Bakkt, Inc. (Bakkt Holdings, Inc.) — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Filed November 14, 2023. Bakkt provides crypto custody and trading services and a loyalty redemption platform. The April 1 acquisition of Apex Crypto, renamed Bakkt Crypto Solutions, materially changed the business mix and drove most of the reported revenue growth.
Financial and operating metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $204.8m | $13.2m | $565.6m | $40.3m |
| Operating loss | $52.9m | $1,594.9m | $149.4m | $1,686.9m |
| Net loss | $51.7m | $1,592.5m | $147.1m | $1,663.5m |
| Net loss attributable to Bakkt Holdings | $17.3m | $468.1m | $48.2m | $479.2m |
| Adjusted EBITDA loss (non-GAAP) | $21.6m | $30.7m | $74.9m | $89.2m |
| Net cash used in operating activities | Not presented quarterly | $53.9m | $93.9m |
- Q3 crypto services revenue was $191.8m, compared with $0.5m a year earlier; loyalty services revenue was $13.0m, versus $12.7m. Nine-month crypto services revenue was $527.5m, while loyalty services revenue was $38.1m.
- Crypto costs were $189.4m in Q3 and $521.6m for the first nine months, substantially offsetting crypto revenue. Crypto revenue less crypto costs was approximately $2.3m in Q3 and $5.9m year to date; these figures are not GAAP segment profit and exclude other costs.
- The company recognized approximately $27.6m of transaction revenue on September 21 from sales associated with delisted crypto assets. This was an unusual item within Q3 revenue.
- Q3 included $23.3m of impairment charges on loyalty-related customer relationships, developed technology and the trademark/trade name. No goodwill impairment was recorded in 2023. The prior-year comparison included $1,547.7m of goodwill and intangible-asset impairments, which substantially explains the much larger 2022 losses.
- Q3 compensation and benefits fell 34.9% year over year to $24.6m, reflecting lower headcount and compensation costs. Nine-month restructuring expense was $4.5m, primarily severance and accelerated equity compensation.
- At September 30, cash and cash equivalents were $68.2m, restricted cash was $28.3m, and available-for-sale securities were $22.7m. Securities were expected to mature within three months. The company reported no debt to service.
- Total assets were $846.7m and total liabilities were $635.7m. Crypto safeguarding assets and matching obligations were each $505.7m; these represent customer crypto held in custody, not operating liquidity. Total equity was $211.1m.
- Cash, cash equivalents, restricted cash and customer funds totaled $124.7m, up from $115.4m at year-end 2022. Operating cash use improved from the prior-year period, but included a $15.2m return of a clearinghouse deposit and cash-flow effects from customer funds.
- Notional traded volume was $366.1m for Q3 and $1,090.4m for the first nine months. Crypto-enabled accounts were 6.1m at quarter-end; monthly transacting accounts were 1.0m in Q3. Assets under custody were $505.7m, representing customer assets.
Material changes and management outlook
- The Apex Crypto acquisition added substantial crypto trading revenue and costs, expanded the fintech and neobank partner base, and resulted in approximately $51.0m of acquired goodwill. Up to $100m of additional Class A stock consideration may be payable based on performance through 2025; the recorded contingent-consideration liability was $13.1m at quarter-end.
- Management said losses and cash consumption are expected to continue for the foreseeable future and additional capital may be needed unless cash burn is reduced. The company’s initial going-concern assessment raised substantial doubt. Management believes planned regulated-entity integration and further expense reductions are probable, expects integration to free approximately $11.5m of available cash, and says the plans alleviate the doubt for at least 12 months from issuance. Financing may not be available on acceptable terms, or at all.
- Management intends to further align headcount and vendor spending and reduce non-essential operating footprint. It expects 2023 cash use, excluding the Apex acquisition price, to decline from 2022 levels. The filing provides no numerical revenue, earnings or cash-flow guidance.
- Bakkt expected to launch crypto services in the UK, Hong Kong, Dubai, Australia and Spain by the end of 2023. It expected to offer a loyalty-points-to-bitcoin rewards service in Q1 2024, subject to regulatory approval. Bakkt Payouts investment was de-prioritized while the company assesses client needs.
- IFUS delisted most Bakkt Bitcoin futures and all Bakkt Bitcoin options in July; the remaining futures expiries ended in August and September. The Triparty Agreement was terminated effective October 2, 2023, following return of the $15.2m clearinghouse contribution.
Risks, contingencies and other notable disclosures
- Crypto regulation remains uncertain, including the classification of supported assets and the licensing obligations associated with products and international expansion. The SEC had made document and information requests to Bakkt Crypto before its acquisition and continued follow-up requests; the company said the outcome and potential financial impact could not be estimated.
- The company delisted a substantial majority of assets previously offered on Bakkt Crypto’s platform, which may reduce revenue, customer activity and the expected benefits of the acquisition. It also cited client onboarding, partner deployment delays, crypto-market conditions and customer retention as risks.
- A securities class-action settlement for $3.0m was subject to court approval; the filing said the motion for preliminary approval remained pending. A related opt-out action was pending. A related derivative action was dismissed in July 2023.
- Management reported effective disclosure controls. Apex Crypto was excluded from the quarter’s internal-control assessment while integration continued. The filing also noted that, as of November 13, 2023, the stock had closed below $1 for nine consecutive trading days; continued weakness could trigger an NYSE minimum-price notice.
Important facts for investors to verify
- Whether management’s liquidity measures and anticipated $11.5m cash release are implemented as planned, and how quickly cash burn changes.
- Whether Apex Crypto partner activation, trading volumes and acquisition-related economics support the acquired business’s valuation and any contingent stock consideration.
- The recurring revenue and margins after the one-time $27.6m delisted-asset sales, and the effect of delistings on clients and transaction activity.
- Developments in the SEC inquiry, crypto asset regulation, licensing and international launch approvals.
- The status and potential cost of the securities litigation and the company’s ability to maintain NYSE listing compliance.