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.
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 “VIH Business Combination”) contemplated by the definitive Agreement and Plan of Merger entered into on January 11, 2021 (as amended, the “Merger Agreement”). In connection with the VIH 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 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 VIH 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”).
Description of Business
We provide, or are working to provide, simplified solutions focused in the following areas:
Crypto
•Custody. Our institutional-grade qualified custody solution caters to more experienced market participants and also supports our consumer-facing crypto business. Crypto that we custody is held by our subsidiary, Bakkt Trust Company LLC (“Bakkt Trust”), a limited purpose trust company that is supervised by the New York State Department of Financial Services (“NYDFS”) and governed by an independent Board of Managers.
•Crypto Connect. Bakkt Marketplace, LLC (“Bakkt Marketplace”) operates a platform that provides consumers, businesses and institutions with the ability to buy, sell and store crypto in a simple, intuitive digital experience accessed via application programming interfaces (“APIs”) or embedded web experience. We aim to enable businesses in various industries - such as fintechs, financial institutions and wallet providers - to provide their customers with the ability to transact in crypto directly in their trusted environments.
•Crypto Rewards. We are in the process of enabling customers 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.
•Crypto Payouts. We are in the process of enabling consumers to automatically invest a portion of payments into crypto. Crypto payouts allow for new cases (for instance, for gig economy or marketplace participants such as freelancers, content providers, and delivery workers to receive their wages in crypto).
Bakkt Trust operates, in conjunction with Intercontinental Exchange, Inc. ("ICE"), regulated infrastructure for trading, clearing, and custody services for physically-delivered bitcoin futures. Bakkt Marketplace holds a New York State virtual currency license (commonly referred to as a "BitLicense"), and money transmitter licenses from all states throughout the U.S. where such licenses are required for the operation of its business, and is registered as a money services business with the Financial Crimes Enforcement Network of the United States Department of the Treasury. Bakkt Trust’s custody solution provides support to Bakkt Marketplace with respect to bitcoin and ether functionality.
Loyalty
•We offer a full spectrum of content that customers 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 and digital experiences. Our travel solution offers a retail e-commerce booking platform, as well as live-agent booking and servicing. Our platform provides a unified shopping experience that is configurable for companies and their programs. Capabilities include a mobile-first user experience, a multi-tier construct to accommodate loyalty tiers, comprehensive fraud protection capabilities and a split-tender payments platform to accept both points and credit cards as a form of payment.
2.Summary of Significant Accounting Policies
Our accounting policies are as set forth in the notes to our Annual Report on Form 10-K for the year ended December 31, 2022 (our "Form 10-K").
Basis of Presentation
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 three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023, 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 our Form 10-K.
Recently Adopted Accounting Pronouncements
For the three months ended March 31, 2023, there were no significant changes to the recently adopted accounting pronouncements applicable to us from those disclosed in Note 2 to the consolidated financial statements included in our Form 10-K.
On March 31, 2022, the Securities and Exchange Commission (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 crypto held for platform users to record a liability and corresponding asset on its balance sheet at
the fair value of the crypto. SAB 121 also added Section FF to SAB Topic 5 to include interpretive guidance for entities to consider when they have obligations to safeguard crypto 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 Note 18 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):
| | | | | | | | | | | | | | |
| Service Type | | Three Months Ended
March 31, 2023 | | Three Months Ended
March 31, 2022 |
Transaction revenue, net(a) | | $ | 7,473 | | | $ | 6,518 | |
| Subscription and service revenue | | 5,513 | | | 6,014 | |
| Total revenue | | $ | 12,986 | | | $ | 12,532 | |
(a)Amounts are net of rebates and incentive payments of less than $0.1 million for the three months ended March 31, 2023, and $0.3 million for the three months ended March 31, 2022. Included in these amounts are amounts earned from related parties of less than $0.1 million for both the three months ended March 31, 2023 and March 31, 2022.
| | | | | | | | | | | | | | |
| Platform | | Three Months Ended
March 31, 2023 | | Three Months Ended
March 31, 2022 |
| Loyalty redemption platform | | 12,776 | | | 12,736 | |
Crypto services(b) | | 210 | | | (204) | |
| Total revenue | | $ | 12,986 | | | $ | 12,532 | |
(b)Amounts are net of rebates and incentive payments of less than $0.1 million for the three months ended March 31, 2023, and $0.3 million for the three months ended March 31, 2022. Included in these amounts are amounts earned from related parties of less than $0.1 million for both the three months ended March 31, 2023 and March 31, 2022.
We recognized revenue from foreign jurisdictions of $0.9 million for the three months ended March 31, 2023, and $1.1 million for the three months ended March 31, 2022.
We have one reportable segment to which our revenues relate.
Deferred Revenue
Contract liabilities consist of deferred revenue 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 three months ended March 31, 2023 and March 31, 2022, respectively, was as follows (in thousands):
| | | | | | | | | | | |
| Three Months Ended
March 31, 2023 | | Three Months Ended
March 31, 2022 |
| Beginning of the period contract liability | $ | 7,084 | |
| $ | 9,448 | |
| Revenue recognized from contract liabilities included in the beginning balance | (1,119) | |
| (1,322) | |
| Increases due to cash received, net of amounts recognized in revenue during the period | 577 | |
| 379 | |
| End of the period contract liability | $ | 6,542 | |
| $ | 8,505 | |
Remaining Performance Obligations
As of March 31, 2023, the aggregate amount of the transaction price allocated to the remaining performance obligations related to partially completed contracts is $24.4 million, comprised of $17.9 million of subscription fees and $6.5 million of service fees that are deferred. We recognize our subscription fees as revenue over a weighted-average period of 32 months (ranges from 1 month – 42 months) and our service fees as revenue over approximately 17 months.
As of March 31, 2022, the aggregate amount of the transaction price allocated to the remaining performance obligations related to partially completed contracts is $26.4 million, comprised of $17.9 million of subscription fees and $8.5 million of service fees that are deferred. We recognize our subscription fees as revenue over a weighted-average period of 42 months (ranges from 3 months – 54 months) and our service fees as revenue over approximately 24 months.
Contract Costs
For the three months ended March 31, 2023 and March 31, 2022, we incurred no incremental costs to obtain and/or fulfill contracts with customers.
4.Business Combination and Asset Acquisition
Apex Crypto
On April 1, 2023 we completed the acquisition of 100% of the ownership interests of Apex Crypto, LLC ("Apex Crypto"). We expect to leverage Apex Crypto's proprietary trading platform and existing relationships with liquidity providers to provide a wider range of assets and competitive pricing to our customers. We expect to recognize goodwill from the acquisition due to the assembled, experienced workforce and anticipated growth we expect to achieve from Apex’s sales pipeline and product capabilities .The total consideration as measured at April 1, 2023 included $55.0 million in cash, approximately $9.1 million in Class A common stock payable based on Apex Crypto’s performance in the fourth quarter of 2022, and $12.2 million of cash paid for net working capital, which was predominantly cash held in banks. In addition, we may pay up to $100.0 million of our Class A common stock as additional consideration depending on Apex Crypto’s achievement of certain financial targets through 2025 (the "contingent consideration"). However, as of the acquisition date the Company does not anticipate paying the contingent consideration and no material fair value was attributed to the contingent consideration. The Company’s evaluation of the fair value of the contingent consideration and of the assets acquired and the liabilities assumed is preliminary. Accordingly, the adjustments to record the assets acquired and the liabilities assumed at fair value reflect the best estimates of the Company based on the information currently available and are subject to change once additional analyses are completed.
The following is a preliminary reconciliation of the fair value of consideration transferred in the acquisition to the fair value of the assets acquired and liabilities assumed.
| | | | | | | | |
| ($ in millions) | | |
| Cash consideration paid | | 55.0 | |
| Cash paid working capital and cash | | 12.2 | |
| Class A common stock at transaction close | | 9.1 | |
| Estimated fair value of Class A common stock contingent consideration | | — | |
| Total consideration | | $ | 76.3 | |
| Current assets | | 21.3 | |
| Safeguarding asset for crypto | | 687.9 | |
| Property, equipment and software, net | | 0.1 | |
| Non-current assets | | 0.3 | |
| Intangible assets - developed technology | | 5.4 | |
| Intangible assets - customer relationships | | 11.0 | |
| Goodwill | | 47.7 | |
| Current liabilities | | (9.5) | |
| Safeguarding obligation for crypto | | (687.9) | |
| Net assets acquired | | $ | 76.3 | |
The following unaudited pro forma financial information presents the Company's results of operations as if the acquisition of Apex Crypto had occurred on January 1, 2022. The unaudited pro forma financial information as presented below is for illustrative purposes and does not purport to represent what the results of operations would actually have been if the acquisition of Apex Crypto occurred as of the date indicated or what the results would be for any future periods. The unaudited pro forma results reflect the step-up amortization adjustments for the fair value of intangible assets acquired, acquisition-related expenses, and share-based compensation expense for newly issued restricted stock units. Proforma net revenue for the three months ended March 31, 2023 and March 31, 2022 would be $458.4 million and $1,308.3 million, respectively. Proforma net loss for the three months ended March 31, 2023 and March 31, 2022 would be $48.2 million and $53.5 million, respectively.
Bumped Acquisition
On February 8, 2023, we acquired 100% of the units of Bumped Financial, LLC ("Bumped"), a broker-dealer registered with the SEC and the Financial Industry Regulatory Authority, Inc., for cash consideration of $631,000. Because of the limited scope of its historical operations we determined that substantially all of the purchase consideration in the transaction would be allocated to the in-place licenses Bumped held and as such have accounted for this as an asset acquisition.
5.Goodwill and Intangible Assets, Net
Changes in goodwill consisted of the following (in thousands):
| | | | | |
| Balance as of December 31, 2022 | $ | 15,852 | |
| Foreign currency translation | 1 | |
| Balance as of March 31, 2023 | $ | 15,853 | |
No goodwill impairment charges have been recognized in the periods presented.
Intangible assets consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 |
| Weighted Average Useful Life (in years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Licenses | Indefinite | | 611 | | | — | | | 611 | |
| Trademarks / trade names | Indefinite | | 8,000 | | | — | | | 8,000 | |
| Technology | 4.2 | | 12,760 | | | (3,720) | | | 9,040 | |
| Customer relationships | 8 | | 44,970 | | | (8,193) | | | 36,777 | |
| Total | | | $ | 66,341 | | | $ | (11,913) | | | $ | 54,428 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Weighted Average Useful Life (in years) | | Gross Carrying Amount | | Accumulated Amortization | | Impairment | | Net Carrying Amount |
| Licenses | Indefinite | | $ | 241,320 | | | $ | — | | | (241,320) | | | $ | — | |
| Trademarks / trade names | Indefinite | | 39,470 | | | — | | | (31,470) | | | 8,000 | |
| Technology | 4.2 | | 67,310 | | | (19,605) | | | (38,035) | | | 9,670 | |
| Customer relationships | 8 | | 44,970 | | | (6,807) | | | — | | | 38,163 | |
| Total | | | $ | 393,070 | | | $ | (26,412) | | | (310,825) | | | $ | 55,833 | |
Amortization of intangible assets for the three months ended March 31, 2023 and March 31, 2022 was $2.0 million and $5.4 million, respectively, and is included in “Depreciation and amortization” in the statements of operations.
Estimated future amortization for definite-lived intangible assets as of March 31, 2023 was as follows (in thousands):
| | | | | |
| March 31, 2023 |
| Remainder of 2023 | $ | 6,158 | |
| 2024 | 8,196 | |
| 2025 | 8,173 | |
| 2026 | 7,628 | |
| 2027 | 5,621 | |
| Thereafter | 10,041 | |
| Total | $ | 45,817 | |
6.Consolidated Balance Sheet Components
Accounts Receivable, Net
Accounts receivable, net consisted of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Trade accounts receivable | $ | 19,074 | | | $ | 16,284 | |
| Unbilled receivables | 4,198 | | | 6,445 | |
| Other receivables | 2,332 | | | 2,787 | |
| Total accounts receivable | 25,604 | | | 25,516 | |
| Less: allowance for doubtful accounts | (210) | | | (210) | |
| Total | $ | 25,394 | | | $ | 25,306 | |
Other Current Assets
Other current assets consisted of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Prepaid expenses | $ | 7,624 | | | $ | 6,060 | |
| Total | $ | 7,624 | | | $ | 6,060 | |
Property, Equipment and Software, Net
Property, equipment and software, net consisted of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Internal-use software | $ | 5,510 | | | $ | 4,383 | |
| Purchased software | 99 | | | 99 | |
| Office furniture and equipment | 2,307 | | | 2,303 | |
| Other computer and network equipment | 4,867 | | | 4,732 | |
| Leasehold improvements | 10,238 | | | 10,102 | |
| Property, equipment and software, gross | 23,021 | | | 21,619 | |
| Less: accumulated amortization and depreciation | (2,923) | | | (1,875) | |
| Total | $ | 20,098 | | | $ | 19,744 | |
For the three months ended March 31, 2023 and 2022, depreciation and amortization expense related to property, equipment and software amounted to approximately $1.0 million and $0.5 million, respectively, of which $0.3 million and $0.1 million, respectively, related to amortization expense of capitalized internal-use software placed in service.
Deposits with Clearinghouse
Deposits with clearinghouse consisted of the default resource contribution as described in Note 8, as well as other deposits with a different clearinghouse. Total deposits at clearinghouses amounted to $15.3 million and $15.2 million as of March 31, 2023 and December 31, 2022, respectively.
Other Assets
Other assets consisted of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Operating lease right-of-use assets | $ | 22,619 | | | $ | 19,632 | |
| Other | 2,755 | | | 2,826 | |
| Total | $ | 25,374 | | | $ | 22,458 | |
Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consisted of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Accounts payable | $ | 8,882 | | | $ | 25,975 | |
| Accrued expenses | 13,856 | | | 15,537 | |
| Purchasing card payable | 14,104 | | | 10,686 | |
| Salaries and benefits payable | 6,279 | | | 13,926 | |
| Other | 5,897 | | | 663 | |
| Total | $ | 49,018 | | | $ | 66,787 | |
Other Current Liabilities
Other current liabilities consisted of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Participation units liability, current | $ | 366 | | | $ | 275 | |
| Current maturities of operating lease liability | 3,323 | | | 3,014 | |
| Other | 624 | | | 530 | |
| Total | $ | 4,313 | | | $ | 3,819 | |
Other Noncurrent Liabilities
Other noncurrent liabilities consisted of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Operating lease liability, noncurrent | $ | 26,277 | | | $ | 23,402 | |
| Total | $ | 26,277 | | | $ | 23,402 | |
7.Tax Receivable Agreement
On October 15, 2021, we entered into a Tax Receivable Agreement (the "TRA") with certain Opco equity holders. Each Opco common unit, when coupled with one share of our Class V common stock is referred to as a “Paired Interest.” 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 are 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 March 31, 2023, 22,678,761 Opco common units had been exchanged for Class A common stock. Refer to Note 14 regarding the contingency related to the TRA.
8.Related Parties
ICE Management and Technical Support
Upon consummation of the VIH Business Combination, we entered into a Transition Services Agreement (the “TSA”) with ICE, pursuant to which ICE provides insurance, digital warehouse, data center, technical support, and other transition-related services in exchange for quarterly service fees payable by us. We recognized $0.6 million and $0.4 million of expense related to the TSA for the three months ended March 31, 2023 and March 31, 2022, respectively, which is reflected as “Related party expenses” in the consolidated statements of operations and “Due to related party in the consolidated balance sheets.
Triparty Agreement
The Digital Currency Trading, Clearing, and Warehouse Services Agreement ("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 ICE Clear US, Inc. ("ICUS") to serve as the clearing house to provide central counterparty and ancillary services for such contracts. 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 both the three months ended March 31, 2023 and March 31, 2022, net of rebates and incentive payments (contra-revenue) of less than $0.1 million for both the three months ended March 31, 2023 and March 31, 2022.
The Triparty Agreement also required Bakkt Trust to make, and, subject to certain limits, to replenish as needed a contribution to ICUS, to be used by ICUS in accordance with the ICUS rules. The contribution requirement was $15.2 million as of March 31, 2023 and March 31, 2022. The contribution is reflected as “Deposits with clearinghouse” in the consolidated balance sheets.
As of March 31, 2023 and December 31, 2022, we had approximately $0.5 million and approximately $1.2 million, respectively, reflected as “Due to related party” in the consolidated balance sheets related to the TSA and Triparty Agreement. As of March 31, 2023 and December 31, 2022, we had no amount recorded within “Accounts receivable, net” in the consolidated balance sheets related to the Triparty Agreement.
9.Warrants
As of March 31, 2023 and December 31, 2022, there were 7,140,808 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 consolidated balance sheets.
During the three months ended March 31, 2023, we did not receive any proceeds from the exercise of the public warrants. During the three months ended March 31, 2022, we received less than $0.1 million in proceeds from the exercise
of the public warrants. We recognized a loss from the change in fair value of the warrant liability during the three months ended March 31, 2023 of $1.0 million. We recognized a gain from the change in fair value of the warrant liability during the three months ended March 31, 2022 of $2.4 million.
10.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 March 31, 2023, 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 record of Class A common stock is entitled to one vote for each share of Class A common stock held 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 March 31, 2023 and December 31, 2022, there were 82,624,773 and 80,926,843 shares of Class A common stock issued and outstanding, respectively.
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. As of March 31, 2023, no dividends have been declared.
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. 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 became eligible on April 16, 2022 under the Exchange Agreement to exchange their Paired Interests for Class A common stock or, at our election, cash in lieu thereof. During the three months ended March 31, 2023, holders of Paired Interests exchanged 0.2 million Paired Interests for our Class A common stock, and the Company did not elect to settle any such exchanges in cash. As of March 31, 2023 and December 31, 2022, there were 183,279,887 and 183,482,777 shares of Class V common stock issued and outstanding, respectively.
Dividends
Dividends will 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 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, 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
The following table summarizes the ownership interest in Opco as of March 31, 2023 and December 31, 2022.
| | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Opco
Common Units | Ownership % | | Opco
Common Units | Ownership % |
| Opco common units held by Bakkt Holdings, Inc. | 82,624,773 | | 31 | % | | 80,926,843 | | 31 | % |
| Opco common units held by noncontrolling interest holders | 183,279,887 | | 69 | % | | 183,482,777 | | 69 | % |
| Total Opco common units outstanding | 265,904,660 | | 100 | % | | 264,409,620 | | 100 | % |
The weighted average ownership percentages for the applicable reporting periods are used to attribute net loss and other comprehensive loss to the Company and the noncontrolling interest holders. The noncontrolling interest holders' weighted average ownership percentage for the three months ended March 31, 2023 was 68.9%.
Members’ Equity
Prior to the VIH 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”).
In connection with the VIH 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 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 the consolidated financial statements included in our Form 10-K for additional information.
In connection with the VIH 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 March 31, 2023, 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. No expenses were recorded during the three months ended March 31, 2023 and March 31, 2022, since the service conditions were not probable of being met in those periods.
11.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 months ended March 31, 2023, we granted 4,511,371 RSUs to employees and directors. During the three months ended March 31, 2023, we did not grant any PSUs. During the three months ended March 31, 2022, we granted 6,969,070 RSUs and 4,865,378 PSUs, which represents 100% of the target award, to employees and directors. We recorded $5.9 million and $10.9 million of share-based compensation expense related to RSUs for the three months ended March 31, 2023 and March 31, 2022, respectively. We recorded $1.4 million and $1.7 million of share-based compensation expense related to PSUs for the three months ended March 31, 2023 and March 31, 2022, respectively. Share-based compensation expense for both RSUs and PSUs is included in “Compensation and benefits” in the consolidated statements of operations.
Unrecognized compensation expense as of March 31, 2023 and December 31, 2022 was $27.9 million and $29.9 million, respectively, for the RSUs and PSUs. The unrecognized compensation expense as of March 31, 2023 and December 31, 2022 will be recognized over a weighted-average period of 2.02 years and 2.05 years, respectively.
RSU and PSU Activity
The following tables summarize RSU and PSU activity under the 2021 Incentive Plan for the three months ended March 31, 2023 (in thousands, except per unit data):
| | | | | | | | | | | | | | | | | | | | | | | |
| 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, 2022 | 13,782 | | | 2.05 | | $ | 4.05 | | | |
| Granted | 4,511 | | | | | $ | 1.48 | | | $ | 6,677 | |
| Forfeited | (763) | | | | | | | |
| Vested | (2,451) | | | | | | | |
| Outstanding as of March 31, 2023 | 15,079 | | | 2.02 | | $ | 3.28 | | | |
During the three months ended March 31, 2023, we recorded $2.1 million of share-based compensation expense related to the accelerated vesting for certain employees that were terminated, which is included in “Restructuring expenses” in the consolidated statements of operations. We also recorded reversal of share-based compensation expense of $0.3 million during the three months ended March 31, 2023 for forfeitures of RSUs, primarily related to the Company's restructuring efforts.
The fair value of the RSUs and PSUs used in determining share-based compensation expense is based on the closing price of our common stock on the grant date.
PSUs provide an opportunity for the recipient to receive a number of shares of our common stock based on our performance during fiscal years 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. Opco classifies incentive units as equity awards on its consolidated balance sheets. 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. Because participation units are settled in cash, Opco classifies participation units as liability awards on its consolidated balance sheets. 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 VIH Business Combination, the 76,475,000 outstanding preferred incentive units and 23,219,745 outstanding common incentive units were converted into 17,473,362 common incentive units, and the 10,811,502 outstanding participation units were converted into 1,197,250 participation units. Contemporaneously with the conversion, approximately one-third of the awards in the Opco Plan vested. The second tranche vested on the one-year anniversary of the Closing Date and the third tranche will vest on the two-year anniversary of the Closing Date, 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 three months ended March 31, 2023 and March 31, 2022, was as follows (in thousands):
| | | | | | | | | | | |
| Type of unit | Three Months Ended
March 31, 2023 | | Three Months Ended
March 31, 2022 |
| Common incentive unit | $ | 542 | | | $ | 1,058 | |
| Participation unit | 138 | | | (961) | |
| Total | $ | 680 | | | $ | 97 | |
Unrecognized compensation expense as of March 31, 2023 was $0.8 million for common incentive units. The unrecognized compensation expense will be recognized over a weighted-average period of 0.54 years. There was no unrecognized compensation expense for participation units as of March 31, 2023.
Unrecognized compensation expense as of December 31, 2022 was $1.4 million for common incentive units. The unrecognized compensation expense will be recognized over a weighted-average period of 0.79 years. There was no unrecognized compensation expense for participation units as of December 31, 2022.
Unit Activity
The following table summarizes common incentive unit activity under the Opco Plan for the three months ended March 31, 2023 (in thousands, except per unit data):
| | | | | | | | | | | | | | |
| 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, 2022 | 8,294 | | 0.79 | $ | 6.30 | | $ | 67,635 | |
| Granted | — | | | | |
| Forfeited | — | | | | |
| Exchanged | (203) | | | | |
| Outstanding as of March 31, 2023 | 8,091 | | 0.54 | $ | 6.30 | | $ | 65,980 | |
The following table summarizes common incentive unit activity under the Opco Plan for the three months ended March 31, 2022 (in thousands, except per unit data):
| | | | | | | | | | | | | | |
| 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 | (269) | | | | |
| Exchanged | — | | | | |
| Outstanding as of March 31, 2022 | 16,070 | | 1.54 | $ | 6.30 | | $ | 131,050 | |
There were no participation units granted during the three months ended March 31, 2023 or March 31, 2022. As of March 31, 2023 and December 31, 2022, the total number of participation units outstanding was 0.2 million and 0.2 million, respectively. The fair value of the participation units as of March 31, 2023 and December 31, 2022 was 0.4 million and 0.3 million, respectively. We made cash payments of less than $0.1 million to settle vested participation units during the three months ended March 31, 2023. We did not make any cash payments to settle vested participation units during the three months ended March 31, 2022. Participation units are settled in cash and the balance is recorded within other current liabilities and other noncurrent liabilities as described in Note 6.
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 conditions 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.
12.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. 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. 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 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):
| | | | | | | | | | | |
| Three Months Ended
March 31, 2023 | | Three Months Ended
March 31, 2022 |
| Net Loss per share: | | | |
| Numerator – basic and diluted: | | | |
| Net loss | $ | (44,859) | | | $ | (43,321) | |
| Less: Net loss attributable to noncontrolling interest | (30,883) | | | (36,193) | |
| Net loss attributable to Bakkt Holdings, Inc. – basic | (13,976) | | | (7,128) | |
| Net loss and tax effect attributable to noncontrolling interests | — | | | (28,787) | |
| Net loss attributable to Bakkt Holdings, Inc. – diluted | $ | (13,976) | | | $ | (35,915) | |
| | | |
| Denominator – basic and diluted: | | | |
| Weighted average shares outstanding – basic | 81,879,315 | | | 57,164,421 | |
| Weighted average shares outstanding – diluted | 81,879,315 | | | 258,617,587 | |
| | | |
| Net loss per share – basic | $ | (0.17) | | | $ | (0.12) | |
| Net loss per share – diluted | $ | (0.17) | | | $ | (0.14) | |
Potential common shares issuable to employees 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 (in thousands):
| | | | | |
| As of March 31, 2023 |
| RSUs and PSUs | 15,079 | |
| Public warrants | 7,141 | |
| Opco warrants | 793 | |
| Opco unvested incentive units | 2,130 | |
| Opco common units | 181,150 | |
| Total | 206,293 | |
13.Capital Requirements
Bakkt Trust is subject to certain regulatory capital requirements imposed by the 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 March 31, 2023 and December 31, 2022, Bakkt Trust had determined that $16.5 million should be set aside to satisfy these requirements, which is reflected as “Restricted cash” in the consolidated balance sheets.
Bakkt Clearing, LLC ("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 with the CFTC and membership in the NFA, which was effective on June 20, 2022. Accordingly, as of March 31, 2023, Bakkt Clearing was no longer required to maintain capital under the rules described above.
Bakkt Marketplace is required to maintain tangible net worth of a minimum amount. Several states have adopted the Model Money Transmission Modernization Act, which defined tangible net worth as the aggregate assets of a licensee excluding all intangible assets, less liabilities. In addition to the tangible net worth requirement, Bakkt Marketplace is also 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 is member's equity minus intangible assets, and is equivalent to tangible net worth. Bakkt Marketplace is also required to maintain positive net worth equal to its wind-down costs, or expected costs associated with the orderly wind-down of the business. As of March 31, 2023 and December 31, 2022, wind-down costs amounted to $6.1 million and $7.1 million, respectively.
As of March 31, 2023 and December 31, 2022, tangible net worth was $65.5 million and $27.7 million, respectively, which was in excess of wind-down costs, tangible net worth, and tangible member's equity requirements.
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.
14.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 months ended March 31, 2023 and March 31, 2022, we recorded approximately $1.0 million and $0.7 million, respectively, of expenses related to the 401(k) plan, which is included in "Compensation and benefits" in the consolidated statement of operations.
Tax Receivable Agreement
The Company is party to a TRA with certain Opco equity holders. As of March 31, 2023, 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. 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 the VIH Business Combination with 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 VIH Business Combination. On April 21, 2022, a putative class action was filed against Bakkt Holdings, Inc. and certain of its directors and officers prior to the VIH 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 VIH Business Combination. On August 3, 2022, the Court appointed lead plaintiffs and lead counsel and on October 18, 2022, lead plaintiffs filed an amended complaint (the "Amended Complaint"). The Amended Complaint alleges that VIH made false or misleading statements and omissions of material fact in the registration statement and prospectus/proxy statement filing in connection with the VIH Business Combination and in other SEC filings made by VIH, in violation of federal securities laws in connection with disclosures relating to certain of VIH’s financial statements, accounting, and internal controls and that, as a result, VIH securities traded at artificially inflated prices. Plaintiffs sought certification of a class of purchasers of (1) VIH/Bakkt’s publicly traded securities between March 31, 2021 and November 19, 2021, and/or (2) Bakkt’s publicly traded securities pursuant and/or traceable to the registration statement. The Amended Complaint sought damages, as well as fees and costs. The Amended Complaint named as defendants only one current director, and no current officers, of Bakkt. On March 14, 2023, the parties reached a settlement in principle. On April 12, 2023, the parties completed a stipulation of settlement resolving the litigation for $3.0 million, subject to Court approval. A motion for preliminary approval was filed with the Court on April 17, 2023. We expect the settlement will be covered by our insurance less our contractual retention.
On February 20, 2023, a derivative action related to the foregoing class action was filed against Bakkt Holdings, Inc. and all of its directors in the U.S. District Court for the Eastern District of New York.
Prior to its acquisition by the Company, Apex Crypto received requests from the SEC for documents and information about certain aspects of its business, including the operation of its trading platform, processes for listing assets, the classification of certain listed assets, and relationships with customers and service providers, among other topics. Based on the ongoing nature of this matter, the outcome remains uncertain and the Company cannot estimate the potential impact, if any, on its business or financial statements at this time.
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, had a purchasing card facility with a bank that we utilized for redemption purchases made from vendors as part of our loyalty redemption platform. Expenditures made using the purchasing card facility were payable monthly, were not subject to formula-based restrictions and did not bear interest if amounts outstanding were paid when due and in full. Among other covenants, the purchasing card facility required 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. served 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, to transition over to the purchasing card facility with Bank of America described below. The maturity date of the purchasing card facility was further extended as of August 12, 2022 to January 13, 2023. During September 2022, we paid off the majority of the remaining balance of the purchasing card facility. The purchasing card facility was closed during October 2022.
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 $35.0 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. We began using the purchasing card facility in August 2022.
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. During the three months ended March 31, 2023, we entered into a five-year strategic marketing agreement which required a committed spend. As of March 31, 2023, our outstanding purchase obligations consisted 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 | $ | 4,050 | | | $ | 19,100 | | | $ | 900 | | | $ | — | | | $ | 24,050 | |
15.Income Taxes
As a result of the VIH 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 VIH Business Combination, on a pro rata basis. The Company's U.S. federal and state income tax expense primarily relates to the Company’s allocable share of any taxable income or loss of Opco following the VIH Business Combination. In addition, 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 rate of less than (0.1)% for the three months ending March 31, 2023 differs from statutory rates primarily due to the noncontrolling interest that is not taxed to the Company and the absence of taxable income available to realize the Company’s net operating losses and other deferred tax assets.
Our effective tax rate of 6.8% for the three months ending March 31, 2022 differs from statutory rates primarily due to the loss allocated to noncontrolling interest that is not taxed to the Company and the non-deductible fair value gains and losses related to the changes in our warrant liability.
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. As of March 31, 2023 and December 31, 2022, the Company believed it was not more likely that not that the net deferred tax assets would be realizable and thus has maintained a full valuation allowance.
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. The Company had no unrecognized tax benefits or related interest and penalties accrued as of March 31, 2023 or December 31, 2022.
16.Fair Value Measurements
Financial assets and liabilities that are measured at fair value on a recurring basis are classified as Level 1 and Level 2 as follows (in thousands):
| | | | | | | | | | | | | | |
| As of March 31, 2023 |
| Total | Level 1 | Level 2 | Level 3 |
| Assets: | | | | |
| U.S. Treasury debt securities | $ | 66,789 | | $ | 66,789 | | $ | — | | $ | — | |
| Safeguarding asset for crypto | 26,055 | | — | | 26,055 | | — | |
| Total Assets | $ | 92,844 | | $ | 66,789 | | $ | 26,055 | | $ | — | |
| | | | |
| Liabilities: | | | | |
| Safeguarding obligation for crypto | $ | 26,055 | | $ | — | | $ | 26,055 | | $ | — | |
| Warrant liability—public warrants | 1,785 | | 1,785 | | — | | — | |
| Total Liabilities | $ | 27,840 | | $ | 1,785 | | $ | 26,055 | | $ | — | |
| | | | | | | | | | | | | | |
| As of December 31, 2022 |
| Total | Level 1 | Level 2 | Level 3 |
| Assets: | | | | |
| U.S. Treasury debt securities | $ | 141,062 | | $ | 141,062 | | $ | — | | $ | — | |
| Safeguarding asset for crypto | 15,792 | | — | | 15,792 | | — | |
| Total Assets | $ | 156,854 | | $ | 141,062 | | $ | 15,792 | | $ | — | |
| | | | |
| Liabilities: | | | | |
| Safeguarding obligation for crypto | $ | 15,792 | | $ | — | | $ | 15,792 | | $ | — | |
| Warrant liability—public warrants | 785 | | 785 | | — | | — | |
| Total Liabilities | $ | 16,577 | | $ | 785 | | $ | 15,792 | | $ | — | |
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.
Our investments in debt securities consist of U.S. Treasury debt securities held in the custody of a major financial institution. As of March 31, 2023, the Company’s investment in available-for-sale debt securities was determined to be a Level 1 investment based on quoted prices in active markets and was recorded in the consolidated balance sheet at fair value.
The fair value of the safeguarding obligation for crypto and the corresponding safeguarding asset for crypto was determined using the mid-point of a bid-ask spread in the market we determine to be the principal market for the related crypto as of March 31, 2023, which we determined was a Level 2 input.
Our public warrant liability is valued based on quoted prices in active markets and is classified within Level 1.
17.Leases
The Company leases real estate for office space under operating leases and office equipment under finance leases. On March 15, 2023, we signed an amendment to our Scottsdale, Arizona lease that extended the lease term. The amended lease has a term of 90 months and total fixed lease payments over the term of the amended lease are $5.7 million. During the year ended December 31, 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 $5.9 million. 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. As of March 31, 2023, we do not have any active finance leases.
Our real estate leases have remaining lease terms as of March 31, 2023 ranging from 37 months to 114 months, with three 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 of our equipment leases provide us with the option to purchase the asset at the fair market value.
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 91 months, and the weighted average discount rate for our operating leases was
5.3%. We were party to short-term leases during three months ended March 31, 2023 and March 31, 2022, which resulted in less than $0.1 million of rent expense, respectively.
18. Safeguarding Obligation For Crypto
We provide bitcoin and ether custody services for our consumer platform users and for standalone custody customers. We do not own crypto 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 March 31, 2023, we have a safeguarding obligation for crypto of $26.1 million. The safeguarding liability, and corresponding safeguarding asset for crypto on the balance sheet, are measured at the fair value of the crypto held for our customers. We are not aware of any actual or possible safeguarding loss events as of March 31, 2023. Therefore, the safeguarding obligation for crypto and the related safeguarding asset for crypto are recorded at the same amount.
We are responsible for holding the following crypto on behalf of our customers as of March 31, 2023 and December 31, 2022 (in thousands): | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Bitcoin | $ | 25,941 | | | $ | 15,717 | |
| Ether | 114 | | | 75 | |
| Safeguarding obligation for crypto | $ | 26,055 | | | $ | 15,792 | |
| | | |
| Safeguarding asset for crypto | $ | 26,055 | | | $ | 15,792 | |
19.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 sheets.
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 “Accumulated other comprehensive loss” in the consolidated balance sheets were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Available-for-sale securities | Cost
Basis | | Unrealized
Gains/(Losses), net | | Fair
Value | | Cost
Basis | | Unrealized
Gains/(Losses), net | | Fair
Value |
| Government debt | | | | | | | | | | | |
| U.S. treasury bonds | 66,954 | | | (165) | | | 66,789 | | | 141,003 | | | 59 | | | 141,062 | |
| Total available-for-sale securities | $ | 66,954 | | | $ | (165) | | | $ | 66,789 | | | $ | 141,003 | | | $ | 59 | | | $ | 141,062 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Available-for-sale securities in an unrealized loss position | Fair Value | | Unrealized
Losses | | Fair Value | | Unrealized
Losses |
| Government debt | | | | | | | |
| U.S. treasury bonds: | | | | | | | |
Less than 12 months(1) | $ | 39,744 | | | $ | (211) | | | $ | 39,574 | | | $ | (381) | |
12 months or more(1) | — | | | — | | | — | | | — | |
| Total available-for-sale securities | $ | 39,744 | | | $ | (211) | | | $ | 39,574 | | | $ | (381) | |
| | | | | | | |
(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 the 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 March 31, 2023.
The cost basis and fair value of available-for-sale debt securities at March 31, 2023, 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.
| | | | | | | | | | | |
| March 31, 2023 |
| Cost Basis | | Fair Value |
| Due in one year or less | $ | 66,954 | | | $ | 66,789 | |
| Due after one year through five years | — | | | — | |
| Total debt securities - available-for-sale | $ | 66,954 | | | $ | 66,789 | |
20.Subsequent Events
We have evaluated subsequent events and determined that no other events or transactions, other than those disclosed above, met the definition of a subsequent event for purposes of recognition or disclosure in the accompanying consolidated financial statements.
