30, 2022 Bakkt Clearing no longer was required to maintain capital under the rules described above.
Bakkt Marketplace, LLC ("Bakkt Marketplace") is required to maintain tangible member’s equity of a minimum amount, plus the amount of customer funds held in transit since it holds a number of money transmitter licenses and has a virtual currency license (or “BitLicense”) from the NYDFS, which subjects it to NYDFS’ oversight with respect to such business activities conducted in New York State and with New York residents. Tangible member’s equity means member’s equity minus intangible assets and as of June 30, 2022 and December 31, 2021, tangible member’s equity amounted to approximately $5.5 million and approximately $11.0 million, respectively.
The minimum capital requirements to which our subsidiaries are subject may restrict their ability to transfer cash. We may also be required to transfer cash to our subsidiaries such that they may continue to meet these minimum capital requirements.
13.Commitments and Contingencies
401(k) Plan
We sponsor a 401(k) defined contribution plan covering all eligible U.S. employees. Both Company and employee contributions to the 401(k) plan are discretionary. For the three and six months ended June 30, 2022, we recorded approximately $0.7 million and $1.3 million, respectively, of expenses related to the 401(k) plan. For the three and six
months ended June 30, 2021, we recorded approximately $0.5 million and $1.0 million, respectively, of expenses related to the 401(k) plan.
Tax Receivable Agreement
The Company is party to a TRA with certain Opco Equity Holders (Note 6). As of June 30, 2022, the Company has not recorded a liability under the TRA related to the income tax benefits originating from the exchanges of Opco common units as it is not probable that the Company will realize such tax benefits. To the extent the Company is able to realize the income tax benefits associated with the exchanges of Paired Interest subject to the TRA, the TRA payable would range from zero to $10.3 million at June 30, 2022.
The amounts payable under the TRA will vary depending upon a number of factors, including the amount, character, and timing of the taxable income of the Company in the future. Should the Company determine that the payment of the TRA liability becomes probable at a future date based on new information, any changes will be recorded on the Company's condensed consolidated statement of operations and comprehensive loss at that time.
Litigation
As described above, in October 2021, we completed our Business Combination with VPC Impact Acquisition Holdings (“VIH”), pursuant to which VIH changed its name to Bakkt Holdings, Inc. and the current directors and officers of the Company replaced the directors and officers in place prior to the Business Combination. On April 21, 2022, a putative class action complaint was filed against Bakkt Holdings, Inc. and certain of its directors and officers prior to the Business Combination in the U.S. District Court for the Eastern District of New York on behalf of certain purchasers of securities of VIH and/or purchasers of Bakkt Class A common stock issued in connection with the Business Combination. The complaint alleges that VIH made false or misleading statements and omissions of purportedly material fact, in violation of federal securities laws, in connection with disclosures relating to certain of VIH’s financial statements, business, operations, and compliance policies. The complaint alleges that the false or misleading statements and omissions were contained in the registration statement filed in connection with the Business Combination and in other SEC filings made by VIH. The complaint alleges that VIH traded at artificially inflated prices as a result of the allegedly misleading statements and omissions. Plaintiff seeks certification of a class of purchasers of (1) VIH/Bakkt securities between March 31, 2021 and November 19, 2021, both dates inclusive and/or (2) Bakkt Class A common stock pursuant and/or traceable to the registration statement filed in connection with the Business Combination and in such other SEC filings. The complaint seeks damages, as well as the plaintiff’s fees and costs. On August 3, 2022, the Court appointed lead plaintiffs and lead counsel. Bakkt intends to vigorously defend against the allegations. No allegations have been made against any current officer or director of Bakkt other than one current board member, who was both an officer and director of VIH and has continued as a director of Bakkt.
Other legal and regulatory proceedings have arisen and may arise in the ordinary course of business. However, we do not believe that the resolution of these matters will have a material adverse effect on our financial position, results of operations or cash flows. However, future results could be materially and adversely affected by new developments relating to the legal proceedings and claims.
Commercial Purchasing Card Facility
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 us to maintain a month-end cash balance of $40.0 million. In January 2021, the purchasing card facility was extended to April 15, 2022 in order to facilitate a long-term agreement on more favorable terms to us. Bakkt Holdings, Inc. serves as the guarantor on behalf of our subsidiary under the commercial purchasing card facility. In April 2022, we further extended the
maturity date of the purchasing card facility to August 12, 2022, which may be extended to the extent necessary to transition over to the purchasing card facility with Bank of America described below.
On April 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.
Purchase Obligations
In December 2021, we entered into a four-year cloud computing arrangement which includes minimum contractual payments due to the third-party provider. As of June 30, 2022, our outstanding purchase obligations consist of the following future minimum commitments (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments Due by Period |
| Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years | | Total |
| Purchase obligations | $ | 2,250 | | | $ | 8,750 | | | $ | 9,000 | | | $ | — | | | $ | 20,000 | |
14.Income Taxes
As a result of the Business Combination, the Company acquired a controlling interest in Opco, which is treated as a partnership for U.S. federal income tax purposes, and in most applicable state and local income tax jurisdictions. As a partnership, Opco is not itself subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by Opco is passed through to and included in the taxable income or loss of its partners, including the Company following the Business Combination, on a pro rata basis. The Company's U.S. federal and state income tax benefit (expense) primarily relates to the Company’s allocable share of any taxable income or loss of Opco following the Business Combination. Opco’s wholly owned corporate subsidiaries that are consolidated for U.S. GAAP purposes but separately taxed for federal, state, and foreign income tax purposes as corporations are generating federal, state, and foreign income tax expense.
Our effective tax rates of 15.6% and 10.4% for the three and six months ending June 30, 2022, respectively, differ from statutory rates primarily due to the loss allocated to noncontrolling interest that is not taxed to the Company and the non-deductible expenses related to fair value gains and losses related to the changes in our warrant liability and nondeductible compensation.
Our effective tax rates of (0.5)% and (0.3)% for the three and six months ending June 30, 2021, respectively, differ from statutory rates primarily due to the impact of losses in which no tax benefit is expected to be recognized. The income tax expense during the period related to our operations in Canada.
Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Our realizability of our deferred tax assets, in each jurisdiction, is dependent upon the generation of future taxable income sufficient to utilize the deferred tax assets on income tax returns, including the reversal of existing temporary differences, historical and projected operating results and tax planning strategies. We assessed that certain of its deferred tax assets were not more likely than not to be realized.
The effects of uncertain tax positions are recognized in the consolidated financial statements if these positions meet a “more-likely-than-not” threshold. For those uncertain tax positions that are recognized in the consolidated financial statements, liabilities are established to reflect the portion of those positions it cannot conclude “more-likely-than-not” to be realized upon ultimate settlement. We had no unrecognized tax benefits or related interest and penalties accrued for the three and six ended June 30, 2022 and 2021.
15.Fair Value Measurements
Financial assets and liabilities that are measured at fair value on a recurring basis are classified entirely as Level 1 as follows (in thousands):
| | | | | | | | | | | | | | |
| Successor |
| As of June 30, 2022 |
| Total | Level 1 | Level 2 | Level 3 |
| Assets: | | | | |
| U.S. Treasury debt securities | $ | 188,746 | | $ | 188,746 | | $ | — | | $ | — | |
| Safeguarding asset for cryptoassets | 147,102 | | — | | 147,102 | | — | |
| Total Assets | $ | 335,848 | | $ | 188,746 | | $ | 147,102 | | $ | — | |
| | | | |
| Liabilities: | | | | |
| Safeguarding obligations for cryptoassets | $ | 147,102 | | $ | — | | $ | 147,102 | | $ | — | |
| Warrant liability—public warrants | 4,713 | | 4,713 | | — | | — | |
| Total Liabilities | $ | 151,815 | | $ | 4,713 | | $ | 147,102 | | $ | — | |
| | | | | | | | | | | | | | |
| Successor |
| As of December 31, 2021 |
| Total | Level 1 | Level 2 | Level 3 |
| Liabilities: | | | | |
| Warrant liability—public warrants | $ | 17,424 | | $ | 17,424 | | $ | — | | $ | — | |
| Total Liabilities | $ | 17,424 | | $ | 17,424 | | $ | — | | $ | — | |
We classify our investments in debt securities as available-for-sale investments. Debt securities consist of U.S. Treasury debt securities. These investments are held in the custody of a major financial institution. As of June 30, 2022, the Company’s investment in marketable securities – available-for-sale was determined to be a level 1 investment and is recorded in the consolidated balance sheet at fair value.
The fair value of the safeguarding obligations for cryptoassets and the corresponding safeguarding asset for cryptoassets were determined using prices available in the market we determine to be the principal market as of June 30, 2022.
Our public warrant liability is valued based on quoted prices in active markets and is classified within Level 1.
The carrying amounts of certain financial instruments, including cash and cash equivalents, accounts receivables, unbilled accounts receivables, due from related party, deposits with clearinghouse, due to related party, accounts payable and accrued liabilities, and operating lease obligations approximate their fair values due to their short-term nature. The balance of deposits with clearinghouse not invested in U.S. government securities are in the form of cash, and therefore approximate fair value.
16.Leases
The Company leases real estate for office space under operating leases and office equipment under finance leases. As of June 30, 2022, we do not have any active finance leases. We consider a lease to have commenced on the date when we are granted access to the leased asset. Several of these leases include escalation clauses for adjusting rentals.
During the six months ended June 30, 2022, we entered into a new real estate lease for office space in New York, New York, that commenced on January 31, 2022. The lease has a term of 94 months and the total fixed lease payments over the term of the lease are $7.3 million. On April 25, 2022, we signed a lease agreement for call center office space in Alpharetta, Georgia. On May 12, 2022, we executed our option to lease additional space for the Alpharetta call center. The call center lease commenced on June 3, 2022. The lease has a term of 47 months and total fixed lease payments over the term of the lease are approximately $5.9 million.
Our real estate leases have remaining lease terms as of June 30, 2022 ranging from 10 months to 123 months, with one of our leases containing an option to extend the term for a period of 5 years exercisable by us, which we are not reasonably certain of exercising at commencement. None of our leases contain an option to terminate the lease without cause at the option of either party during the lease term. Certain equipment leases contain options to purchase the asset at the fair market value, available with the Company.
Certain of our real estate leasing agreements include terms requiring us to reimburse the lessor for its share of real estate taxes, insurance, operating costs and utilities which we account for as variable lease costs when incurred since we have elected to not separate lease and non-lease components, and hence are not included in the measurement of lease liability. There are no restrictions or covenants imposed by any of the leases, and none of our leases contain material residual value guarantees.
The discount rates for all of our leases are based on our estimated incremental borrowing rate since the rates implicit in the leases were not determinable. Our incremental borrowing rate is based on management’s estimate of the rate of interest we would have to pay to borrow on a fully collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
We have elected the practical expedient under which lease components would not be separated from the non-lease components for all our classes of underlying assets. Accordingly, each lease component and the non-lease components related to the lease component are accounted for as a single lease component. The weighted average remaining lease term for our operating leases was approximately 95 months, and the weighted average discount rate for our operating leases was 5.0%. We were not party to any short-term leases during the periods presented.
17. Safeguarding Obligations For Cryptoassets
We provide bitcoin and ether custody services for our consumer platform users and for standalone custody customers. We do not own cryptoassets held in a custodial capacity on behalf of our customers. We hold the cryptographic key information on behalf of our custodial customers. We also maintain the internal recordkeeping of those assets and are obligated to safeguard the assets and protect them from loss or theft.
As of June 30, 2022, upon the implementation of SAB 121, the Company recorded a safeguarding obligation for cryptoassets of approximately $147.1 million. The safeguarding liability, and corresponding safeguarding asset for cryptoassets on the balance sheet, are measured at the fair value of the cryptoassets held for our customers. The Company is not aware of any actual or possible safeguarding loss events as of June 30, 2022. Therefore, the safeguarding obligation for cryptoassets and the related safeguarding asset for cryptoassets are recorded at the same amount.
We are responsible for holding the following cryptoassets on behalf of our customers as of June 30, 2022 (in thousands):
| | | | | |
| Successor |
| June 30, 2022 |
| Bitcoin | $ | 147,064 | |
| Ether | 38 | |
| Safeguarding obligations for cryptoassets | $ | 147,102 | |
| |
| Safeguarding asset for cryptoassets | $ | 147,102 | |
18.Investment in Debt Securities
We have investments in certain debt securities, which we record at fair value and present as Available-for-sale securities in the Consolidated Balance Sheet.
Unrealized gains and temporary losses, net of related taxes, are included in accumulated other comprehensive income (loss) (AOCI). Upon realization, those amounts are reclassified from AOCI to earnings. The amortization of premiums and discounts on the investments are included in our results of operations. Realized gains and losses are calculated based on the specific identification method. We classify our investments as current or noncurrent based on the nature of the investments and their availability for use in current operations.
The cost basis and fair value of available-for-sale debt securities with unrealized gains and losses included in equity (AOCI in the Consolidated Statement of Financial Position) were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor |
| Available-for-sale securities | June 30, 2022 | | December 31, 2021 |
| Cost
Basis | | Unrealized
Net Losses | | Fair
Value | | Cost
Basis | | Unrealized
Net Losses | | Fair
Value |
| Government debt | | | | | | | | | | | |
| U.S. treasury bonds | $ | 188,759 | | | $ | (13) | | | $ | 188,746 | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | |
| Total available-for-sale securities | $ | 188,759 | | | $ | (13) | | | $ | 188,746 | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Successor |
| Available-for-sale securities in an unrealized loss position | June 30, 2022 | | December 31, 2021 |
| Fair Value | | Unrealized
Net Losses | | Fair Value | | Unrealized
Net Losses |
| Government debt | | | | | | | |
| U.S. treasury bonds: | | | | | | | |
Less than 12 months 1 | $ | 89,455 | | | $ | (42) | | | $ | — | | | $ | — | |
12 months or more 1 | — | | | — | | | — | | | — | |
| | | | | | | |
| Total available-for-sale securities | $ | 89,455 | | | $ | (42) | | | $ | — | | | $ | — | |
| | | | | | | |
1 Indicates the length of time that individual securities have been in a continuous unrealized loss position. |
The unrealized losses on our investments in government debt securities relate to changes in interest rates since time of purchase. We do not intend to sell the investments, and it is not likely that we will be required to sell the investments before recovery of their respective amortized cost basis. In addition, there were no credit losses on these investments as of June 30, 2022.
The cost basis and fair value of available-for-sale debt securities at June 30, 2022, by contractual maturity, are shown below (in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to prepay and creditors may have the right to call obligations.
| | | | | | | | | | | |
| June 30, 2022 |
| Cost Basis | | Fair Value |
| Due in one year or less | $ | 173,758 | | | $ | 173,753 | |
| Due after one year through five years | 15,001 | | | 14,993 | |
| Total debt securities - available-for-sale | $ | 188,759 | | | $ | 188,746 | |
19.Subsequent Events
We have evaluated subsequent events and transactions and determined that no other events or transactions met the definition of a subsequent event for purpose of recognition or disclosure in these financial statements.