| search for a target business or businesses and complete the Proposed Transaction or another initial business combination, and we will depend on loans from our sponsor or management team to fund our search and to complete the Proposed Transaction or another initial business combination.
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Past performance by relationships with our management teamexisting clients, our business, financial condition, results of operations and their affiliatesfuture prospects would be materially and adversely affected. Moreover, sales efforts to large clients involve risks that may not be indicativepresent or that are present to a lesser extent with respect to sales to smaller organizations.
For our platform to be successful, we must continue our existing partnerships, and successfully develop new, partnerships with clients. Our ability to retain and grow our relationships with our clients depends on the willingness of future performancethose clients to establish a commercial relationship with us. Moreover, our growth plan includes marketing expense to incentivize clients with whom we develop partnerships to market our platform to their customers, which we expect would accelerate customer adoption of our platform and lower our overall customer acquisition cost. If clients with whom we develop partnerships fail to market or do not effectively market our platform to their customers, or customers fail to adopt our platform through these marketing efforts in such numbers as we have projected, our customer acquisition costs may increase and our business, financial condition and results of operations may be adversely affected.
Sales to large clients involve risks that may not be present or that are present to a lesser extent with sales to smaller organizations, such as longer sales cycles, more complex requirements and substantial upfront sales costs. For example, large clients may require considerable time to evaluate and test our platform prior to making a decision, or may request pricing models that may decrease our potential margins. Several factors influence the length and variability of our sales cycle, including the need to educate potential clients about the uses and benefits of our platform, the discretionary nature of purchasing and budget cycles, and the competitive nature of evaluation and purchasing approval processes. In order for our sales efforts to large organizations to be successful, we often must be able to engage with senior officers of the organization. As a result, the length of our sales cycle, from identification of the opportunity to deal closure, may vary significantly for each clients, with sales to large enterprises typically taking longer to complete. If we fail to effectively manage the risks associated with sales cycles and sales to large clients, our business, financial condition and results of operations may be adversely affected.
Moreover, when we execute an agreement with a client, we are still dependent on that client to deploy our platform. Larger clients in particular often delay deployment for a lengthy period of time after executing an agreement. Even when clients begin their integration into our platform, they do so on a limited basis while frequently requiring that we provide implementation services, which may include customization and controls that limit the functionality of our platform, and negotiate pricing discounts, which increases our upfront investment in the sales effort with no guarantee that sales to these clients will justify our upfront investment, which can be substantial. If a client delays deployment for lengthy periods of time, our consumer and revenue growth may not achieve expectations and our business, financial condition and results of operations may be adversely affected.
Our agreements with our clients have terms that range from approximately three to five years, and in some cases, our existing clients can generally terminate these agreements without cause upon 30 to 90 days’ prior written notice. In addition, many of those agreements also provide for the right of the client to terminate the agreement, or for us to pay financial penalties, in the event that we breach certain service level agreements with respect to the operation of our platform. The termination of one or more of our agreements with a client would result in a reduction in a loss of transacting accounts, transaction volume and revenue attributable to customers generated from that client relationship, and our business, financial condition, results of operations and future prospects would be materially and adversely affected.
Additionally, certain of our partnerships have not yet been memorialized in definitive written agreements, or certain terms of the written agreements relating to such partnerships remain subject to further discussion and refinement before they can be implemented. Our ability to realize the intended benefits of these partnerships will depend on our ability to finalize such agreements, and to do so on terms sufficiently favorable to us. While we continue to negotiate partnership terms, we may be unable to agree to terms with such clients on commercially advantageous terms or at all, which may adversely affect our business and prospects.
YouSome of our current and prospective clients require the approval of their own regulators in order to deploy our solutions, especially our crypto solutions, and if they are unable to obtain those approvals on a timely basis, or at all, our results of operations and future prospects would be materially and adversely affected.
Some of our current and prospective clients themselves are regulated entities that may be restricted from engaging with us. For instance, several banks to whom we seek to provide our crypto solutions are regulated by the Federal Reserve, the Office of the Comptroller of the Currency, and/or the Federal Deposit Insurance Corporation. Pursuant to statements made by these regulators in the last several months, banks they regulate are required to consult with, and potentially obtain the approval of, their relevant regulator before “engaging in crypto-related activities.” If these banks, or other current or prospective clients that are regulated entities, are unable to obtain the approval of their regulators, or the timing of such approvals is delayed, that failure or delay would materially and adversely affect our results of operations and future prospects.
We face substantial and increasingly intense competition worldwide in the industries in which we operate.
The crypto and loyalty and rewards industries are highly competitive, rapidly changing, highly innovative, and increasingly subject to regulatory scrutiny and oversight. Although we do not believe that we have any single direct competitor for the full range of products we provide through our platform, we compete against a wide range of businesses in the crypto and loyalty industries generally, including those that are larger than us, have greater name recognition, larger pools of deployable capital, longer operating histories, or a dominant or more secure position, or offer other products and services to customers that we do not offer, as well as smaller or younger companies that may be more agile in responding quickly to regulatory and technological changes. Many of the areas in which we compete evolve rapidly with changing and disruptive technologies, shifting consumer needs, and frequent introductions of new products and services. Competition also may intensify as businesses enter into business combinations and partnerships, and established companies in other segments expand to become competitive with different aspects of our business.
We compete primarily on the basis of the following:
•ability to attract, retain and engage clients (and in turn, customers) on our platform;
•ability to demonstrate to clients that they may achieve incremental revenue and attract new customers by using and offering our services to their customers;
•confidence in the safety, security, privacy and control of customer information on our platform;
•ability to develop products and services across multiple commerce channels, including crypto and loyalty points; and
•system reliability, regulatory compliance and data security.
We partner with many businesses and consider the ability to continue establishing these partnerships important to our business. Competition for relationships with these clients is intense and there can be no assurance that we will be able to continue to establish, grow, or maintain these client relationships.
Some of our current and potential competitors have larger customer bases, broader geographic scope, volume, scale, resources and market share than we do, which may provide them significant competitive advantages. Some competitors may also be subject to less burdensome licensing, anti-money laundering, counter-terrorist financing and other
regulatory requirements. They may devote greater resources to the development, promotion and sale of products and services, and offer lower prices or more effectively offer their own innovative programs, products and services.
We also compete against a large number of decentralized and noncustodial platforms. On these platforms, customers can interact directly with a market-making smart contract or on-chain trading mechanism to exchange one type of crypto for another without any centralized intermediary. These platforms are typically not as easy to use as our platform, and some lack the speed and liquidity of centralized platforms, but various innovative models and incentives have been designed to bridge the gap. In addition, such platforms have low startup and entry costs as market entrants often remain unregulated and have minimal operating and regulatory costs. If the demand for decentralized platforms grows and we are unable to compete with these decentralized and noncustodial platforms, our business may be adversely affected.
If we are not able to differentiate our products and services from those of our competitors, drive value for our clients and customers, or effectively and efficiently align our resources with our goals and objectives, we may not be able to compete effectively in the market.
If our platform does not meet our service level commitments, our revenue and reputation may be negatively impacted.
We typically commit, through service level agreements or otherwise, to maintaining a minimum service levels with respect to our platform’s functionality, availability and response time. If we are unable to meet these commitments, we may be obligated to provide clients with remedies set forth below. A failure to meet service level commitments, even for a relatively short duration, could cause us to be contractually obligated to issue credits or refunds to a large number of affected clients and customers, or could result in the dissatisfaction or loss of clients and customers. Affected participants could also choose to pursue other legal remedies that may be available to them.
In addition, we rely on public cloud providers, such as Microsoft Azure and Google Cloud, and any availability interruption in the public cloud could result in us not meeting our service-level commitments. In some cases, we may not have a contractual right with our public cloud providers that compensates us for any rightslosses due to availability interruptions in the public cloud.
Any of the above circumstances or interests in funds from the Trust Account, except under certain limited circumstances. Therefore, to liquidate your investment, youevents may be forced to sell your public shares or warrants, potentially at a loss.
Nasdaq may delistimpact our securities from trading on its exchange, which could limit investors’revenues, harm our reputation, impair our ability to make transactions indevelop our securitiesplatform and grow our base of clients and customers, subject us to financial penalties and liabilities under our service level agreements and otherwise harm our business, financial condition and results of operations.
If we fail to successfully transition certain services provided to us by ICE in the past, our business could be harmed.
We have historically relied on ICE, a significant stockholder, to provide services with respect to certain aspects of our business, including the following:
•market credibility, regulatory and industry expertise and infrastructure support;
•critical infrastructure for custody of our crypto; and
•institutional-grade services to support our custody arrangements, which leverage ICE’s robust platform of security protocols.
Pursuant to a transition services agreement (the “Transition Services Agreement”) we signed with ICE on November 10, 2021, we have agreed to transition certain services, including technology and data center services, away from ICE that had previously been provided under an intercompany services agreement (“ISA”). There can be no assurance that we will be able to timely, efficiently or economically develop these capacities or provide these services without ICE, or that we will be able to procure alternative services from third parties. We may also be unable to provide the services at the level that they have historically been provided by ICE, or at all.
In the interim, because we rely on ICE to provide support services and to facilitate certain of our business activities, we may face increased operational risk. Over time, we anticipate that ICE may sell down its ownership interest in us, thereby reducing the alignment of interests between us and ICE. With or without this sell down, ICE may be subject to financial, legal, regulatory and labor issues, cyberattacks, security incidents, privacy breaches, service terminations, disruptions or interruptions, or other problems, which may impose additional trading restrictions.
Unlike somecosts or requirements on us or prevent ICE from providing services to us or our customers on our behalf, which could harm our business. In addition, ICE may disagree with our interpretation of contract terms or applicable laws and regulations, fail or refuse to process transactions or provide other similarly structured special purpose acquisition companies,services adequately, take actions that degrade the functionality of our initial shareholders will receiveservices, impose additional Class A ordinary shares ifcosts or requirements on us or our customers, or give preferential treatment to competitive services. As a result, we issue certain sharesmay be subject to consummate an initial business combination.
disruptions, losses related to costs to remediate any deficiencies, consumer dissatisfaction, reputational damage, legal or regulatory proceedings, or other adverse consequences, any of which could harm our business.Risks Relating
We face operational, legal and other risks related to our Searchreliance on third party vendors, over which we have no control.
We face operational risk because we rely on third party vendors to provide us with financial, technology and other services and to facilitate certain of our business activities, including, for Consummationexample, marketing services, fulfillment services, cloud-based computer and data storage and other IT solutions and payment processing.
These third parties may be subject to financial, legal, regulatory and labor issues, cyberattacks, security incidents, privacy breaches, service terminations, disruptions or interruptions, or other problems, which may impose additional costs or requirements on us or prevent these third parties from providing services to us or our customers on our behalf, which could harm our business. Additionally, the Consumer Financial Protection Bureau (“CFPB”) and other regulators have issued guidance stating that institutions under their supervision may be held responsible for the actions of the companies with which they contract. Accordingly, we could be adversely impacted to the extent our vendors fail to comply with the legal requirements applicable to the particular products or Inabilityservices being offered.
In some cases, vendors are the sole source, or one of a limited number of sources, of the services they provide to
Consummate,us. For example, we are solely reliant on our agreement with our cloud computing web services provider for the provision of cloud infrastructure services to support our platform. Most of our vendor agreements are terminable by the vendor with little or no notice, and if our current vendors were to terminate their agreements with us or otherwise stop providing services to us on acceptable terms, we may be unable to procure alternatives from other vendors in a
Business CombinationOur public shareholderstimely and efficient manner and on acceptable terms, or at all. If any vendor fails to provide the services we require, fails to meet contractual requirements (including compliance with applicable laws and regulations), fails to maintain adequate data privacy controls and electronic security systems, or suffers a cyberattack or other security incident or breach, we could be subject to CFPB, Federal Trade Commission, SEC, and other regulatory enforcement actions, claims from third parties, including our customers, incur significant costs to resolve any issues or suffer economic and reputational harm, any of which could have an adverse effect on our business.
If we cannot keep pace with rapid technological developments to provide new and innovative products and services, the use of our products and services may not develop, and, consequently, our business would suffer.
Rapid, significant and disruptive technological changes impact the industries in which we operate, including developments in crypto (including distributed ledger and blockchain technologies). As a result, we expect new services and technologies to continue to emerge and evolve, and we cannot predict the effects of technological changes on our business. In addition to our own initiatives and innovations, we rely in part on third parties for the development of and access to new or evolving technologies. These third parties may restrict or prevent our access to, or utilization of, those technologies, as well as their platforms or products. In addition, we may not be afforded an opportunityable to voteaccurately predict which technological developments or innovations will become widely adopted and how those technologies may be regulated. We expect that new services and technologies applicable to the industries in which we operate will continue to emerge and may be superior to, or render obsolete, the technologies we currently use in our products and services. Developing and incorporating new technologies into our products and services may require substantial expenditures, take considerable time, and ultimately may not be
successful. In addition, our ability to adopt new products and services and to develop new technologies may be inhibited by industry-wide standards, payments networks, changes to laws and regulations, resistance to change from clients or customers, third-party intellectual property rights, or other factors. Our success will depend on our proposed initialability to develop and incorporate new technologies and adapt to technological changes and evolving industry standards. If we are unable to do so in a timely or cost-effective manner, our business combination, and even if we hold a vote, holderscould be harmed.
A large percentage of our founder shares will participate inrevenue is concentrated with a small number of clients; the loss of any such vote, which means we may completeclient would materially and adversely affect our initial business, combination even though a majorityfinancial condition, results of operations and future prospects. Moreover, because of our public shareholders do not supportB2B2C go-to-market model, the loss of any client – regardless of the reason – increases the risk that the customers that originally emanated from that client will transition to another provider or stop doing business with us, which would harm our business.
The concentration of a significant portion of our business and transaction volume with a limited number of clients exposes us disproportionately to the risk of any of those clients choosing to no longer partner with us, to the economic performance of such
a combination.clients or their respective industries or to any events, circumstances, or risks affecting such clients or their respective industries. Any such loss could make our platform less appealing to existing and potential customers. Accordingly, the loss of any significant client relationship could materially and adversely affect our business, results of operations, financial condition and future prospects.
Acquisitions, strategic investments, partnerships, or alliances may be difficult to identify. We may choose not realize the anticipated benefits of past or future investments, strategic transactions or acquisitions, including our pending acquisition of Apex Crypto LLC, and integration of these acquisitions may pose integration challenges, divert the attention of management, disrupt our business, dilute stockholder value or otherwise adversely affect our business, financial condition and results of operations.
We have in the past and may in the future seek to hold a shareholder voteacquire or invest in businesses, joint ventures, partnerships, alliances and platform technologies that we believe could complement or expand our platform, enhance our technology, or otherwise offer growth opportunities. For example, on November 2, 2022, we entered into an agreement to approveacquire all of the membership interests of Apex Crypto LLC (“Apex”).
We may not realize the anticipated benefits of past or future investments, strategic transactions, or acquisitions, including the pending acquisition of Apex, and these transactions involve numerous risks that are not within our initialcontrol. These risks include the following, among others:
•obtaining the requisite regulatory approvals necessary to consummate the transaction the acquisition, or to integrate the acquired business combination unlesswith our own;
•difficulty in assimilating the operations, systems, and personnel of the acquired business;
•difficulty in effectively integrating the acquired technologies or products with our current products and technologies;
•difficulty in maintaining controls, procedures and policies during the transition and integration;
•disruption of our ongoing business combination would require shareholderand distraction of our management and employees from other opportunities and challenges due to integration issues;
•difficulty integrating the acquired business’s accounting, management information and other administrative systems;
•inability to retain key technical and managerial personnel of the acquired business;
•inability to retain key customers, vendors and other business clients of the acquired business;
•inability to achieve the financial and strategic goals for the acquired and combined businesses;
•incurring acquisition-related costs or amortization costs for acquired intangible assets that could impact our results of operations;
•regulatory changes that affect the value of the businesses we acquire or our plans for integration of those businesses, or that expose us to additional regulation or litigation in connection with the acquired businesses;
•significant post-acquisition investments which may lower the actual benefits realized through the acquisition;
•potential failure of the due diligence process to identify significant issues with product quality, legal, and financial liabilities among other things; and
•potential inability to assert that internal controls over financial reporting are effective.
In particular, the pending acquisition of Apex presents risks to our business, including because:
•our ability to consummate the Apex acquisition is subject to regulatory approval, under applicable law or stock exchange listing requirements. In such case, the decisionand there can be no assurance as to whether we will obtain that regulatory approval. Further, even if we do obtain the required approvals, the timing of those approvals may be later than we project, which would have a material adverse effect on our revenue projections;
•our ability to retain the existing clients of Apex, and expand those relationships, is a key growth driver for us;
•we plan to replace and/or augment many of our existing systems and relationships (e.g. agreements with crypto liquidity providers) with those presently used by Apex;
•Apex’s platform currently processes significantly more volume than our platform, and we need to be able to accommodate this significant increase in volume;
•Apex currently lists more cryptoassets on its platform than we do on ours, and there can be no assurance that some or all of those additional cryptoassets will not be deemed to be “securities” or otherwise restricted from trading by regulators; and
•The commercial relationship with Apex Clearing that is a part of the pending acquisition is a key growth driver for us, but that relationship may not produce the benefits that we envision.
Our failure to address these risks, or other problems encountered in connection with our past or future investments, strategic transactions, or acquisitions, could cause us to fail to realize the anticipated benefits of these acquisitions or investments, cause us to incur unanticipated liabilities, and harm our business generally. Future acquisitions could also result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities, amortization expenses, incremental expenses or the write-off of goodwill, any of which could harm our financial condition or results of operations, and the trading price of our common stock could decline. For example, under the purchase agreement for the acquisition of Apex, we agreed to issue cash consideration of $55.0 million, up to $45 million in shares of our Class A common stock depending on Apex's achievement of certain profitability targets for the fourth quarter of 2022 (Apex’s profitability in the fourth quarter of 2022 results in Class A common stock consideration of $9.0 million based on the earn-out target mechanics), and up to an additional $100.0 million in shares of our Class A common stock depending on Apex's achievement of certain financial targets through 2025.
We may require additional capital to support the growth of our business, and such capital might not be available on acceptable terms, if at all.
Other than the proceeds received from the VIH Business Combination, we have funded our operations since inception primarily through equity financings and payments received from our platform. We cannot be certain when or if our operations will generate sufficient cash to fully fund our ongoing operations or the growth of our business. We intend to continue to make investments to support our business, which may require us to engage in equity or debt financings to secure additional funds. Additional financing may not be available on terms favorable to us, if at all. If adequate funds are not available on acceptable terms, we may be unable to invest in future growth opportunities, which could harm our business, financial condition, or results of operations. If we incur debt, the debt holders would have rights senior to holders of existing securities to make claims on our assets, and the terms of any debt could restrict our operations, including our ability to pay dividends on our Class A Common Stock. Furthermore, if we issue additional equity securities, stockholders
will experience dilution, and the new equity securities could have rights senior to those of our existing securities. Our decision to issue securities in the future will depend on numerous considerations, including factors beyond our control, thus we cannot predict or estimate the amount, timing, or nature of any future issuances of debt or equity securities. As a result, our stockholders bear the risk of future issuances of debt or equity securities reducing the value of our securities and diluting their interests.
We hold our cash and cash equivalents that we use to meet our working capital and operating expense needs in deposit accounts that could be adversely affected if the financial institutions holding such funds fail.
We hold our cash and cash equivalents that we use to meet our working capital and operating expense needs in deposit accounts at multiple financial institutions. The balances held in these accounts typically exceed the Federal Deposit Insurance Corporation deposit insurance limit. If a financial institution in which we hold such funds fails or is subject to significant adverse conditions in the financial or credit markets, we could be subject to a risk of loss of all or a portion of such uninsured funds or be subject to a delay in accessing all or a portion of such uninsured funds. Any such loss or lack of, or delay in, access to these funds could adversely impact our liquidity and our ability to meet our ongoing working capital and operating expense obligations.
We also maintain investment accounts with other financial institutions in which we hold our investments and, if access to these investments were to be impaired, we may not be able to open new operating accounts, sell investments or transfer funds from our investment accounts to new operating accounts on a timely basis sufficient to meet our operating expense obligations. In addition, if further liquidity and financial stability concerns arise with respect to banks and financial institutions, the ability of our clients or their customers to access existing cash, cash equivalents or investments or to access existing, or enter into new, banking arrangements or facilities, may be adversely impacted, which could in turn impact such parties’ ability to pay their obligations to us or to our clients, or to enter into new commercial arrangements with us.
The loss of the services of our senior management could adversely affect our business.
The experience of our senior management is a valuable asset to us. If we are unable to retain members of our core senior management team, including our Chief Executive Officer, Gavin Michael, we could experience uncertainty and significant delays or difficulty in the achievement of our development and strategic objectives and our business, financial condition and results of operations could be materially and adversely harmed. Our management team has significant experience, is responsible for many of our core competencies, and would be difficult to replace. Competition for senior executives in these businesses is intense, and we may not be able to attract and retain qualified personnel to replace or succeed members of our senior management team or other key personnel. Failure to retain talented senior leadership could have a material adverse effect on our business.
Our business will suffer if we fail to attract and retain highly skilled employees.
Our future success will depend on our ability to identify, hire, develop, motivate and retain highly qualified personnel for all areas of our organization, particularly information technology and sales. Further, hiring qualified and experienced personnel in this specialized technology space is difficult due to the high level of competition and scarcity of experience. Many of the companies with which we compete for experienced employees have greater resources than we do and may be able to offer more attractive terms of employment. In addition, we invest significant time and expense in training employees, which increases their value to competitors that may seek shareholder approvalto recruit them. We may not be able to attract, develop and maintain the skilled workforce necessary to operate our business and labor expenses may increase as a result of a proposedshortage in the supply of qualified personnel, which would negatively impact our business. Further, if we suffer attrition and shortages with respect to certain of our customer service personnel, such as our call centers, our ability to maintain compliance with our service level commitments to clients may be impacted, resulting in financial penalties and, potentially, damage to or loss of those client relationships. In addition, in response to the difficult macroeconomic environment and in an effort to reduce our operating expenses, we recently implemented two separate reductions in force, or RIFs, that collectively impacted approximately 95 full-time employees. These RIFs may impact the morale of our
current employees, may impact our ability to retain them and to attract new employees in the future, which would have a negative effect on the implementation of our operations.
Our revenue is impacted, to a significant extent, by the general economy.
Our business combination or will allow shareholdersand our clients’ businesses are sensitive to sell their shares to us in a tender offer will be made by us, solely in our discretion, and will be based on a variety ofmacroeconomic conditions. Economic factors such as interest rates, inflation, changes in monetary and related policies, market volatility (including as a result of geopolitical issues, such as the war in Ukraine), consumer confidence, and unemployment rates are among the most significant factors that impact consumer spending behavior. Weak economic conditions, high interest rates, inflation or a significant deterioration in economic conditions reduce the amount of disposable income consumers have, which in turn reduces consumer spending and the willingness of consumers to accumulate and spend crypto and loyalty points or otherwise transact in such assets, which would have an adverse effect on our business, results of operations, financial condition, and future prospects. In particular, the high levels of, and increases in, inflation currently experienced in the United States could negatively impact our business by increasing our costs and reducing consumer activities necessarily to our revenue generation.
Our ability to generate subscription and service revenue and transaction revenue depends, in part, on customers continuing to access and utilize our platform. Our clients’ businesses may decrease or fail to increase as a result of factors outside of their control, such as the macroeconomic conditions referenced above, or business conditions affecting a particular client, industry vertical, or region. Weak economic conditions also could extend the length of our clients’ sales cycle and cause consumers to delay making (or not make) purchases. Some of our clients have experienced a decrease in sales, supply chain disruptions, inventory shortages, and other adverse effects. A decline in activity by consumers of our clients’ products and services for any reason may correspondingly result in lower revenue generated by our platform.
If we experience rapid growth, it may place significant demands on our operational, administrative and financial resources and it may be difficult to sustain such growth.
We have a relatively limited operating history even at our current scale and our projected growth in future periods exposes us to increased risks, uncertainties, expenses and difficulties. If we are unable to appropriately scale our operations to support such growth, our business, results of operations, financial condition and future prospects would be materially and adversely affected.
If we experience rapid growth, we could face significant challenges in:
•maintaining and developing relationships with existing and new clients
•securing funding to maintain our operations and future growth;
•maintaining adequate financial, business and risk controls;
•implementing new or updated information and financial risk controls and procedures;
•navigating complex and evolving regulatory and competitive environments;
•attracting, integrating and retaining an appropriate number of qualified, skilled employees;
•training, managing and appropriately sizing our workforce and other components of our business on a timely and cost-effective basis;
•expanding within existing markets;
•entering new markets and introducing new solutions;
•continuing to develop, maintain, protect and scale our platform;
•effectively using limited personnel and technology resources; and
•maintaining the security of our platform and the confidentiality of the information, including personally identifiable information, provided and utilized across our platform.
We may not be able to properly manage and scale our expanding operations effectively, and any failure to do so could adversely affect our ability to generate revenue and control our expenses, which could in turn materially and adversely affect our business, financial condition, results of operations and future prospects.
Future material impairments in the value of our long-lived assets, including goodwill, have in the past negatively affected, and could in the future negatively affect, our operating results.
We regularly review our long-lived assets, including our goodwill and other intangible assets, for impairment. Goodwill and other intangible assets are subject to impairment review on an annual basis and whenever potential impairment indicators are present. Changes in market conditions or other changes in the future outlook of value may lead to impairment charges in the future. Future events or decisions may lead to asset impairments and/or related charges. Certain non-cash impairments may result from a change in our strategic goals, business direction or other factors relating to the overall business environment. Material impairment charges could negatively affect our results of operations.
For example, during the fiscal year ended December 31, 2022, we recognized $1.8 billion of goodwill and intangible assets impairments relating to the elongated timing for expected crypto product activations and the decline in our market capitalization as of December 31, 2022. Further adverse changes to the timing for expected crypto product activations and declines in market capitalization could lead to additional goodwill or intangible asset impairment charges in future periods, which could be material to our results of operations. For more information on the valuation and impairment of long-lived assets, see “Critical Accounting Policies” in Item 7 of this Annual Report.
We may not be successful in achieving expected operating efficiencies and sustaining or improving operating expense reductions, and might experience business disruptions and adverse tax consequences associated with restructuring, realignment and cost reduction activities.
Portions of our business have been, and may in the future be, the subject of restructuring, realignment or cost reduction initiatives. For example, in the fourth quarter of 2022 and first quarter of 2023, we launched a restructuring plan in order to simplify and focus on our core capabilities. The streamlining effects of the transactionplan could result in reduced revenue, which may adversely impact our business operations. In addition, we may not be successful in achieving the full efficiencies and whethercost reduction benefits we expect or such benefits might be realized later than expected, and the termsongoing costs of implementing these measures might be greater than anticipated. If these measures are not successful or sustainable, we might undertake additional restructuring efforts, which could result in future charges. Moreover, our ability to achieve our other strategic goals and business plans might be adversely affected, and we could experience business disruptions, if our restructuring and realignment efforts and our cost reduction activities prove ineffective.
Stakeholders’ expectations of our performance relating to environmental, social and governance factors may impose additional costs and expose us to new risks.
There is an increasing focus from stakeholders concerning corporate responsibility, specifically related to environmental, social and governance matters, or ESG. Some stakeholders may use these non-financial performance factors to guide their investment strategies and, in some cases, may choose not to invest in us if they believe our policies and actions relating to corporate responsibility are inadequate. In particular, increasing concerns over climate change have resulted and may continue to result in new regulatory requirements relating to climate change, including regulating greenhouse gas emissions (and the establishment of enhanced internal processes or systems to track them) and sustainability initiatives, which may impose more stringent restrictions and requirements than our current legal or regulatory obligations and could increase our compliance costs. We may also face reputational damage in the event that we do not meet the ESG standards set by various constituencies.
Furthermore, if our competitors’ corporate social responsibility performance is perceived to be better than ours, potential or current investors may elect to invest with our competitors instead. In addition, in the event that we communicate certain initiatives and goals regarding ESG matters, we could fail, or be perceived to fail, in our achievement of such initiatives or goals, or we could be criticized for the scope of such initiatives or goals. If we fail to satisfy the expectations of stakeholders or our initiatives are not executed as planned, our reputation and business, operating results and financial condition could be adversely impacted.
Pandemics and other public health emergencies, including the COVID-19 pandemic, or fear thereof, could adversely impact our business, operations and financial condition.
Occurrences of epidemics or pandemics, depending on their scale, may cause different degrees of damage to the national and local economies within our geographic focus. Global economic conditions may be disrupted by widespread outbreaks of infectious or contagious diseases, including any resurgence or new variants of COVID-19. Pandemics and other public health emergencies, or fear thereof, have in the past caused and are likely in the future to cause substantial changes in consumer behavior and restrictions on business and individual activities, which have led, and are likely to lead to reduced economic activity. These effects could be exacerbated or prolonged by the emergence of variants. Extraordinary actions taken by international, federal, state and local public health and governmental authorities to contain and combat pandemics in regions throughout the world, including travel bans, quarantines, “stay-at-home” orders and similar mandates for many individuals and businesses to substantially restrict daily activities have had and could in the future have an adverse effect on our financial condition and results of operations. The willingness of clients to expend resources to integrate into our platform may be hampered by the uncertainty resulting from any pandemic or other public health emergency. Additionally, existing clients could seek financial relief from obligations to us, or choose to cancel contracts with us.
Risks Related to Crypto
Disruptions in the crypto market subject us to additional risks.
Recent financial distress in the crypto market, such as bankruptcies filed by certain market participants including providers of banking services to crypto companies, has increased uncertainty in the macroeconomic environment. There is no certainty that the measures we have taken will be sufficient to address the risks posed by the downstream effects of continued financial distress in the crypto market, and we may experience material and adverse impacts to our business as a result of the global economic impacts of such financial distress, including the loss of customer trust in crypto, including bitcoin, and any recession or economic downturn that has occurred or may occur in the future.
The ultimate impact of the financial distress in the crypto market will depend on future developments, including, but not limited to, the downstream effects of the bankruptcies filed by certain crypto market participants, their severity, and the actions taken by regulators to address its impact. Any further deterioration in the crypto markets may have an adverse effect on our reputation, and any negative perception by our clients of crypto may lead to a loss of client demand for our products and services, any of which could have an adverse impact on our business and financial condition. We may also suffer a decline in the market price of our Class A common stock due to any negative perception by our clients, investors, or the general public, of crypto or the crypto market.
Due to unfamiliarity and some negative publicity associated with crypto platforms, existing and potential customers may lose confidence in crypto platforms, which could have an adverse impact on our business.
Numerous crypto platforms have been sued, investigated, or shut down due to fraud, manipulative practices, business failure and security breaches. In many of these instances, customers of these platforms were not compensated or made whole for their losses. For example, in May 2019, Binance, one of the world’s largest platforms, was hacked, resulting in losses of approximately $40 million, and in February 2021, Bitfinex settled a long-running legal dispute with the State of New York related to Bitfinex’s alleged misuse of over $800 million of customer assets. Further, in 2022, each
of Celsius Networks, Voyager, Three Arrows Capital and FTX declared bankruptcy, resulting in a loss of confidence in participants of the crypto economy and negative publicity surrounding crypto more broadly.
In response to these events, the crypto markets have experienced extreme price volatility, certain markets experienced issues with liquidity and several other entities in the crypto industry have been, and may continue to be, negatively affected, further undermining confidence in the crypto markets and in bitcoin. If the liquidity of the crypto markets continues to be negatively impacted by these events, crypto prices (including the price of bitcoin) may continue to experience significant volatility and confidence in the crypto markets may be further undermined. These events are continuing to develop and it is not possible to predict at this time all of the risks that they may pose to us, our service providers or on the crypto industry as a whole.
In addition, there have been reports that a significant amount of crypto trading volume on crypto platforms is fabricated and false in nature, with a specific focus on unregulated platforms located outside the United States. Such reports may indicate that the market for crypto platform activities is significantly smaller than otherwise understood. Negative perception, a lack of stability and standardized regulation in the crypto industry, and the closure or temporary shutdown of crypto platforms due to fraud, business failure, hackers or malware, or government mandated regulation, and associated losses suffered by customers may reduce confidence in the crypto economy and demand for crypto products and services, and result in greater volatility of the prices of crypto, including significant depreciation in value. Any of these events could reduce customer demand for our products and services and have an adverse impact on our business.
There may be a general perception among regulators and others that crypto is used to facilitate illegal activity such as fraud, money laundering, tax evasion and scams. Because we provide the ability to transact in crypto, any negative perceptions associated with crypto could harm our reputation.
Crypto is perceived by regulators and the general public as being susceptible to, and in fact has been used on numerous occasions for, illegal or improper uses, including money laundering, tax evasion, terrorist financing, illegal online gambling, fraudulent sales of goods or services, illegal sales of prescription medications or controlled substances, piracy of software, movies, music and other copyrighted or trademarked goods (in particular, crypto goods), bank fraud, child pornography, human trafficking, prohibited sales of alcoholic beverages or tobacco products, securities fraud, pyramid or ponzi schemes, or to facilitate other illegal activity. Because our platform allows certain customers of Bakkt Trust to deposit and withdraw crypto, and our platform allows customers to transact in crypto, this perception may harm our reputation because we could be viewed as facilitating, or could otherwise become associated with, these illegal activities. Any such negative perception of our reputation could harm our business.
In addition, because we use a B2B2C go-to-market strategy, our ability to attract customers (and in turn, transaction volume that generates revenue) depends on our ability to attract and enter into relationships with clients. To the extent that these clients perceive crypto as a risky sector, or one that these clients do not wish to associate with (or allow their customers to associate with through that client’s brand), that would have a material adverse effect on our business.
Further, banks may not provide banking services, or may cut off banking services, to businesses that provide crypto-related services, which could dampen liquidity in the market and damage the public perception of crypto generally or any one cryptoasset in particular, which could decrease the trading volume of crypto.
Crypto custodial solutions and related technology, including our systems and custodial arrangements, are subject to risks related to a loss of funds due to theft of crypto, employee or vendor sabotage, security and cybersecurity risks, system failures and other operational issues, the loss, destruction or other compromise of our private keys and a lack of sufficient insurance.
Our systems and custodial solutions involve the processing, storage and transmission of crypto and data. Contractual limits on our exposure in the event that crypto is stolen or misappropriated may not be sufficient to protect us from liability or other harm. The theft or misappropriation of crypto held in custody by us would likely result in financial loss, reputational damage, potential lack of trust from our customers, negative press coverage, and diversion of our
management’s time and focus. The secure storage and transmission of crypto and data over networks is a critical element of our operations. Threats to our operations come from external factors such as governments, organized crime, hackers, and other third parties such as outsourced or infrastructure-support providers and application developers, or may originate internally from an employee or service provider to whom we have granted access to our systems.
Crypto transactions are generally irrevocable, and stolen or incorrectly transferred crypto may be irretrievable. Once a transaction has been verified and recorded in a block that is added to the distributed ledger, an incorrect transfer of a crypto generally will not be reversible, and we may not be able to obtain compensation for any such transfer or theft. It is possible that, through computer or human error, or through theft or criminal action, the crypto could be transferred in incorrect amounts or to unauthorized third parties, or to uncontrolled accounts. Such events would have a material adverse effect on our ability to continue as a going concern.
Crypto is controllable only by the possessor of private keys relating to the distributed ledger through which the crypto is held. While the distributed ledgers require a public key relating to a cryptoasset to be published when used in a transaction, private keys must be safeguarded and kept private in order to prevent a third party from accessing the cryptoasset. To the extent our private keys are lost, destroyed, or otherwise compromised and no backups of the private keys are accessible, we will be unable to access the crypto held through the distributed ledger. Any loss of private keys relating to, or hack or other compromise of, our crypto could adversely affect our consumers’ ability to access or sell their crypto and could harm consumers’ trust in us and our products. Additionally, any loss of private keys relating to, or hack or other compromise of, the distributed ledger through which third parties store crypto could have negative reputational effects on us and harm consumers’ trust in us and our products.
Our insurance policies may not be adequate to reimburse us for losses caused by security breaches or incidents, and we may lose crypto valued in excess of the insurance policy without any recourse. Unlike bank accounts or accounts at some other financial institutions, in the event of loss or loss of utility value, there is no public insurer to offer recourse to us or to any consumer and the misappropriated crypto may not be easily traced to the bad actor.
Further, when crypto custodial solutions or transfer venues, whether involving our systems or others, experience system failures or other operational issues, such events could result in a reduction in crypto prices or confidence and impact our success and have a material adverse effect on our ability to continue as a going concern.
Our failure to safeguard and manage our customers’ crypto could adversely impact our business, operating results, and financial condition.
In our capacity as a crypto custodian, our platform holds crypto for individual and institutional customers, and buys, sells, sends and receives crypto to fulfill buy and sell orders of such customers, which it then holds on behalf of the customers through the Bakkt Warehouse. On March 31, 2022, the SEC issued Staff Accounting Bulletin No. 121, which represents a significant change regarding how a company safeguarding crypto held for its platform users reports such crypto on its balance sheet. Applicable insolvency law is not fully developed with respect to the holding of crypto in custodial arrangements and, if our custodially held crypto were, in the event of our bankruptcy, considered to be the property of our bankruptcy estate, the crypto we custodially hold could be subject to bankruptcy proceedings and our customers could be treated as our general unsecured creditors. This prospect may result in customers finding our custodial services more risky and less attractive and this, and any failure to increase our customer base, discontinuation or reduction in use of our platform and products by existing customers as a result, could adversely impact our business, operating results, and financial condition. Further, any future changes in U.S. generally accepted accounting principles (“GAAP”) that require us to seek shareholder approval. Evenchange the manner in which we account for our crypto held for our customers could have a material adverse effect on our financial results and the market price of our securities.
See “Risks Related to Risk Management and Financial Reporting – Future changes in financial accounting standards may significantly change our reported results of operations.”
Crypto does not have extensive historical precedent and distributed ledger technology continues to rapidly evolve. The unique characteristics of crypto presents risks and challenges to us that could have a material adverse effect on our business.
Crypto does not have extensive historical precedent and distributed ledger technology continues to rapidly evolve. Given the infancy of the development of crypto networks, parties may be unwilling to transact in crypto, which would dampen the growth, if we seek shareholder approval,any, of crypto networks. In our capacity as a crypto custodian, our platform holds crypto for individual and institutional customers, and buys, sells, sends and receives crypto to fulfill buy and sell orders of such consumers, which it then holds on behalf of the customers through Bakkt Trust. The rate of change of crypto networks can present technological challenges and require us to expend significant time and expenditures to adapt to new crypto network technologies. Acceptance of software patches or upgrades by a significant, but not overwhelming, percentage of the users and miners in a crypto network, such as the Bitcoin Network, could result in a “fork” in such network’s distributed ledger, resulting in the operation of multiple separate networks. This could require us to develop and incorporate new technologies to integrate with the new fork, which may require substantial expenditures and take considerable time, if it can be done at all. Until such time as we currently expectdevelop and incorporate such new technologies, consumers may not be able to doaccess new forks or the assets available on new forks. Because crypto networks are dependent upon the internet, a disruption of the internet or a crypto network, such as the Bitcoin Network, would affect the ability to transfer crypto, including bitcoin. The realization of one or more of the foregoing risks may have a material adverse effect on our crypto trading and custody business. Moreover, because crypto, including bitcoin, has been in existence for a short period of time and is continuing to develop and evolve, there may be additional risks in the future that are impossible to predict and which could have a material adverse effect on our crypto and custody business.
We may encounter technical issues in connection with the Proposed Transaction, the holdersintegration of supported cryptoassets and changes and upgrades to their underlying networks, which could adversely affect our founder sharesbusiness.
In order to support any particular cryptoasset, a variety of front and back-end technical and development work is required to integrate such supported cryptoasset with our existing technical infrastructure. For certain cryptoassets, a significant amount of development work is required and there is no guarantee that we will
participate in the vote onbe able to integrate successfully with any existing or future cryptoasset. In addition, such
approval. Accordingly, weintegration may
completeintroduce software errors or weaknesses into our
initial business combination,platform, including
the Proposed Transaction, evenour existing infrastructure. Even if
a majoritysuch integration is initially successful, any number of
our public shareholders do not approve of the business combination we complete.Your only opportunity to effect the investment decision regarding a potential business combination, including the Proposed Transaction, may be limitedtechnical changes, software upgrades, soft or hard forks, cybersecurity incidents, bugs, errors, defects or other changes to the exercise of your right to redeem your shares from us for cash.
At the time of your investment in us, you will not be provided with an opportunity to evaluate the specific merits or risks of our initial business combination. Since our board of directorsunderlying blockchain network may complete a business combination without seeking shareholder approval, public shareholders may not have the right or opportunity to vote on the business combination, unless we seek such shareholder vote, as we currently expect to do in connection with the Proposed Transaction. Accordingly, your only opportunity to effect the investment decision regarding our initial business combination may be limited to exercising your redemption rights within the period of time (which will be at least 20 business days) set forth in our tender offer documents mailed to our public shareholders in which we describe our initial business combination.
If we seek shareholder approval of our initial business combination, as we expect to do in connection with the Proposed Transaction, our initial shareholders and management team have agreed to vote in favor of such initial business combination, including the Proposed Transaction, regardless of how our public shareholders vote.
Our initial shareholders currently own 20% of our issued and outstanding ordinary shares. Our initial shareholders and management team also mayoccur from time to time, purchase Class A ordinary shares priorcausing incompatibility, technical issues, disruptions, or security weaknesses to our
platform. If we are unable to identify, troubleshoot and resolve any such issues successfully, we may no longer be able to support such cryptoassets, our customers’ assets may be frozen or lost, the security of our hot, warm, or cold wallets may be compromised, and our platform and technical infrastructure may be affected, all of which could adversely impact our business. initialThe blockchains on which ownership of crypto is recorded are dependent on the efforts of third parties acting in their capacity as the blockchain transaction miners or validators, and if these third parties fail to successfully perform these functions, the operation of the blockchains that record ownership of crypto could be compromised.
Blockchain miners or validators maintain the record of ownership of crypto. If these entities suffer from cyberattacks or other security incidents (whether from hacking, which involves efforts to gain unauthorized access to information or systems, or to cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment, the inadvertent transmission of computer viruses or other malware, other forms of malicious attacks, malfeasance or negligent acts of its personnel, or via other means, including phishing attacks and other forms of social engineering), of for financial or other reasons cease to perform these functions, the functioning of the blockchains on which the ownership of a cryptoasset is recorded and the valuation based may be jeopardized. Any such interruption could result in loss of crypto and/or its value.
In addition, over the past several years, crypto mining operations have evolved from individual users mining with computer processors, graphics processing units and first-generation application specific integrated circuit (“ASIC”)
machines to “professionalized” mining operations using proprietary hardware or sophisticated machines. If the profit margins of crypto mining operations are not sufficiently high, crypto miners are more likely to immediately sell tokens earned by mining, resulting in an increase in liquid supply of that crypto, which would generally tend to reduce that crypto’s market price.
Risks Related to Regulation, Taxation and Laws
Our business combination,is subject to extensive government regulation, oversight, licensure and approvals. Our failure to comply with extensive, complex, uncertain, overlapping and frequently changing rules, regulations and legal interpretations could materially harm our business.
Our business is subject to laws, rules, regulations, policies and legal interpretations in the markets in which we operate, including, but not limited to, those governing money transmission, virtual currency business activity, consumer protection, anti-money laundering, counter-terrorist financing, privacy and data protection, cybersecurity, economic and trade sanctions, commodities, derivatives, and securities.
We have been, and expect to continue to be, required to apply for and maintain various licenses, certifications and regulatory approvals in jurisdictions where we provide our services, including due to changes in applicable laws and regulations or the interpretation of such laws and regulations. There can be no assurance that we will elect to pursue, or be able to obtain, any such licenses, certifications and approvals. In addition, there are substantial costs and potential product changes involved in maintaining and renewing such licenses, certifications and approvals. For instance, in the United States, Bakkt Marketplace has obtained licenses to operate as a money transmitter (or its equivalent) in the states where it operates and where such licenses are required, as well as in the District of Columbia and Puerto Rico, and as a virtual currency business with the State of New York. In these capacities, Bakkt Marketplace is subject to reporting requirements, restrictions with respect to the investment of consumer funds, bonding requirements and inspection by state regulatory agencies.
As we expand our business activities, both as to the products and services offered and into jurisdictions beyond the United States, including as a result of the Apex acquisition, if consummated, we will become increasingly obligated to comply with new laws and regulations, including those of any additional countries or markets in which we operate, and we may be subject to increased regulatory oversight and enforcement and more restrictive rules and regulations. Laws outside of the United States often impose different, more specific, or even conflicting obligations on companies, as well as broader liability. For example, certain transactions that may be permissible in a local jurisdiction may be prohibited by regulations of U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) or U.S. anti-money laundering or counter-terrorist financing regulations. Our ability to manage our business and conduct our operations internationally will require considerable management attention and resources, particularly as we have no operating history outside the United States and limited experience with international regulatory environments and market practices. Our failure to successfully manage regulatory risks could harm our international operations and have an adverse effect on our business, operating results, and financial condition.
In general, any failure or perceived failure to comply with existing or new laws, regulations, or orders of any regulatory authority (including changes to or expansion of the interpretation of those laws, regulations, or orders) may subject us to liability, significant fines, penalties, criminal and civil lawsuits, forfeiture of significant assets and enforcement actions in one or more jurisdictions, result in additional compliance and licensure requirements, increase regulatory scrutiny of our business, restrict our operations and force us to change our business practices, make product or operational changes, including ceasing our operations in certain jurisdictions, or delaying planned product launches or improvements. Any of the foregoing could, individually or in the aggregate, harm our reputation, damage our brand and business, impose substantial costs and adversely affect our financial condition and results of operations. The complexity of U.S. federal and state regulatory and enforcement regimes, coupled with the scope of our operations and the evolving regulatory environment, could result in a single event giving rise to a large number of overlapping investigations and legal and regulatory proceedings by multiple authorities. Moreover, we cannot provide any assurance that our employees, contractors, or agents will not violate such laws and regulations.
The U.S. state and federal regulatory regime governing blockchain technologies and crypto is uncertain, and new regulations or policies may require us to alter our business practices.
Significant parts of our business, such as our product and service offerings involving crypto, are subject to uncertain and/or evolving regulatory regimes. As crypto has grown in both popularity and market size, governments have reacted differently, with certain governments deeming it illegal and others allowing its use and trade without restriction, while in some jurisdictions, such as in the United States, subject the ownership and exchange of crypto to extensive, and in some cases overlapping, unclear and evolving regulatory requirements.
Many U.S. regulators, including the Proposed Transaction. OurSEC, FinCEN, the IRS and certain state regulators, have made official pronouncements or issued guidance or rules regarding the treatment of crypto. However, there remain uncertainties associated with being subject to FinCEN regulations as a money service business, as FinCEN’s rules, regulations and guidance are evolving and subject to change. For instance, while FinCEN has released guidance about how it considers its regulations to interact with crypto businesses, there remain some uncertainties about the application of this guidance to certain crypto businesses. Changes to FinCEN’s rules, regulations and guidance could subject us to increased scrutiny and/or require updates to our policies and procedures and compliance programs. The IRS released guidance treating crypto as property that is not currency for U.S. federal income tax purposes, although there is no indication yet whether other courts or federal or state regulators will follow this classification. In May 2022, the Chair of the U.S. Commodity Futures Trading Commission (the “CFTC”), Rostin Behnam, stated that bitcoin and ether are commodities. In April 2022, SEC Chairman Gary Gensler announced that he had asked SEC staff to work: (i) to register and regulate crypto platforms like securities exchanges; (ii) with the CFTC on how to jointly address crypto platforms that trade both securities and non-securities; (iii) on segregating out crypto platforms’ custody of customer assets, if appropriate; and (iv) on segregating out the market-making functions of crypto platforms, if appropriate. On July 21, 2022, the SEC announced insider trading charges against individuals transacting in crypto and, as part of the complaint, the SEC alleged certain cryptoassets were securities. Mr. Gensler also indicated in an October 2022 speech that he believed the “vast majority” of crypto tokens are securities and thus, that many crypto intermediaries are transacting in securities and have to register with the SEC. The SEC has also indicated that governance tokens, staking services and stablecoins as securities. In January 2023, the Federal Reserve, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation issued a joint statement, highlighting key risks of the crypto sector in light of its significant volatility in 2022 and stating that (i) issuing or holding as principal cryptoassets that are issued, stored or transferred on an open, public, and/or decentralized network or similar system is “highly likely to be inconsistent with safe and sound banking practices,” and (ii) they have “significant safety and soundness concerns” associated with business models that are concentrated in crypto-asset-related activities or have concentrated exposures to the crypto-asset sector.
Various governmental and regulatory bodies, including legislative and executive bodies, in the United States and in other countries may adopt new laws and regulations, the direction and timing of which may be influenced by changes in the governing administrations and major events in the crypto industry. For example, following the failure of several prominent crypto trading venues and lending platforms, such as FTX, Celsius Networks, Voyager and Three Arrows Capital in 2022, the U.S. Congress expressed the need for both greater federal oversight of the crypto industry and comprehensive cryptocurrency legislation. In the near future, various governmental and regulatory bodies, including in the United States, may introduce new policies, laws, and regulations relating to crypto and the crypto industry generally, and crypto platforms in particular. The failures of risk management and other control functions at other companies that played a role in the 2022 events could accelerate an existing regulatory trend toward stricter oversight of crypto platforms and the crypto industry. Furthermore, new interpretations of existing laws and regulations may be issued by such bodies or the judiciary, which may adversely impact the development of the crypto industry as a whole and our legal and regulatory status in particular by changing how we operate our business, how our products and services are regulated, and what products or services we and our competitors can offer, requiring changes to our compliance and risk mitigation measures, imposing new licensing requirements, or imposing a total ban on certain crypto transactions, as has occurred in certain jurisdictions in the past.
Meanwhile, certain state regulators, such as the NYDFS, have created or are in the process of creating new regulatory frameworks with respect to crypto. For example, in 2015, the NYDFS adopted the first U.S. regulatory framework for licensing participants in crypto business activity. The regulation, known informally as the “BitLicense,” regulates the conduct of businesses that are involved in crypto in New York or with New York customers and prohibits any person or entity involved in such activity from conducting such activities without a license. Bakkt Marketplace currently operates under a BitLicense. On January 25, 2023, the NYDFS released guidance regarding crypto custody practices, providing that a “virtual currency entity custodian” must: (1) separately account for and segregate customer assets from proprietary assets, (2) take possession of customer assets only for the limited purpose of carrying out custody and safekeeping services, (3) request approval before implementing any sub-custody arrangements, and (4) provide adequate disclosure to customers.
Other states have adopted or are considering proposing similar statutes and regulations that will require us or our subsidiaries to obtain a license to conduct crypto activities. For example, Louisiana’s virtual currency regulation became effective on January 1, 2023. It requires operators of virtual currency businesses to obtain a virtual currency license in order to conduct business in Louisiana, and as such, we are in the process of applying for this license. Other states, such as Texas, have published guidance on how their existing regulatory regimes governing money transmitters apply to virtual currencies. Some states, such as New Hampshire, North Carolina and Washington, have amended their state’s statutes to clarify the treatment of virtual currencies within existing licensing regimes, while others have interpreted their existing statutes as requiring a money transmitter license to conduct certain virtual currency business activities.
Both federal and restated memorandumstate agencies have instituted enforcement actions against those violating their interpretation of existing laws. For example, in January 2023, Coinbase settled an NYDFS compliance investigation for a monetary penalty of $50 million and articlesa separate commitment to make $50 million in compliance program investments by the end of association provides2024. Other U.S. and many state agencies have offered little official guidance and issued no definitive rules regarding the treatment of crypto. The CFTC staff has publicly taken the position that certain cryptoassets are commodities, and as such, exchange-traded derivatives involving bitcoin are subject to the CFTC’s jurisdiction and enforcement powers. This has been reflected in certain CFTC enforcement actions, including those against Coinflip, Inc. and certain informal CFTC guidance, such as the LabCFTC’s Primer on Virtual Currencies. However, such informal guidance is not official policy, rule or regulation, may be subject to change, and does not necessarily bind the CFTC. To the extent that bitcoin is deemed to fall within the definition of a “commodity interest” under the Commodity Exchange Act (“CEA”), we may be subject to additional regulation under the CEA and CFTC regulations. Although the CFTC has suggested it is not particularly focused on pursuing such enforcement at this time, if the CFTC pursues such enforcement and ultimately shuts down an exchange on which our bitcoin futures contract is traded, it may have a significant adverse impact on our business and plan of operations.
As blockchain technologies and crypto business activities grow in popularity and market size, and as new crypto businesses and technologies emerge and proliferate, federal, state and local regulators revisit and update their laws and policies and can be expected to continue to do so in the future. Changes in this regulatory environment, including changing interpretations and the implementation of new or varying regulatory requirements by the government, may significantly affect or change the manner in which we seek shareholder approvalcurrently conduct some aspect of our business.
The technologies underlying crypto are novel technologies and relatively untested, and the application of U.S. federal and state securities and other financial laws to aspects of these technologies and crypto is unclear in certain respects. Because of the novelty of crypto and their underlying blockchain technologies, it is possible that securities regulators may interpret laws in a manner that adversely affects the value of crypto and our business. Various legislative and executive bodies in the United States and in other countries may, in the future, adopt laws, regulations, or guidance, or take other actions that could severely or materially impact the permissibility of the operation of the blockchain networks underlying crypto. It is difficult to predict how or whether regulatory agencies may apply existing or new regulation with respect to this technology and its applications. In addition, self-regulatory bodies may be established that set guidelines regarding crypto which could have similar effects to new policies adopted by government bodies.
Any future regulatory actions applicable to crypto, the blockchain networks underlying them, our business, and our related activities could severely impact us. It could also result in negative publicity. Regulatory change could even potentially result in certain of our operations being viewed as impermissible, which could negatively affect the value of crypto and our business. The interpretation and application of various federal and states laws to crypto is also uncertain and/or evolving. For instance, U.S. bankruptcy courts are now faced with a number of questions of first impression that may determine the status of crypto in bankruptcy, and the rights and obligations of platforms that custody crypto for their customers.
Crypto networks, blockchain technologies, and coin and token offerings also face an uncertain regulatory landscape in many foreign jurisdictions, including (among others) the European Union, China and Russia. Various foreign jurisdictions may, in the future, adopt laws, regulations or directives that affect crypto and our business. The effect of any future regulatory change is impossible to predict, but any change could be substantial and materially adverse to the adoption and value of crypto and our business.
New or changing laws and regulations or interpretations of existing laws and regulations, in the United States and other jurisdictions, may materially and adversely impact crypto and our business, including with respect to their value, their liquidity, the ability to access marketplaces or exchanges on which to trade crypto, and the structure, rights and transferability of crypto, and the treatment of crypto and holders of crypto in insolvency proceedings.
A crypto’s status as a “security” in any relevant jurisdiction is subject to a high degree of uncertainty, and if cryptoassets on our platform are later determined to be securities, we may be subject to regulatory scrutiny, investigations, fines, and other penalties, which may adversely affect our business, operating results, and financial condition.
The SEC and its staff have taken the position that certain cryptoassets fall within the definition of a “security” under the U.S. federal securities laws, and it is possible the SEC may take this position with respect to other assets that may be transacted on our platform. The legal test for determining whether any given asset is a security is a highly complex, fact-driven analysis that evolves over time, and the outcome is difficult to predict. The SEC generally has not provided advance guidance or confirmation on the status of any particular cryptoasset as a security. Furthermore, it is difficult to predict the direction or timing of any continuing evolution of the SEC’s views with regard to crypto. It is also possible that a change in the governing administration or the appointment of new SEC commissioners could substantially impact the views of the SEC and its staff. To date, public statements by senior officials at the SEC indicate that the SEC does not intend to take the position that bitcoin or ether are securities in their current form; however, these are the only cryptoassets as to which senior officials at the SEC have publicly expressed such a view. Moreover, such statements do not represent SEC rules or official policy statements by the SEC; they reflect only the speakers’ views and are not binding on the SEC or any other agency or court and cannot be generalized to any other cryptoasset. With respect to all other cryptoassets, there is currently no certainty under the existing securities laws to determine that such assets are not securities; though the SEC’s Strategic Hub for Innovation and Financial Technology published a framework for analyzing whether any given cryptoasset is a security in April 2019, this framework is also not a rule, regulation or statement of the SEC and is not binding on the SEC. In July 2022, the SEC announced insider trading charges against individuals transacting in crypto and, as part of the complaint, the SEC alleged certain cryptoassets were securities, and the current SEC Chairman, Gary Gensler, has repeatedly indicated in remarks to various forums, including the U.S. Congress, that many cryptoassets and related products and services may qualify as securities and accordingly be subject to SEC oversight and regulation. The SEC, as well as other regulators, seem increasingly focused on the regulation of crypto, which may impact our business. There also remains a significant lack of clarity over whether individual cryptoassets backed by local currencies, known as “stablecoins,” will be deemed to be “securities.”
While we currently operate only in the United States, we intend to expand internationally and will be required to comply with the securities (and other) laws of those jurisdictions as we do so. Foreign jurisdictions have varying approaches to classifying crypto as “securities,” and certain cryptoassets and other assets may be deemed to be a “security”
under the laws of some jurisdictions, but not others. Various non-U.S. jurisdictions may, in the future, adopt additional laws, regulations, or directives that affect the characterization of crypto as “securities.”
The classification of an initial business combination,asset as we expecta security under applicable law has wide-ranging implications for the regulatory obligations that flow from the offer, sale, trading and clearing of such assets. For example, an asset that is a security in the United States may generally only be offered or sold in the United States pursuant to do in connectiona registration statement filed with the Proposed Transaction, such initial business combination,SEC or in an offering that qualifies for an exemption from registration. Persons that effect transactions in assets that are classified as securities in the United States may be subject to registration with the SEC and states in which they offer and sell securities as a “broker” or “dealer” and subject to the corresponding rules and regulations of the SEC, relevant states and self-regulatory organizations, including the Proposed Transaction,Financial Industry Regulatory Authority, Inc. (“FINRA”). Platforms that bring together buyers and sellers of assets that are classified as securities in the United States constitute securities exchanges and will be approved ifeither required to register as such with the SEC, or to operate pursuant to an exemption, as an alternative trading system (“ATS”).
We could be subject to legal or regulatory action in the event the SEC, a foreign regulatory authority, or a court were to determine that a supported cryptoasset bought, sold, converted, spent or sent through our platform is a “security” under applicable laws. Because our platform is not yet registered or licensed with the SEC or foreign authorities as a broker-dealer, national securities exchange, or ATS (or foreign equivalents), and we receivedo not seek to register or rely on an ordinary resolutionexemption from such registration or license to facilitate the offer and sale of cryptoassets on our platform, we currently only permit transactions in cryptoassets that we have determined are not securities. We intend to offer other cryptoassets on our platform in the future, although which cryptoassets will be allowed on our platform, and the timing for such cryptoassets to be allowed on out platform, is uncertain. We will only allow those cryptoassets for which we determine there are reasonably strong arguments to conclude that the cryptoasset is not a security.
However, the application of securities laws to the specific facts and circumstances of crypto may be complex and subject to change, and a listing determination does not guarantee any conclusion under Cayman Islands law,the United States federal securities laws. For example, in December 2020, the SEC filed a lawsuit against Ripple Labs, Inc. and two of its executives, alleging that they have engaged in an unregistered, ongoing securities offering through the sale of XRP, Ripple’s cryptoasset, which requireshad been in the affirmative votepublic domain since 2012. In July 2022, the SEC filed securities fraud charges against a former employee of Coinbase related to misuse of confidential Coinbase information. These SEC charges allege that nine cryptoassets involved in this matter are securities under federal securities laws. In February 2023, the SEC entered into a majoritysettlement agreement with Kraken after alleging its staking-as-a-service program constituted an offering and sale of securities. Pursuant to the shareholders who attend and vote atsettlement agreement, Kraken committed to cease offering or selling securities through its crypto staking services or staking programs in the United States. Additionally, in February 2023, the SEC issued a general meeting ofWells notice to the Paxos Trust Company, including the founder shares.LLC (“Paxos”), which Paxos claims pertains to a potential SEC action alleging BUSD, a stablecoin, is a security. As a result, it is unclear if the SEC would take a similar view or action with respect to other cryptoassets. We expect our risk assessment policies and procedures to regularly evolve to take into account developments in addition to our initial shareholders’ founder shares, we would need 7,773,952,case law, facts and developments in technology, regulatory clarity and changes in market acceptance and adoption of these cryptoassets. Actions may also be brought by private individuals or 37.5%,entities alleging illegal transactions involving cryptoassets that they claim are securities, and seeking recission of the public shares sold in the initial public offering tothose transactions, and/or other legal and equitable relief under federal or state securities laws.
There can be
voted in favor of an initial business combination, including the Proposed Transaction, in order to have such initial business combination approved (assuming all outstanding shares are voted). Accordingly, if we seek shareholder approval of our initial business combination, as we expect to do in connection with the Proposed Transaction, the agreement by our initial shareholders and management team to vote in favor of such initial business combination will increase the likelihoodno assurances that we will
receive an ordinary rsolution, being the requisite shareholder approvalproperly characterize any given cryptoasset as a security or non-security for
such initial business combination, including the Proposed Transaction.The abilitypurposes of our public shareholders to redeem their shares for cash may make our financial condition unattractive to potential business combination targets, which may make it difficult for us to enter into a business combination with a target.
We may seek to enter into a business combination transaction agreement with a minimum cash requirement for (i) cash considerationdetermining if that cryptoasset is allowed to be paidoffered through our platform, or that the SEC, foreign regulatory authority, or a court, if the question was presented to it, would agree with our assessment. If the targetSEC, foreign regulatory authority, or its owners, (ii) cash for working capitala court were to determine that bitcoin or any other general corporate purposescryptoasset to be offered, sold, or (iii)traded on our platform in the retention of cash to satisfy other conditions. The Proposed Transactionfuture is conditioned on the post-business combination entity have at least $425,000,000 of available cash after deducting the amount required to satisfy redemptions of our Class A ordinary shares, if any (but prior to payment of (a) deferred underwriting commissions and (b) our or our affiliates’ transaction expenses), (y) outside of the Trust Account, and (z) from the gross proceeds of the PIPE Investment. If too many public shareholders exercise their redemption rights,a security, we would not be able to meetoffer such closing conditioncryptoasset for trading until we are able to do so in a compliant manner, such as through an alternative trading system approved to trade cryptoassets that constitute securities, and such determination may have adverse consequences for such supported cryptoassets. A determination by the SEC, a foreign regulatory authority, or a court that an asset that we support for trading on our platform constitutes a security may also result in a determination that we should remove such asset from our platform, as well as other assets that have similar
characteristics to such asset deemed to be a security. In addition, we could be subject to judicial or administrative sanctions for failing to offer or sell the asset in compliance with the registration requirements, or for acting as a broker, dealer, or national securities exchange without appropriate registration. Such an action could result would notin injunctions, cease and desist orders, as well as civil monetary penalties, fines and disgorgement, criminal liability and reputational harm. Customers that traded such supported assets on our platform and suffered trading losses could also seek to rescind a transaction that we facilitated on the basis that it was conducted in violation of applicable law, which could subject us to significant liability. Furthermore, if we remove any assets from trading on our platform, our decision may be ableunpopular with our customers and may reduce our ability to proceedattract and retain customers, especially if such assets remain traded on unregulated exchanges, which includes many of our competitors.
We are subject to significant litigation risk and risk of regulatory liability and penalties. Any current or future litigation against us could be costly and time-consuming to defend.
We are from time to time subject to legal proceedings and claims that arise in the ordinary course of business, such as securities class action litigation or other shareholder litigation, claims brought by our clients or customers in connection with commercial disputes, or employment claims made by our current or former employees, and patent litigation. 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
business combination. Furthermore,VIH Business Combination, seeking damages as well as fees and costs. On March 14, 2023, the parties reached a settlement in
no event will we redeem our public shares in an amount that would cause our net tangible assetsprinciple, and expect to
be less than $5,000,001. Consequently, if accepting all properly submitted redemption requests would cause our net tangible assets to be less than $5,000,001complete a stipulation of settlement on or
such greater amount necessary to satisfy a minimum cash condition as described above, we would not proceed with such redemption andbefore April 10, 2023. We expect the
related business combination and may instead search for an alternate business combination. Prospective targetssettlement will be
awarecovered 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
these risks and, thus, may be reluctant to enter into a business combination transaction with us.The abilityits directors in the U.S. District Court for the Eastern District of New York.
Many aspects of our
public shareholders to exercise redemption rights with respectbusiness also involve substantial litigation risks, including potential liability from disputes over terms of a trade, the claim that a system failure or delay caused monetary losses to a
large number of our shares may not allow us to complete the most desirable business combination or optimize our capital structure.At the time we enter into an agreement for our initial business combination, we will not, and at the timecustomer, that we entered into the Merger Agreement,an unauthorized transaction, that we did not, know how many shareholders may exercise their redemption rights, and therefore will need to, and did, structure the transaction based on our expectations as to the number of shares that will be submitted for redemption. If our initial business combination agreement requires us to use a portion of the cash in the trust account to pay the purchase price,provided materially false or like the Merger Agreement, requires us to have a minimum amount of cash at closing, we will need to reserve a portion of the cash in the Trust Account to meet such requirements, or arrange for third-party financing. In addition, if a larger number of shares is submitted for redemption than we initially expected, we may need to restructure the transaction to reserve a greater portion of the cash in the Trust Account or arrange for third-party financing. Raising additional third-party financing, including the PIPE Investment, may involve dilutive equity issuances, such as the PIPE Investment, or the incurrence of indebtedness at higher than desirable levels. Furthermore, this dilution would increase to the extent that the anti-dilution provision of the Class B ordinary shares results in the issuance of Class A ordinary shares on a greater than one-to-one basis upon conversion of the Class B ordinary shares at the time of our initial business combination. In addition, the amount of the deferred underwriting commissions
payable to the underwriters will not be adjusted for any shares that are redeemedmisleading statements in connection with an initial business combination, including the Proposed Transaction. The per share amount we will distribute to shareholders who properly exercise their redemption rights will not be reduced by the deferred underwriting commission and after such redemptions, the amount held in trust will continue to reflect our obligation to pay the entire deferred underwriting commissions. The above considerations may limit our ability to complete the most desirable business combination available to usa transaction or optimize our capital structure.
The ability of our public shareholders to exercise redemption rights with respect to a large number of our shares could increase the probability that our initial business combination would be unsuccessful and that you would have to wait for liquidation in order to redeem your shares.
If our initial business combination agreement requires us to use a portion of the cash in the trust account to pay the purchase price, or, like the Merger Agreement, requires us to have a minimum amount of cash at closing, the probability that our initial business combination, including the Proposed Transaction, would be unsuccessful is increased. If the Proposed Transaction or another initial business combination is unsuccessful, you would not receive your pro rata portion of the Trust Account until we liquidate the trust account. If you are in need of immediate liquidity, you could attempt to sell your shares in the open market; however, at such time our shares may trade at a discount to the pro rata amount per share in the Trust Account. In either situation, you may suffer a material loss on your investment or lose the benefit of funds expected in connection with your exercise of redemption rights until we liquidate or you are able to sell your shares in the open market.
The requirement that we completefailed to effectively fulfill our initial business combination by September 25, 2022 may give potential target businesses leverage over us in negotiating a business combination and may limit the time we have in which to conduct due diligence on potential business combination targets, in particular as we approach our dissolution deadline, which could undermine our ability to complete our initial business combination on terms that would produce value for our shareholders.
Any potential target business with which we enter into negotiations concerning a business combination will be aware that we must complete our initial business combination by September 25, 2022. Consequently, such target business may obtain leverage over us in negotiating a business combination, knowing that if we do not complete our initial business combination with that particular target business, weregulatory oversight responsibilities. We may be unablesubject to complete our initial business combination with any target business. This risk will increase as we get closer todisputes regarding the timeframe described above. In addition, we may have limited time to conduct due diligence and may enter into our initial business combination on terms that we would have rejected upon a more comprehensive investigation.
Our search for a business combination, and any target business, including Bakkt, with which we ultimately consummate a business combination, may be materially adversely affected byquality of customer order execution, the coronavirus (COVID-19) outbreak and the statussettlement of debt and equity markets, as well as protectionist legislation in our target markets.
In December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China, which has and is continuing to spread throughout China and other parts of the world, including the United States. On January 30, 2020, the World Health Organization declared the outbreak of the coronavirus disease (COVID-19) a “Public Health Emergency of International Concern.” On January 31, 2020, U.S. Health and Human Services Secretary Alex M. Azar II declared a public health emergency for the United States to aid the U.S. healthcare community in responding to COVID-19, and on March 11, 2020 the World Health Organization characterized the outbreak as a “pandemic.” The COVID-19 outbreak has and a significant outbreak of other infectious diseases could result in a widespread health crisis that could adversely affect the economies and financial markets worldwide, and the business of Bakkt, or any other potential target business with which we consummate a business combination could be materially and adversely affected. Furthermore, we may be unable to complete a business combination, including the Proposed Transaction, if continued concerns relating to COVID-19 continues to restrict travel, limit the ability to have meetings with potential investors or the target company’s
personnel, vendors and services providers are unavailable to negotiate and consummate a transaction, including the Proposed Transaction, in a timely manner. In addition, countries or supranational organizations in our target markets may develop and implement legislation that makes it more difficult or impossible for entities outside such countries or target markets to acquire or otherwise invest in companies or businesses deemed essential or otherwise vital. The extent to which COVID-19 impacts our search and ability to consummate a business combination, including the Proposed Transaction, will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others. If the disruptions posed by COVID-19customer orders or other matters of global concern continue for an extensive period of time, andrelating to our services.
Litigation, even claims without merit, might result in
protectionist sentimentssubstantial costs and
legislation inmay divert management’s attention and resources, which might seriously harm our
target markets, our abilitybusiness, financial condition and results of operations. Insurance might not cover such claims, might not provide sufficient payments to
consummate a business combination, includingcover all the
Proposed Transaction,costs to resolve one or
the operations of Bakkt or another target business with which we ultimately consummate a business combination, maymore such claims, and might not continue to be
materially adversely affected.In addition, our ability to consummate a transaction, including the Proposed Transaction, may be dependent on the ability to raise equity and debt financing which may be impacted by COVID-19 and other events, including as a result of increased market volatility, decreased market liquidity in third-party financing being unavailableavailable on terms acceptable to us (including premium increases or at all.
We maythe imposition of large deductible or co-insurance requirements). A claim brought against us that is uninsured or underinsured could result in unanticipated costs, potentially harming our business, financial position and results of operations. In addition, we cannot be sure that our existing insurance coverage and coverage for errors and omissions will continue to be available on acceptable terms, or that our insurers will not be abledeny coverage as to completeany future claim. Further, an adverse resolution of any lawsuit or claim against us could have a material adverse effect on our initial business combination by September 25, 2022, in which case we would cease all operations except for the purpose of winding up and we would redeem our public shares and liquidate.
We may not be able to find a suitable target business and complete our initial business combinationreputation. To the extent we are found to have failed to fulfill our regulatory obligations, we could lose our authorizations or licenses or become subject to conditions that could make future operations more costly and impair our profitability. Such events could also result in consumer dissatisfaction and a decline in consumers’ willingness to use our platform.
Bakkt Holdings, Inc. is a holding company, its only material asset is its interest in Opco, and it is accordingly dependent upon distributions made by September 25, 2022. Ourits subsidiaries to pay taxes and expenses, make payments under the Tax Receivable Agreement and pay dividends.
Bakkt Holdings, Inc. is a holding company with no material assets other than our ownership of Opco Common Units and our managing member interest in Opco. As a result, it have no independent means of generating revenue or cash flow. Its ability to completepay taxes and operating expenses, make payments under the Proposed Transaction or another initial business combination may be negatively impacted by general market conditions, volatility in the capitalTax Receivable Agreement (the “Tax Receivable Agreement”) and debt markets and the other risks described herein. For example, the outbreak of COVID-19 continues to grow both in the U.S. and globally and, while the extent of the impact of the outbreak on uspay dividends (if any) will depend on future developments,the financial results and cash flows of Opco and its
subsidiaries and the distributions it receives from Opco. Deterioration in the financial condition, earnings or cash flow of Opco and its subsidiaries for any reason could limit or impair Opco’s ability to pay such distributions. Additionally, to the extent it needs funds and Opco and/or any of its subsidiaries are restricted from making such distributions under applicable law or regulation or under the terms of any financing arrangements, or Opco is otherwise unable to provide such funds, it could limitmaterially adversely affect Bakkt Holdings’ liquidity and financial condition.
Opco will continue to be treated as a partnership for U.S. federal income tax purposes and, as such, generally will not be subject to any entity-level U.S. federal income tax. Instead, taxable income will be allocated to holders of Opco Common Units. Accordingly, we will be required to pay income taxes on our allocable share of any net taxable income of Opco. Under the terms of the Opco LLC Agreement, Opco is obligated to make certain tax distributions to holders of Opco Common Units (including us). In addition to tax expenses, we will also incur other expenses, including payment obligations under the Tax Receivable Agreement, which could be significant. We intend to cause Opco to make distributions to holders of Opco Common Units, pro rata, in aggregate amounts sufficient to cover all of our applicable income taxes, payments required to be made by us under the Tax Receivable Agreement and dividends, if any, declared us. However, Opco’s ability to completemake such distributions may be subject to various limitations and restrictions including, but not limited to, restrictions on distributions that would either violate any contract or agreement to which Opco is then a party, including debt agreements, or any applicable law, or that would have the Proposed Transaction effect of rendering Opco insolvent. If our cash resources are insufficient to meet our obligations under the Tax Receivable Agreement and to fund our obligations, we may be required to incur additional indebtedness to provide the liquidity needed to make such payments, which could materially adversely affect our liquidity and financial condition and subject us to various restrictions imposed by any such lenders. To the extent that we are unable to make payments under the Tax Receivable Agreement for any reason, such payments will be deferred and will accrue interest until paid; provided, however, that non-payment for a specified period may constitute a material breach of a material obligation under the Tax Receivable Agreement and therefore accelerate payments due under the Tax Receivable Agreement, which could be substantial.
Additionally, although Opco generally will not be subject to any entity-level U.S. federal income tax, it may be liable under federal tax legislation for adjustments to its tax return, absent an election to the contrary. In the event that the taxing authorities determine that Opco’s tax returns are incorrect, Opco and/or another initial businessits members, including us, in later years may be subject to material liabilities pursuant to this federal legislation and its related guidance.
We anticipate that the distributions we will receive from Opco may, in certain periods, exceed our actual tax liabilities and obligations to make payments under the Tax Receivable Agreement. Our board of directors (the “Board”), in its sole discretion, will make determinations with respect to the use of any such excess cash, which may include, among other uses to pay dividends, which may include special dividends, on the Class A Common Stock; to fund repurchases of Class A Common Stock; or any combination includingof the foregoing. We will have no obligation to distribute such cash (or other available cash other than any declared dividend) to our stockholders. To the extent that we do not distribute such excess cash as dividends on Class A Common Stock or otherwise undertake ameliorative actions between Opco Common Units and shares of Class A Common Stock and instead, for example, hold such cash balances, holders of Opco Common Units that hold interests in Opco may benefit from any value attributable to such cash balances as a result of increasedtheir ownership of Class A Common Stock following an exchange of their Opco Common Units, notwithstanding that such holders may previously have participated as holders of Opco Common Units in distributions by Opco that resulted in such excess cash balances for us.
Opco is generally prohibited under Delaware law from making a distribution to a member to the extent that, at the time of the distribution, after giving effect to the distribution, liabilities of Opco (with certain exceptions) exceed the fair value of its assets. Opco’s subsidiaries are generally subject to similar legal limitations on their ability to make distributions to Opco.
Pursuant to the Tax Receivable Agreement, we are required to pay 85% of the net income tax savings we realize as a result of increases in the tax basis in Opco’s assets as a result of exchanges of Opco Common Units for Class A Common Stock (or cash) pursuant to the Exchange Agreement, and those payments may be substantial.
The Opco Equity Holders may exchange their Opco Common Units for shares of Class A Common Stock (or cash) pursuant to the Exchange Agreement, subject to certain conditions and transfer restrictions as set forth therein and in the Third Amended and Restated LLC Agreement. These exchanges are expected to result in increases in our allocable share of the tax basis of the tangible and intangible assets of Opco. These increases in tax basis may increase (for income tax purposes) depreciation and amortization deductions and therefore reduce the amount of U.S. federal and applicable state income tax that we would otherwise be required to pay in the future had such exchanges never occurred.
We are party to the Tax Receivable Agreement, which generally provides for the payment by us of 85% of certain net tax benefits, if any, that we realize (or in certain cases are deemed to realize) as a result of these increases in tax basis and certain other tax attributes of Opco and tax benefits related to entering into the Tax Receivable Agreement, including tax benefits attributable to payments under the Tax Receivable Agreement. These payments are our obligation and not an obligation of Opco. The actual increase in our allocable share of Opco’s tax basis in its assets, as well as the amount and timing of any payments under the Tax Receivable Agreement, will vary depending upon a number of factors, including the timing of exchanges, the market volatility, decreasedprice of the Class A Common Stock at the time of the exchange, the extent to which such exchanges are taxable and the amount and timing of the recognition of our income. While many of the factors that will determine the amount of payments that we will make under the Tax Receivable Agreement are outside of our control, we expect that the payments we will make under the Tax Receivable Agreement will be substantial and could have a material adverse effect on our financial condition. Estimating the amount and timing of payments that may become due under the Tax Receivable Agreement is, by its nature, imprecise. The amount and timing of any payments under the Tax Receivable Agreement are dependent upon significant future events, including those noted above in respect of estimating the amount and timing of our realization of tax benefits. The potential future tax savings that we will be deemed to realize, and the Tax Receivable Agreement payments made by us, will be calculated based on the market liquidityvalue of the Class A Common Stock at the time of each redemption or exchange under the Exchange Agreement and third-party financing being unavailable on terms acceptablethe prevailing tax rates applicable to us or at all. Furthermore, we may be unableover the life of the Tax Receivable Agreement and will depend on us generating sufficient taxable income to completerealize the Proposed Transaction or another initial business combination if continued concerns relating to COVID-19 restrict travel, limit the ability to have meetings with potential investors or the target company’s, including Bakkt’s, personnel, vendors and servicing providerstax benefits that are unavailable to negotiate and consummate a transaction, including the Proposed Transaction, in a timely manner. Additionally, the outbreak of COVID-19 may negatively impact businesses we may seek to acquire. If we have not completed our initial business combination within such time period, we will: (i) cease all operations except for the purpose of winding up, (ii) as promptly as reasonably possible but not more than ten business days thereafter, redeem the public shares, at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the trust account, including interest earned on the funds held in the trust account (less taxed payable and up to $100,000 of interest to pay dissolution expenses), divided by the number of then outstanding public shares, which redemption will completely extinguish public shareholders’ rights as shareholders (including the right to receive further liquidation distributions, if any), and (iii) as promptly as reasonably possible following such redemption, subject to the approvalTax Receivable Agreement. Any payments made by us under the Tax Receivable Agreement will generally reduce the amount of overall cash flow that might have otherwise been available to us. To the extent that we are unable to make timely payments under the Tax Receivable Agreement for any reason, the unpaid amounts will be deferred and will accrue interest until paid; however, non-payment for a specified period may constitute a material breach of a material obligation under the Tax Receivable Agreement and therefore accelerate payments due under the Tax Receivable Agreement, which could be substantial, as further described below. Furthermore, our remaining shareholders and our board of directors, liquidate and dissolve, subjectfuture obligation to make payments under the Tax Receivable Agreement could make it a less attractive target for an acquisition, particularly in ethethe case of clauses (ii) and (iii), to our obligationsan acquirer that cannot use some or all of the tax benefits that may be deemed realized under Cayman Islands law to provide for claims of creditors and in allthe Tax Receivable Agreement.
In certain cases, subject topayments under the other requirements of applicable law.
IfTax Receivable Agreement may exceed the actual tax benefits we seek shareholder approval of our initial business combination, as we expect to do in connection withrealize or such payments may be accelerated.
Payments under the
Proposed Transaction, our sponsor, initial shareholders, directors, officers, advisors and their affiliates may elect to purchase shares or public warrants from public shareholders, which may influence a vote on a proposed business combination, including the Proposed Transaction, and reduce the public “float” of our Class A ordinary shares.If we seek shareholder approval of our initial business combination, as we expect to do in connection with the Proposed Transaction, and we do not conduct redemptions in connection with our initial business combination pursuant to the tender offer rules, our sponsor, initial shareholders, directors, officers, advisors or their affiliates may purchase shares or public warrants in privately negotiated transactions or in the open market either prior to or following the completion of such initial business combination, although they are under no obligation to do so. There is no limitTax Receivable Agreement will be based on the number of shares our initial shareholders, directors, officers, advisors or their affiliates may purchase in such transactions, subject to compliance with applicable lawtax reporting positions that we determine, and the Nasdaq rules. However, other than as expressly stated herein, they have no current commitments, plansInternal Revenue Service (the “IRS”) or intentions to engage in such transactions and have not formulatedanother taxing authority may challenge all or any terms or conditions for any such transactions. Nonepart of the funds in the trust account will be used to purchase shares or public warrants intax basis increases, as well as other tax positions that we take, and a court may sustain such transactions. Such purchases may include a contractual acknowledgment that such shareholder, although still the record holder of our shares, is no longer the beneficial owner thereof and therefore agrees not to exercise its redemption rights.
challenge. In the event that our sponsor, initial shareholders, directors, officers, advisors or their affiliates purchase shares in privately negotiated transactions from public shareholders who have already elected to exercise their redemption rights, such selling shareholders wouldany tax benefits initially claimed by us are disallowed, the current Opco Equity Holders will not be required to revoke their prior electionsreimburse us for any excess payments that may previously have been made under the Tax Receivable Agreement, for example, due to redeem their shares. The purposeadjustments resulting from examinations by taxing authorities. Rather, excess payments made to such holders will be netted against any future cash payments otherwise required to be made by us, if any, after the determination of such excess. However, a challenge to any tax benefits initially claimed by us may not arise for a number of years following the initial time of such purchasespayment or, even if challenged early, such excess cash payment may be greater than the amount of shares couldfuture cash payments that we might otherwise be required to vote such shares in favormake under the terms of the Proposed Transaction or such other business combination,Tax Receivable Agreement and, thereby increaseas a result, there might not be future cash payments from which to net against. As a result, in certain circumstances we could make payments under the likelihood of obtaining shareholder approval of the Proposed Transaction or such other business combination or to satisfy a closing conditionTax Receivable Agreement in an agreement with a target, such as Bakkt, that requires us to have a minimum net worth or a certain amount of cash at the closingexcess of our initial business combination, where it appearsactual income tax savings, which could materially impair our financial condition.
Moreover, the Tax Receivable Agreement provides that,
such requirement would otherwise not be met. The purpose of any such purchases of public warrants could be to reduce the number of public warrants outstanding or to vote such warrants on any matters submitted to the warrant holders for approval in connection with the Proposed Transaction or such other initial business combination. Any such purchases of our securities may result in the
completionevent that (a) we exercise our early termination rights under the Tax Receivable Agreement, (b) the Tax Receivable Agreement is rejected in a bankruptcy proceeding, (c) certain changes of
control occur (as described in the
Proposed TransactionTax Receivable Agreement) or
such other initial business combination that may not otherwise have been possible. We expect any such purchases will be reported pursuant to Section 13 and Section 16(d) we are more than thirty days late in making of
a payment due under the
Exchange Act to the extent such purchasers are subject to such reporting requirements.In addition, if such purchases are made, the public “float” of our Class A ordinary shares or public warrants and the number of beneficial holders of our securities may be reduced, possibly making it difficult to obtain or maintain the quotation, listing or trading of our securities on a national securities exchange.
If a shareholder fails to receive notice of our offer to redeem our public shares in connection with our initial business combination, including the Proposed Transaction, or fails to comply with the procedures for submitting or tendering its shares, such shares may not be redeemed.
We will comply with the proxy rules or tender offer rules, as applicable, when conducting redemptions in connection with our initial business combination, including the Proposed Transaction. Despite our compliance with these rules, if a shareholder fails to receive our proxy materials or tender offer documents, as applicable, such shareholder may not become aware of the opportunity to redeem its shares. In addition, proxy materials or tender offer documents, as applicable,Tax Receivable Agreement (unless we determine that we will furnishhave insufficient funds to holdersmake such payment as a result of our public shares in connection with the Proposed Transaction or another initial business combination will describe the various procedures that must be complied with in order to validly tender or submit public shares for redemption. For example, we intend to require our public shareholders seeking to exercise their redemption rights, whether they are record holders or hold their shares in “street name,” to, at the holder’s option, either deliver their share certificates to our transfer agent, or to deliver their shares to our transfer agent electronically prior to the date set forth in the proxy
materials or tender offer documents, as applicable. In the case of proxy materials, as we expect to distribute in connection with the Proposed Transaction, this date may be up to two business days prior to the scheduled vote on the proposal to approve the initial business combination. In addition, if we conduct redemptionsobligations imposed in connection with a shareholder vote, assenior obligation or applicable law), our obligations under the Tax Receivable Agreement will accelerate and we expectwill be required to do in connection withmake an immediate lump-sum cash payment to the Proposed Transaction, we intendOpco Equity Holders equal to require a public shareholder seeking redemptionthe present value of its public shares to also submit a written request for redemptionall forecasted future payments that would have otherwise been made under the Tax Receivable Agreement, which lump-sum payment would be based on certain assumptions, including those relating to our transfer agent two business days priorfuture taxable income. The lump-sum payment to the scheduled voteOpco Equity Holders could be substantial and could exceed the actual tax benefits that we realize subsequent to such payment because such payment would be calculated assuming, among other things, that we would have certain tax benefits available to it, that we would be able to use the potential tax benefits in whichfuture years, and that tax rates applicable to us would be the namesame as they were in the year of the beneficial ownertermination.
There may be a material negative effect on our liquidity if the payments under the Tax Receivable Agreement exceed the actual income tax savings that we realize. Furthermore, our obligations to make payments under the Tax Receivable Agreement could also have the effect of such sharesdelaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control. We may need to incur additional indebtedness to finance payments under the Tax Receivable Agreement to the extent our cash resources are insufficient to meet our obligations under the Tax Receivable Agreement as a result of timing discrepancies or otherwise.
We may have to constrain our business activities to avoid being deemed an investment company under the Investment Company Act.
In general, a company that is
included. In the event that a shareholder fails to comply with these or
any other procedures disclosedholds itself out as being engaged primarily in the
proxybusiness of investing, reinvesting, or
tender offer materials, as applicable, its shares may not be redeemed.You will not be entitled to protections normally afforded to investors of many other blank check companies.
Since the net proceeds of the initial public offering and the sale of the private placement warrants are intended to be used to complete an initial business combination with a target business that has not been selected, wetrading in securities may be deemed to be a “blank check”an investment company under the United States securities laws. However, becauseInvestment Company Act. The Investment Company Act contains substantive legal requirements that regulate the manner in which “investment companies” are permitted to conduct their business activities. We believe we have net tangible assets in excess of $5,000,000conducted, and have filed a Current Report on Form 8-K, including an audited balance sheet demonstrating this fact, we are exempt from rules promulgated by the SEC to protect investors in blank check companies, such as Rule 419. Accordingly, investors will not be afforded the benefits or protections of those rules. Among other things, this means our units will be immediately tradable and we will have a longer period of time to complete our initial business combination than do companies subject to Rule 419. Moreover, if the initial public offering were subject to Rule 419, that rule would prohibit the release of any interest earned on funds held in the trust account to us unless and until the funds in the trust account were released to us in connection with our completion of an initial business combination.
Because of our limited resources and the significant competition for business combination opportunities, it may be more difficult for us to complete the Proposed Transaction or another initial business combination. If we are unable to complete the Proposed Transaction or another initial business combination, our public shareholders may receive only their pro rata portion of the funds in the trust account that are available for distribution to public shareholders, and our warrants will expire worthless.
We expect to encounter competition from other entities having a business objective similar to ours, including private investors (which may be individuals or investment partnerships), other blank check companies and other entities, domestic and international, competing for the types of businesses we intend to acquire. Many of these individuals and entities are well-established and have extensive experiencecontinue to conduct, our business in identifying and effecting, directly or indirectly, acquisitions of companies operatinga manner that does not result in or providing services to various industries. Many of these competitors possess similar or greater technical, human and other resources to ours or more local industry knowledge than we do and our financial resources will be relatively limited when contrasted with those of many of these competitors. While we believe there are numerous target businesses, including Bakkt, we could potentially acquire with the net proceeds of the initial public offering and the sale of the private placement warrants, our ability to compete with respect to the acquisition of certain target businesses that are sizable will be limited by our available financial resources. This inherent competitive limitation gives others an advantage in pursuing the acquisition of certain target businesses. Furthermore, we are obligated to offer holders of our public shares the right to redeem their shares for cash at the time of our initial business combination, including the Proposed Transaction, in conjunction with a shareholder vote or via a tender offer. Target companies, such as Bakkt, will be aware that this may reduce the resources available to us for our initial business combination. Any of these obligations may place us at a competitive disadvantage in successfully negotiating a business combination. If we are unable to complete the Proposed Transaction or another initial business combination, our public shareholders may receive only their pro rata portion of the funds in the trust account that are available for distribution to public shareholders, and our warrants will expire worthless.
If the net proceeds of the initial public offering not being held in the trust account are insufficient to allow us to operate for at least until September 25, 2022, it could limit the amount available to fund our search for a target business or businesses and complete the Proposed Transaction or another initial business combination, and we will depend on loans from our sponsor or management team to fund our search and to complete our initial business combination.
Of the net proceeds of the initial public offering, only approximately $1,000,000 were available to us initially outside the trust account to fund our working capital requirements. We believe that the funds available to us outside of the trust account are sufficient to allow us to operate for at least until September 25, 2022; however, we cannot assure you that our estimate is accurate. Of the funds available to us, we could use a portion of the funds available to us to pay fees to consultants to assist us with our search for a target business. We could also use a portion of the funds as a down payment or to fund a “no-shop” provision (a provision in letters of intent or merger agreements designed to keep target businesses from “shopping” around for transactions with other companies or investors on terms more favorable to such target businesses) with respect to a particular proposed business combination, although we do not have any current intention to do so and have not done so in connection with the Proposed Transaction. If we entered into a letter of intent or merger agreement where we paid for the right to receive exclusivity from a target business and were subsequently required to forfeit such funds (whether as a result of our breach or otherwise), we might not have sufficient funds to continue searching for, or conduct due diligence with respect to, a target business.
Prior to the completion of our initial business combination, including the Proposed Transaction, we do not expect to seek loans from parties other than our sponsor or an affiliate of our sponsor as we do not believe third parties will be willing to loan such funds and provide a waiver against any and all rights to seek access to funds in our Trust Account. If we are unable to complete the Proposed Transaction or another initial business combination because we do not have sufficient funds available to us, we will be forced to cease operations and liquidate the Trust Account. Consequently, our public shareholders may only receive an estimated $10.00 per share, or possibly less, on our redemption of our public shares, and our warrants will expire worthless.
If third parties bring claims against us, the proceeds held in the Trust Account could be reduced and the per-share redemption amount received by shareholders may be less than $10.00 per share.
Our placing of funds in the Trust Account may not protect those funds from third party claims against us. Although we seek to have all vendors, service providers, prospective target businesses and other entities (except for our Independent Registered Public Accounting Firm) with which we do business execute agreements with us waiving any right, title, interest or claim of any kind in or to any monies held in the trust account for the benefit of our public shareholders, such parties may not execute such agreements, or even if they execute such agreements they may not be prevented from bringing claims against the Trust Account, including, but not limited to, fraudulent inducement, breach of fiduciary responsibility or other similar claims, as well as claims challenging the enforceability of the waiver, in each case in order to gain advantage with respect to a claim against our assets, including the funds held in the Trust Account. If any third party refuses to execute an agreement waiving such claims to the monies held in the Trust Account, our management will consider whether competitive alternatives are reasonably available to us and will only enter into an agreement with such third party if management believes that such third party’s engagement would be in the best interests of the Company under the circumstances. WithumSmith+Brown, PC, our independent registered independent public accounting firm, and the underwriters of our initial public offering will not execute agreements with us waiving such claims to the monies held in the Trust Account.
Examples of possible instances where we may engage a third party that refuses to execute a waiver include the engagement of a third party consultant whose particular expertise or skills are believed by management to be significantly superior to those of other consultants that would agree to execute a waiver or in cases where management is unable to find a service provider willing to execute a waiver. In addition, there is no guarantee that such entities will agree to waive any claims they may have in the future as a result of, or arising out of, any
negotiations, contracts or agreements with us and will not seek recourse against the Trust Account for any reason. Upon redemption of our public shares, if we are unable to complete the Proposed Transaction or another initial business combination within the prescribed timeframe, or upon the exercise of a redemption right in connection with such initial business combination, we will be required to provide for payment of claims of creditors that were not waived that may be brought against us within the 10 years following redemption. Accordingly, the per-share redemption amount received by public shareholders could be less than the $10.00 per public share initially held in the trust account, due to claims of such creditors. Pursuant to the letter agreement the form of which is filedcharacterized as an exhibit to the registration statement of which this Annual Report on Form 10-K forms a part, our Sponsor has agreed that it will be liable to us if and to the extent any claims by a third party for services rendered or products sold to us, or a prospective target business with whichinvestment company. To avoid being deemed an investment company, we have entered into a written letter of intent, confidentiality or other similar agreement or business combination agreement, reduce the amount of funds in the Trust Account to below the lesser of (i) $10.00 per public share and (ii) the actual amount per public share held in the trust account as of the date of the liquidation of the Trust Account, if less than $10.00 per public share due to reductions in the value of the trust assets, less taxes payable, provided that such liability will not apply to any claims by a third party or prospective target business who executed a waiver of any and all rights to the monies held in the Trust Account (whether or not such waiver is enforceable) nor will it apply to any claims under our indemnity of the underwriters of the initial public offering against certain liabilities, including liabilities under the Securities Act. However, we have not asked our Sponsor to reserve for such indemnification obligations, nor have we independently verified whether our Sponsor has sufficient funds to satisfy its indemnity obligations and we believe that our Sponsor’s only assets are securities of our company. Therefore, we cannot assure you that our Sponsor would be able to satisfy those obligations. As a result, if any such claims were successfully made against the Trust Account, the funds available for the Proposed Transaction or another initial business combination and redemptions could be reduced to less than $10.00 per public share. In such event, we may not be able to complete the Proposed Transaction or another initial business combination, and you would receive such lesser amount per share in connection with any redemption of your public shares. None of our officers or directors will indemnify us for claims by third parties including, without limitation, claims by vendors and prospective target businesses.
Our directors may decide not to enforce the indemnification obligations ofbroaden our Sponsor, resulting in a reduction in the amount of funds in the Trust Account available for distribution to our public shareholders.
In the event that the proceeds in the Trust Account are reduced below the lesser of (i) $10.00 per share and (ii) the actual amount per public share held in the Trust Account as of the date of the liquidation of the Trust Account if less than $10.00 per public share due to reductions in the value of the trust assets, in each case less taxes payable, and our sponsor asserts that it is unable to satisfy its obligations or that it has no indemnification obligations related to a particular claim, our independent directors would determine whether to take legal action against our Sponsor to enforce its indemnification obligations. While we currently expect that our independent directors would take legal action on our behalf against our Sponsor to enforce its indemnification obligations to us, it is possible that our independent directors in exercising their business judgment and subject to their fiduciary duties may choose not to do so in any particular instance, if for example, the cost of such legal action is deemed by the independent directors to be too high relative to the amount recoverable or if the independent directors determine that a favorable outcome is not likely. If our independent directors choose not to enforce these indemnification obligations, the amount of funds in the Trust Account available for distribution to our public shareholders may be reduced below $10.00 per share.
If, after we distribute the proceeds in the Trust Account to our public shareholders, we file a bankruptcy or insolvency petition or an involuntary bankruptcy or insolvency petition is filed against us that is not dismissed, a bankruptcy or insolvency court may seek to recover such proceeds, and the members of our board of directors may be viewed as having breached their fiduciary duties to our creditors, thereby exposing the members of our board of directors andofferings, which could require us to claims of punitive damages.
If, after we distribute the proceeds in the Trust Account to our public shareholders, we file a bankruptcy or insolvency petition or an involuntary bankruptcy or insolvency petition is filed against us that is not dismissed, any distributions received by shareholders could be viewed under applicable debtor/creditor and/or bankruptcy laws as either a “preferential transfer” or a “fraudulent conveyance.” As a result, a bankruptcy or insolvency court could seek to recover some or all amounts received by our shareholders. In addition, our board of directors may be viewed as having breached its fiduciary duty to our creditors and/or having acted in bad faith, by paying public shareholders from the Trust Account prior to addressing the claims of creditors, thereby exposing itself and us to claims of punitive damages.
If, before distributing the proceeds in the Trust Account to our public shareholders, we file a bankruptcy petition or insolvency or an involuntary bankruptcy or insolvency petition is filed against us that is not dismissed, the claims of creditors in such proceeding may have priority over the claims of our shareholders and the per-share amount that would otherwise be received by our shareholders in connection with our liquidation may be reduced.
If, before distributing the proceeds in the Trust Account to our public shareholders, we file a bankruptcy or insolvency petition or an involuntary bankruptcy or insolvency petition is filed against us that is not dismissed, the proceeds held in the Trust Account could be subject to applicable bankruptcy law, and may be included in our bankruptcy estate and subject to the claims of third parties with priority over the claims of our shareholders. To the extent any bankruptcy claims deplete the Trust Account, the per-share amount that would otherwise be received by our shareholders in connection with our liquidation may be reduced.
forgo attractive opportunities. If we are deemed to be an investment company under the Investment Company Act, we maywould be required to institute burdensome compliance requirements and our activities maywould be restricted, which may make it difficult for us to completewould adversely affect our initial business, combination.
If we are deemed to be an investment company under the Investment Company Act, our activities may be restricted, including:
restrictions on the naturefinancial condition and results of our investments; and
restrictions on the issuance of securities, each of which may make it difficult for us to complete our initial business combination, including the Proposed Transaction.operations. In addition, we may have imposed upon us burdensome requirements, including:
registration as an investment company with the SEC;
adoption of a specific form of corporate structure; and
reporting, record keeping, voting, proxy and disclosure requirements and other rules and regulations thatbe forced to make changes to our management team if we are not subject to.
In order notrequired to be regulatedregister as an investment company under the Investment Company Act, unlessAct.
Broker-dealers are subject to extensive state and federal government regulation in the United States, and our failure or inability to comply with these regulations or regulatory action against us could adversely affect our results of operations, financial condition, or business.
We have recently acquired Bumped, a broker-dealer registered with FINRA, subject to FINRA approval of a CMA filed by Bumped. Bumped is registered as a broker-dealer in 52 U.S. states and territories. As such, if the CMA is approved by FINRA completing the acquisition, we can qualify for an exclusion, we must ensure that we are engaged primarily in a business other than investing, reinvesting or trading of securities and that our activities do not include investing, reinvesting, owning, holding or trading “investment securities” constituting more than 40% of our assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. Our business will be subject to identifyregulation, examination, investigation, and completedisciplinary action by the SEC, FINRA, and state securities regulators, as well as other governmental authorities and self-regulatory organizations with which Bumped is registered or licensed or of which Bumped is a business combinationmember. Our failure or inability to comply with these any of these regulations or any regulatory action against us could adversely affect our results of operations, financial condition, or business.
We are subject to anti-money laundering and thereaftercounter terrorist financing laws and regulations, globally, including the USA PATRIOT Act, and failure to operate the post-transaction business or assets for the long term. We do not plan to buy businesses or assetscomply with a view to resale or profit from their resale. We do not plan to buy unrelated businesses or assets or to be a passive investor.
We do not believe that our anticipated principal activities willsuch laws and regulations may subject us to liability. There can be no assurance that our employees or agents will not violate such laws and regulations.
We are subject to anti-money laundering and counter terrorist financing laws and regulations globally, including the Investment Company Act. To this end,Bank Secrecy Act, as amended by the USA PATRIOT Act, the regulations promulgated by FinCEN, as well as economic and trade sanctions programs, including those imposed and administered by OFAC. These regulations prohibit, among other things, our involvement in transferring the proceeds heldof criminal activities. Under OFAC’s economic sanctions program, we are prohibited from financial transactions and other dealings with certain countries and geographies and with persons and entities included in OFAC sanctions lists, including its list of Specially Designated Nationals and Blocked Persons.
The United States is also a member of the Financial Action Task Force (“FATF”), an intergovernmental body that establishes international standards to combat money laundering, terrorist financing and other related threats to the integrity of the international financial system. FATF issues guidance that members states are required to observe. More recently, in October 2021, FATF issued the Updated Guidance for Virtual Assets and Virtual Asset Service Providers (“FATF Guidance”) which provides additional details regarding expectations for crypto businesses, including those related to due diligence, transmission of transaction data and reporting.
Regulators in the Trust Account may only be invested in United States, “government securities” within the meaningwhere we currently operate, continue to increase their scrutiny of Section 2(a)(16)compliance with these obligations, which may require us to further revise or expand our compliance program. For example, Division F of the Investment CompanyNational Defense Authorization Act having a maturityfor Fiscal Year 2021, titled the Anti-Money Laundering Act of 185 days or less or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act which invest only in direct U.S. government treasury obligations. Pursuant2020, makes significant reforms to the trust agreement,Bank Secrecy Act and other anti-money laundering rules. Evaluation and incorporation of changes required under Division F could result in greater costs for compliance. Furthermore, on March 2, 2022, a group of United States Senators sent the trustee is not permitted to invest in other securities or assets. By restricting the investmentSecretary of the proceedsUnited States Treasury Department a letter asking Secretary Yellen to investigate its ability to enforce such sanctions vis-à-vis bitcoin, and on March 8, 2022, President Biden announced an executive order on cryptocurrencies that seeks to establish a unified federal regulatory regime for cryptocurrencies. We are unable to predict the nature or extent of new and proposed legislation and regulation affecting the cryptocurrency industry, or the potential impact of the use of cryptocurrencies by Specially Designated Nationals or Blocked Persons, which could have material adverse effects on our business and our industry more broadly. Our failure to comply with such laws and regulations, as required by our regulators, may expose us to liability or enforcement actions.
There also can be no assurance that our employees or agents will not violate such anti-money laundering and counter terrorist financing laws and regulations. A failure by us or our employees or agents to comply with such laws and regulations and subsequent judgment or settlement against us under these instruments,laws could subject us to monetary penalties, damages and/or have a significant reputational impact.
Failure to comply with anti-bribery and by having aanti-corruption laws and similar laws could subject us to penalties and other adverse consequences.
We are subject to the U.S. Foreign Corrupt Practices Act of 1977 (the “FCPA”), the U.S. domestic bribery statute contained in 18 U.S.C. § 201, and possibly other anti-bribery and anti-corruption laws in countries outside of the United States where we conduct our activities. Anti-corruption and anti-bribery laws are enforced aggressively and are interpreted broadly to generally prohibit companies, their employees, agents, representatives, clients, and third-party intermediaries from authorizing, offering, or providing, directly or indirectly, improper payments or benefits to recipients in the public or private sector.
We may leverage third parties to sell our products and conduct our business plan targeted at acquiringabroad. We, our employees, agents, representatives, clients and growing businessesthird-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and we may be held liable for the long term (rather than on buying and selling businesses in the mannercorrupt or other illegal activities of a merchant bankthese employees, agents, representatives, clients or private equity fund), we intend to avoid being deemed an “investment company” within the meaning of the Investment Company Act. Our securities are not intended for persons who are seeking a return on investments in government securities or investment securities. The Trust Account is intended as a holding place for funds pending the earliest to occur of either: (i) the completion of our initial business combination, including the Proposed Transaction; (ii) the redemption of any public shares properly submitted in connection with a shareholder vote to amend our amended and restated memorandum and articles of association (A) to modify the substance or timing of our obligation to allow redemption in connection with our initial business combination or to redeem 100% of our public sharesthird-party intermediaries even if we do not completeexplicitly authorize such activities. We cannot assure you that all of our initialemployees, agents, representatives, clients or third-party intermediaries will not take actions in violation of applicable law for which we may be ultimately held responsible. As we increase our international sales and business, combination by September 25, 2022;our risks under these laws may increase.
These laws also require that we keep accurate books and records and maintain internal controls and compliance procedures designed to prevent any such actions. While we have implemented policies and procedures designed to ensure compliance with these laws and regulations, there can be no assurance that none of our employees, agents, representatives, clients or (B) with respectthird-party intermediaries will not violate our policies or applicable laws and regulations, for which we may be ultimately held responsible.
Any allegations or violation of the FCPA or other applicable anti-bribery and anti-corruption laws could result in whistleblower complaints, sanctions, settlements, prosecution, enforcement actions, fines, damages, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions, or suspension or debarment from government contracts, all of which may have an adverse effect on our reputation, business, results of operations, and prospects. Responding to any investigation or action will likely result in a materially significant diversion of management’s attention and resources and significant defense costs and other material provisions relatingprofessional fees.
We are subject to shareholders’ rights or pre-initial business combination activity, or (iii) absent an initial business combination by September 25, 2022, our return of the funds heldfederal and state consumer protection laws and regulations in the trust account to our public shareholders as partjurisdictions in which we operate, which may result in liability or expense, including potential private rights of our redemption of the public shares. Ifaction, if we do not investcomply, or it is alleged that we do not to comply, with such laws.
We are subject to federal and state consumer protection laws and regulations in the proceedsjurisdictions in which we operate. In the United States, Bakkt Marketplace is subject to federal and state consumer protection laws and regulations applicable to its activities, including the Electronic Fund Transfer Act (“EFTA”) and Regulation E as discussed above, weimplemented by the CFPB. These regulations require us to provide advance disclosure of changes to our services, follow specified error resolution procedures and reimburse consumers for losses from certain transactions not authorized by the consumer, among other requirements. There are uncertainties associated with being subject to consumer protection rules and regulations of the CFPB and other regulators, including in the application of certain rules and regulations to our business model and to crypto. Bakkt Marketplace may be deemed toconsidered a “covered person” for purposes of the CFPB’s enforcement authority and may additionally be subject to the Investment Company Act. Ifauthority of the Federal Trade Commission. Under certain consumer protection rules and regulations, we were deemedmay be exposed to significant liability to consumers in the event that there is an incident which results in a large number of unauthorized and fraudulent transfers out of our system. Additionally, we could face private litigation by consumers under consumer protection laws and regulations that have private rights of action. Technical violations of consumer protection laws could result in the assessment of actual damages or statutory damages or penalties of up to $1,000 in individual cases or up to $500,000 per violation in any class action and treble damages in some instances; we could also be liable for plaintiffs’ attorneys’ fees in such cases. We could be subject to, and could be required to pay amounts in settlement of, lawsuits containing allegations that our business violated the Investment Company Act, complianceEFTA and Regulation E or otherwise advance claims for relief relating to our business practices.
We have implemented certain changes to comply with these additional regulatory burdens wouldthe CFPB’s rule on prepaid accounts, which requires, among other things, the disclosure of fees and other information to the consumer prior to the creation of a prepaid account, some of which constitute substantial changes to the design of certain U.S. consumer accounts and their operability, which could lead to consumer dissatisfaction, require additional expenses forus to reallocate resources, and increase our costs, which we have not allotted fundscould negatively affect our business.
Complying with evolving privacy and
other data related laws and requirements may
hinderbe expensive and force us to make changes to our
ability to complete a business,
combination. If we are unable to complete the Proposed Transaction or another initial business combination, our public shareholders may only receive their pro rata portion of the funds in the Trust Account that are available for distribution to public shareholders, and
our warrants will expire worthless.Changes in laws or regulations, or a failure to comply with anysuch laws and regulations, may adversely affectrequirements could result in substantial harm to our business, including our ability to negotiate and complete the Proposed Transaction or another initial business combination, and results of operations.
business.
We are subject to a number of laws, rules, directives and regulations (“privacy laws”) relating to the collection, use, retention, security, processing and transfer of personally identifiable information about our consumers, employees, and other individuals (“personal data”) in the jurisdictions where we operate. Our business relies on the processing of data and the movement of data, and, as a result, much of the personal data that we process, especially financial information, may be regulated by multiple privacy laws. In many cases, these laws apply not only to third-party transactions, but also to transfers of information between or among us, our subsidiaries and other parties with which we have commercial
relationships. Regulatory scrutiny of privacy, data protection and the collection, storage, use and sharing of personal data is increasing across multiple jurisdictions.
Furthermore, laws relating to privacy and data protection, including with respect to the use of data in artificial intelligence and machine learning, are rapidly evolving, extensive, complex and include inconsistencies and uncertainties. Examples of recent and anticipated developments that have or could impact our business include the following:
•The California Consumer Privacy Act (“CCPA”), as amended by the California Privacy Rights (“CPRA”) provide California residents increased privacy rights and protections with respect to certain sensitive personal information, including the ability to opt out of sales of their personal information. The CPRA also creates a new state agency that will be vested with authority to implement and enforce the CCPA and the CPRA.
•In March 2021, the Governor of Virginia signed into law the Virginia Consumer Data Protection Act (“VCDPA”) (effective January 1, 2023). The VCDPA creates consumer rights similar to the CCPA, but also imposes security and assessment requirements for businesses.
•In July 2021, Colorado enacted the Colorado Privacy Act, which closely resembles the VCDPA, and, like the VCDPA, will be enforced by the state Attorney General and district attorney.
•Other U.S. states are considering adopting similar laws. The enactment of such laws could have potentially conflicting requirements that would make compliance challenging.
•The United States government is considering regulating artificial intelligence and machine learning.
•The certifications we maintain and the standards we comply with, including the Payment Card Industry Data Security Standard, among others, are becoming more stringent.
These and other similar legal and regulatory developments could contribute to legal and economic uncertainty, affect how we design, market, sell and operate our platform, how our clients, customers and vendors process and share data, how we process and use data, and how we transfer personal data from one jurisdiction to another, which could negatively impact demand for our platform. We may incur substantial costs to comply with such laws and regulations, enacted by national, regional and local governments. In particular, we are required to complymeet the demands of our clients relating to their own compliance with certain SEC and other legal requirements. Compliance with, and monitoring of, applicable laws and regulations, and to establish and maintain internal policies, self-certifications and third-party certifications supporting our compliance programs. Our clients may delegate their obligations relating to these or other laws or regulations to us via contract, and we may otherwise be difficult, time consumingrequired to expend resources to assist our clients with such compliance obligations. In addition, any actual or perceived non-compliance with applicable laws, regulations, policies, industry data protections, security standards and costly. Thosecertifications could result in proceedings, investigations, or claims against us by regulatory authorities, consumers, clients, or others, leading to reputational harm, significant fines, litigation costs and damages. Furthermore, many foreign countries and governmental bodies have laws and regulations concerning the collection, use, processing, storage, and deletion of personal information obtained from their interpretationresidents or by businesses operating within their jurisdiction. These laws and application may also change from timeregulations often are more restrictive than those in the United States. As we expand our business activities into jurisdictions beyond the United States, including as a result of the Apex acquisition, if consummated, our practices, offerings, or platform could fail, or be alleged to time and those changesfail to meet applicable requirements in the jurisdictions we operate. All of these impacts could have a material adverse effect on our business, investmentsfinancial condition and results of operations.
We may at times fail to comply with our privacy policies regarding the collection, processing, use and disclosure of personal data, including credit card information, and certain other information or may be perceived to have failed to do so. We may also not be successful in achieving compliance if our employees or vendors fail to comply with our published policies, certifications and documentation. Such failures can subject us to potential local, state and federal action if they are found to be deceptive, unfair, or misrepresentative of our actual practices.
In addition, because of the large number of text messages, emails, phone calls and other communications we send or make to our consumers for various business purposes, communication-related privacy laws that provide a specified monetary damage award or fine for each violation could result in particularly significant damage awards or fines. For
example, under the Telephone Consumer Protection Act (“TCPA”), in the U.S., plaintiffs may seek actual monetary loss or statutory damages of $500 per violation, whichever is greater, and courts may triple the damage award for willful or knowing violations. We could be subject to lawsuits (including class-action lawsuits) containing allegations that our business violated the TCPA. These lawsuits seek damages (including statutory damages) and injunctive relief, among other remedies. Given the large number of communications we send to our consumers, a determination that there have been violations of the TCPA or other communications-based statutes could expose us to significant damage awards that could, individually or in the aggregate, materially harm our business.
We may be unable to sufficiently protect our proprietary rights and may encounter disputes from time to time relating to our use of the intellectual property of third parties.
We rely on a combination of trademarks, patents, service marks, copyrights, trade secrets, domain names and agreements with employees and third parties to protect our proprietary rights. Nonetheless, third parties may challenge, invalidate or circumvent our intellectual property, and our intellectual property may not be sufficient to provide it with a competitive advantage.
Despite our efforts to protect these rights, unauthorized third parties may attempt to duplicate or copy the proprietary aspects of our technology and processes. Our competitors and other third parties independently may design around or develop similar technology or otherwise duplicate our services or products such that we could not assert our intellectual property rights against them. In addition, our contractual arrangements may not effectively prevent disclosure of our intellectual property and confidential and proprietary information or provide an adequate remedy in the event of an unauthorized disclosure. Measures in place may not prevent misappropriation or infringement of our intellectual property or proprietary information and the resulting loss of competitive advantage, and we may be required to litigate to protect our intellectual property and proprietary information from misappropriation or infringement by others, which is expensive, could cause a diversion of resources and may not be successful.
We also may encounter disputes from time to time concerning intellectual property rights of others, and we may not prevail in these disputes. Third parties may raise claims alleging that we, or consultants or other third parties retained or indemnified by us, infringe on their intellectual property rights. Given the complex, rapidly changing and competitive technological and business environment in which we operate, and the potential risks and uncertainties of intellectual property-related litigation, an assertion of an infringement claim against us may cause us to spend significant amounts to defend the claim, even if we ultimately prevail, pay significant money damages, lose significant revenues, be prohibited from using the relevant systems, processes, technologies or other intellectual property (temporarily or permanently), cease offering certain products or services, or incur significant license, royalty or technology development expenses.
Regulatory requirements upon a change of control of our regulated subsidiaries may require an investor to obtain prior approval or submit information to regulators upon acquiring a direct or indirect controlling interest in us.
Certain of our subsidiaries are subject to regulatory supervision, including the requirement to obtain prior consent from the relevant regulator when a person holds, acquires or increases a controlling interest in those entities. For instance, under certain state money transmitter regulations, no person may hold or acquire, alone or together with others, a direct or indirect stake of 10% or more of us, or exercise, directly or indirectly, a controlling influence over us or any of the regulated subsidiaries. Under other state money transmitter regulations, that threshold may be higher.
Non-compliance with those requirements may lead to injunctions, penalties and sanctions against us as well as the person seeking to hold, acquire or increase a controlling interest, may subject the relevant transactions to cancellation or forced sale, and may result in increased regulatory compliance requirements or other potential regulatory restrictions on our business (including in respect of matters such as corporate governance, restructurings, mergers and acquisitions, financings and distributions). If any of this were to occur, it could damage our reputation, limit our growth and materially and adversely affect our business, financial condition and results of operations.
Our tax information reporting obligations with respect to transactions involving loyalty points or other incentives are subject to change.
Under the current law, we do not believe that we are required to file any information returns with taxing authorities with respect to the issuance by our clients of loyalty points or other incentives, and we believe that we are in compliance with our tax information reporting obligations with respect to incentives that we issue. There can be no assurance that the IRS will not challenge our position, or that the applicable laws and administrative guidance will not change in a manner requiring us to provide additional tax information reporting to our customers.
It is unclear whether the conversion to cash or crypto of loyalty points by means of using our platform is or may become subject to information reporting by us. In our capacity as the facilitator of an exchange on which such transactions occur, we may be deemed to have certain information reporting obligations to the IRS or another taxing authority. The IRS has provided limited guidance with respect to information reporting obligations for transactions involving loyalty points or other incentives, and, absent future regulatory or administrative guidance, we expect to file information returns with the IRS for only a limited number of such transactions. There can be no assurances, however, that the IRS will not take a contrary position with respect to our information reporting obligations. If the IRS were to successfully challenge our position with respect to its information reporting obligations or if it were ultimately determined that the conversion of loyalty points to cash or crypto is subject to information reporting obligations, we could potentially be subject to penalties for any failure to satisfy such information reporting obligations. Additionally, changes in applicable laws and administrative guidance could impose such obligations on us. For example, under the Infrastructure Investment and Jobs Act of 2021 (Pub. L. 117-58), we may be treated as a “broker” with respect to crypto transactions we facilitate. As a result, we may be required to file certain information reports, including customer’s names and addresses, gross proceeds from sales, and any capital gains or losses to the IRS. The IRS has not yet provided any administrative guidance with respect to the application of this new legislation to companies like ours. Such changes in our tax information reporting obligations may have a negative effect on the experience of our customers and may significantly increase our compliance costs. As a result of the foregoing, our planned business model may be adversely affected or it may incur additional costs in connection therewith.
Changes in tax laws or their judicial or administrative interpretations, or becoming subject to additional taxes that cannot be passed through to our loyalty customers, could negatively affect our business, financial condition and results of operations.
Our operations may be subject to extensive tax liabilities, including federal and state income taxes and other taxes, such as excise, sales/use, payroll, franchise, withholding and ad valorem taxes. Changes in tax laws or their judicial or administrative interpretations could decrease the amount of revenues we receive, the value of any tax loss carryforwards and tax credits recorded on our balance sheet and the amount of our cash flow and may have a material adverse impact on our business, financial condition and results of operations. Some of our tax liabilities may be subject to periodic audits by the applicable taxing authority, which could increase our tax liabilities. Furthermore, we may become subject to taxation in various taxing jurisdictions. If we are required to pay additional taxes and are unable to pass the tax expense through to our customers, our costs would increase and our net income would be reduced, which could have a material adverse effect on our business, financial condition and results of operations.
Because there is limited guidance for tax reporting or accounting of bitcoin and other crypto transactions, the determination that we have made for how to account for or report the tax treatment of crypto transactions may be subject to change and challenge by relevant tax authorities in various countries, including the United States. Failure to properly report activity related to crypto for tax or accounting purposes may have negative regulatory or legal outcomes and harm our reputation.
Because there has been limited guidance for the tax reporting or accounting of crypto and limited guidance has been provided by the IRS, it is unclear how crypto transactions or other actions related to crypto (such as forks, provision of staking rewards and other crypto incentives and rewards products or other similar items) and related tax consequences should be accounted for or reported for tax purposes. In 2014, the IRS released Notice 2014-21, IRB 2014-16, or IRS
Notice, discussing certain aspects of “convertible virtual currency” (that is, crypto currency that has an equivalent value in real (or fiat) currency or that acts as a substitute for fiat currency) for U.S. federal income tax purposes. IRS stated that such crypto currency is treated as “property”, not “currency” for purposes of the rules relating to foreign currency gain or loss, and may be held as a capital asset. In 2019, the IRS released Revenue Ruling 2019-24 and a set of “Frequently Asked Questions”, or the Revenue Ruling & FAQs, that provide some additional guidance, including guidance to the effect that, under certain circumstances, hard forks of crypto currencies are taxable events giving rise to ordinary income and guidance with respect to the determination of the tax basis of crypto currency. However, the IRS Notice and the Revenue Ruling & FAQs do not address other significant aspects of the U.S. federal income tax treatment of crypto and related transactions. Moreover, although the Revenue Ruling & FAQs address the treatment of forks, there continues to be uncertainty with respect to the timing and amount of income inclusions for various crypto transactions including, but not limited to, staking rewards and other crypto products. Furthermore, the accounting treatment for revenues from cryptocurrency transactions is currently under review and subject to change. Failure to properly account for and report the transactions and other items related to the crypto held by our consumers to relevant tax authorities, such as the IRS, could have negative outcomes for us and harm our reputation with consumers and others.
There can be no assurance that the IRS or other foreign tax authority will not alter its existing positions with respect to crypto in the future or that a court would uphold the treatment set forth in the existing IRS guidance. It is also unclear what additional guidance may be issued in the future on the treatment of existing crypto transactions and future crypto innovations for purposes of U.S. federal income tax or other foreign tax regulations. Any such alteration of existing IRS and foreign tax authority positions or additional guidance regarding crypto products and transactions could result in adverse tax consequences for holders of crypto and could have an adverse effect on the value of crypto and the broader crypto markets. Future technological and operational developments that may arise with respect to crypto currencies may increase the uncertainty with respect to the treatment of crypto currencies for U.S. federal income and foreign tax purposes. The uncertainty regarding tax treatment of crypto transactions impacts our customers, and could impact our business, both domestically and abroad.
It is likely that the IRS will introduce new rules related to our tax reporting and withholding obligations on our customer transactions in the future, possibly in ways that differ from our existing compliance protocols and where there is risk that we do not have proper records to ensure compliance for certain legacy customers. If the IRS determines that we are not in compliance with our tax reporting or withholding requirements with respect to customer crypto transactions, we may be exposed to significant penalties, which could adversely affect our financial position. We anticipate additional guidance from the IRS regarding tax reporting and withholding obligations with respect to customer crypto transactions that will likely require us to invest substantially in new compliance measures and may require significant retroactive compliance efforts, which could adversely affect our financial position. Similarly, it is likely that new rules for reporting crypto under the “common reporting standard” will be implemented on our international operations, creating new obligations and a need to invest in new onboarding and reporting infrastructure. Such rules are under discussion today by the member and observer states of the “Organization for Economic Cooperation and Development” and may give rise to potential liabilities or disclosure requirements for prior customer arrangements and new rules that affect how we onboard our customers and report their transactions to taxing authorities.
Our ability to use net operating losses to offset future taxable income may be subject to certain limitations under U.S. or foreign tax law.
Under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its net operating losses, or NOLs to offset future taxable income. Future changes in our stock ownership, the causes of which may be outside of our control, could result in an ownership change under Section 382 of the Code. Any future NOLs we generate may also be impaired under state laws. In addition, under the 2017 Tax Cuts and Jobs Act, or Tax Act, future tax losses may be utilized to offset no more than 80% of taxable income annually. Under the Coronavirus Aid, Relief, and Economic Security, or CARES Act, signed into law in March 2020, the limitation on the deduction of NOLs to 80% of current year taxable income is eliminated for taxable years beginning before January 1, 2021. We may be required to pay federal income taxes in future years despite
generating a loss for federal income tax purposes. There is also a risk that due to statutory or regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our future NOLs could expire or otherwise be unavailable to offset future income tax liabilities. Based on state conformity or the lack thereof to the provisions in the Tax Act, as amended by the CARES Act, there is the potential that the Company may also be required to pay state income taxes despite generating a loss for state income tax purposes. For these reasons, we may not be able to realize a tax benefit from the use of any future NOLs we generate, whether or not we attain profitability.
We may be subject to various governmental export control and trade sanctions laws and regulations that could impair our ability to compete in international markets or subject us to liability if we violate these controls.
In some cases, our platform may be subject to export control laws and regulations, including the Export Administration Regulations administered by the U.S. Department of Commerce, and our activities may be subject to trade and economic sanctions, including those administered by the United States Department of the Treasury’s Office of Foreign Assets Control, or OFAC (collectively, “Trade Controls”). As such, a license may be required to make our platform available to certain countries and end-users, and for certain end-uses. The process for obtaining necessary licenses may be time-consuming or unsuccessful, potentially causing delays in sales or losses of sales opportunities, and these licenses may not be issued. Trade Controls are complex and dynamic regimes and monitoring and ensuring compliance can be challenging. Although we have procedures in place designed to ensure our compliance with Trade Controls, any failure to comply could subject us to both civil and criminal penalties, including substantial fines, possible incarceration of responsible individuals for willful violations, possible loss of our export or import privileges, and reputational harm.
In addition, various countries regulate the import of certain encryption technology, including through import permit and license requirements, and have enacted laws that could limit our ability to distribute our software and services or could limit our customers’ ability to implement our platform in those countries. Changes in our platform or changes in export and import regulations in such countries may create delays in the introduction of our platform into international markets, prevent our customers with international operations from deploying our platform globally or, in some cases, prevent or delay the export or import of our software and services to certain countries, governments, or persons altogether.
Risks Related to Information Technology and Data
Actual or perceived cyberattacks, security incidents or breaches could result in serious harm to our reputation, business and financial condition.
Our business involves the collection, storage, processing and transmission of confidential information and customers’ personal data, including financial information and information about how customers interact with our platform. We have built our reputation on the premise that we offer customers a secure and convenient way to manage their crypto. We also maintain and process other information in our business, including our own proprietary, confidential, or otherwise sensitive information, and information we maintain or otherwise process for third parties. An increasing number of organizations, including large merchants, businesses, technology companies and financial institutions, as well as government institutions, have disclosed breaches of their information security systems, some of which have involved sophisticated and highly targeted attacks, including on their websites, mobile applications and infrastructure.
The techniques used to obtain unauthorized, improper, or illegal access to systems and information (including customers’ personal data), disable or degrade service, or sabotage systems are constantly evolving and have become very complex and sophisticated, may be difficult to detect quickly, and often are not recognized or detected until after they have been launched against a target. We may be unable to anticipate these techniques or to implement adequate preventative measures, and any cyberattack, breach or other security incident may take longer than expected to remediate or otherwise address. Unauthorized parties have attempted, and we expect that they will continue to attempt, to gain access to our systems or facilities through various means, including, but not limited to, hacking into our systems or facilities or those of our customers or vendors, and attempting to fraudulently induce users of our systems (including employees and customers) into disclosing customer names, passwords, payment card information, or other sensitive information, which may in turn be used to access our information technology systems, or to steal crypto stored by our customers. Threats can come from a
variety of sources, including criminal hackers, hacktivists, state-sponsored intrusions, industrial espionage and insider threats. Certain efforts may be supported by significant financial and technological resources, making them even more sophisticated and difficult to detect. Numerous and evolving cybersecurity threats, including advanced and persistent cyberattacks, cyberextortion, ransomware, denial-of-service attacks, spear phishing and social engineering schemes, the introduction of computer viruses or other malware, and the physical destruction of all or portions of our information technology and infrastructure could compromise the confidentiality, availability and integrity of the information (including consumers’ personal data) in our systems. Although we have developed systems and processes designed to protect information we manage, prevent data loss and other security breaches and effectively respond to known and potential risks, and we expect to continue to expend significant resources to bolster these protections, there can be no assurance that these security measures will provide absolute security or prevent breaches, security incidents or attacks, in particular, as the frequency and sophistication of cyberattacks increases.
Our information technology and infrastructure and those of our vendors (including data center and cloud computing providers) may be vulnerable to cyberattacks, security incidents and breaches and third parties may be able to access our customers’ personal data and/or proprietary information, banking, crypto and payment card information, or other confidential, proprietary, or otherwise sensitive information, stored on or accessible through those systems. We have experienced from time to time, and may experience in the future, security incidents or breaches due to human error, malfeasance, insider threats, system errors, bugs, vulnerabilities, or other irregularities. Actual or perceived breaches of our or our vendors’ security could, among other things:
•interrupt our operations;
•result in our systems or services being unavailable or degraded;
•result in improper disclosure of information (including consumers’ personal data) and violations of applicable privacy and other laws;
•materially harm our reputation;
•result in significant liability claims, litigation, regulatory scrutiny, investigations, fines, penalties and other legal and financial exposure;
•cause us to incur significant remediation costs;
•lead to loss or theft of customer crypto or loyalty points;
•lead to loss of customer confidence in, or decreased use of, our products and services;
•divert the attention of management from the operation of our business;
•result in significant compensation or contractual penalties from us to our customers as a result of losses to them or claims by them; and
•adversely affect our business and results of operations.
We have expended and expect to continue to invest in resources to protect against privacy and security incidents and breaches and may be required to redress problems caused by privacy and security incidents or breaches. We have implemented remote and hybrid working protocols and offer work-issued devices to certain employees, but the actions of employees while working remotely may have a greater effect on the security of our infrastructure, networks, and the information, including personal data, we process, including for example by increasing the risk of compromise to systems or information arising from employees’ combined personal and private use of devices, accessing our networks or information using wireless networks that we do not control, or the ability to transmit or store information outside of our secured network. Our employees’ or third parties’ intentional, unintentional, or inadvertent actions may increase our vulnerability or expose us to security threats, such as ransomware, other malware and phishing attacks, and we may remain responsible for unauthorized access to, loss, alteration, destruction, acquisition, disclosure or other processing of information we or our vendors process or otherwise maintain, even if the security measures used to protect such information comply with applicable laws, regulations and other actual or regulations,asserted obligations. Also, cyberattacks, including on the supply chain,
continue to increase in frequency and magnitude, and we cannot provide assurances that our preventative efforts will be successful.
Financial services regulators in various jurisdictions have implemented authentication requirements for banks and payment processors intended to reduce online fraud, which could impose significant costs, require us to change our business practices, make it more difficult for new consumers to join us, and reduce the ease of use of our platform, which could harm our business. Our insurance policies may not be adequate to reimburse us for losses caused by security incidents or breaches. We also cannot be certain that our insurance coverage will be adequate for incurred information security liabilities, that insurance will continue to be available to us on economically reasonable terms, or at all, or that an insurer will not deny coverage as
interpreted and applied,to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, including our
ability to negotiate and complete the Proposed Transaction or another initial business combination, andfinancial condition, results of
operations.operations, and reputation.
Systems failures and resulting interruptions in the availability of our websites, applications, products or services could harm our business.
Our shareholderssystems and those of our service providers and clients have experienced from time to time, and may experience in the future service interruptions or degradation because of hardware and software defects or malfunctions, insider threats, human error, earthquakes, hurricanes, floods, fires and other natural disasters, power losses, disruptions in telecommunications services, fraud, military or political conflicts (including ongoing geopolitical tensions related to Russia’s actions in Ukraine, resulting sanctions imposed by the U.S. and other countries, and retaliatory actions taken by Russia or its allies in response to such sanctions), terrorist attacks, computer viruses or other malware, or other events. We have experienced from time to time, and may experience in the future, disruptions in our systems. In addition, as a provider of payments solutions and crypto trading and custody solutions, we are subject to heightened scrutiny by regulators that may require specific business continuity, resiliency and disaster recovery plans and more rigorous testing of such plans, which may be held liablecostly and time-consuming to implement, and may divert our resources from other business priorities.
We have experienced and expect to continue to experience system failures, denial-of-service attacks and other events or conditions from time to time that interrupt the availability, or reduce or adversely affect the speed or functionality, of our products and services. These events have resulted and likely will result in loss of revenue. A prolonged interruption in the availability or reduction in the availability, speed, or functionality of our products and services could materially harm our business. Frequent or persistent interruptions in our services could cause current or potential clients to believe that our systems are unreliable, leading them to switch to competitors or to avoid or reduce the use of our platform, and could permanently harm our reputation. Moreover, if any system failure or similar event results in damages to our customers, these clients could seek significant compensation or contractual penalties from us for their losses, and those claims, even if unsuccessful, would likely be time-consuming and costly for us to address, and could have other consequences described in this “Risk Factors” section under the caption “Actual or perceived cyberattacks, security incidents, or breaches could result in serious harm to our reputation, business and financial condition.” Further, frequent or persistent site interruptions could lead to regulatory scrutiny, significant fines and penalties and mandatory and costly changes to our business practices, and ultimately could cause us to lose existing licenses that we need to operate or prevent or delay us from obtaining additional licenses that may be required for our business.
We also rely on facilities, components, applications and services supplied by third parties, againstincluding data center facilities and cloud storage services, which subjects us to risks in the extentnature of distributions received by them upon redemptionthose discussed in this “Risk Factors” section under the caption “We face operational, legal and other risks related to our reliance on third party vendors, over which we have no control.” From time to time, such third parties may cease to provide us with such facilities and services. Additionally, if these third parties experience operational interference or disruptions, breach their agreements with us, fail to perform their obligations and meet our expectations, or experience a cyberattack, security incident or breach, our operations could be disrupted or otherwise negatively affected, which could result in consumer dissatisfaction, regulatory scrutiny and damage to our reputation and brands and materially and adversely affect our business. Our business
interruption insurance coverage may be insufficient to compensate us for all losses that may result from interruptions in our service as a result of systems failures and similar events.
Implementation of new systems and technologies is complex, expensive and time-consuming. If we are forcedfail to enter intotimely and successfully implement new information systems and technologies, or improvements or upgrades to existing information systems and technologies, or if such systems and technologies do not operate as intended, this could have an insolvent liquidation, any distributions received by shareholdersadverse impact on our business, internal controls (including internal controls over financial reporting), results of operations and financial condition.
If we use open source software inconsistent with our policies and procedures or the license terms applicable to such software, we could be viewed assubject to legal expenses, damages, or costly remediation or disruption to our business.
We use open source software in our platform. While we have policies and procedures in place governing the use of open source software, there is a risk that we incorporate open source software with onerous licensing terms, including the obligation to make our source code available for others to use or modify without compensation. If we receive an unlawful payment if it was provedallegation that immediately followingwe have violated an open source license, we may incur significant legal expenses, be subject to damages, be required to redesign our platform to remove the dateopen source software, or be required to comply with onerous license restrictions, all of which could have a material impact on which the distribution was made, we were unable to pay our debts as they fall duebusiness. Even in the ordinary courseabsence of business. As a result,claim, if we discover the use of open source software inconsistent with our policies, we could expend significant time and resources to replace the open source software or obtain a liquidatorcommercial license, if available. All of these risks are heightened by the fact that the ownership of open source software can be uncertain, leading to litigation, and many of the licenses applicable to open source software have not been interpreted by courts, and these licenses could seekbe construed to recover someimpose unanticipated conditions or all amounts receivedrestrictions on our ability to commercialize our products. Any use of open source software inconsistent with our policies or licensing terms could harm our business and financial position.
Risks Related to Risk Management and Financial Reporting
Real or perceived inaccuracies in our key operating metrics may harm our reputation and negatively affect our business.
We track certain key operating metrics with internal systems and tools that are not independently verified by any third party. While the metrics presented in this Annual Report on Form 10-K are based on what we believe to be reasonable assumptions and estimates, our shareholders. Furthermore, our directors may be viewed as having breached their fiduciary duties to us or our creditors and/or mayinternal systems and tools have acted in bad faith, thereby exposing themselvesa number of limitations, and our companymethodologies for tracking these metrics may change over time. In addition, limitations or errors with respect to claims, by paying public shareholders fromhow we measure data or with respect to the trust account prior to addressing the claimsdata that we measure may affect our understanding of creditors. We cannot assure you that claims will not be brought against us for these reasons. We and our directors and officers who knowingly and willfully authorized or permitted any distribution to be paid outcertain details of our share premium account while we were unable to pay our debts as they fall due in the ordinary course of business, would be guilty of an offence and may be liable to a fine of $18,293 and to imprisonment for five years in the Cayman Islands.
We may not hold an annual general meeting until after the consummation of our initial business combination, which could delayaffect our long-term strategies. If the opportunity for our shareholdersinternal systems and tools we use to appoint directors.
In accordance with Nasdaq corporate governance requirements,track these metrics understate or overstate performance or contain algorithmic or other technical errors, the key operating metrics we are not required to hold an annual general meeting until no later than one year after our first fiscal year end following our listing on Nasdaq. There is no requirement under the Companies Law for us to hold annual or extraordinary general meetings to appoint directors. Until we hold an annual general meeting, public shareholdersreport may not be afforded the opportunityaccurate. If investors do not perceive our operating metrics to appoint directors andbe accurate, or if we discover material inaccuracies with respect to discuss company affairs with management. Our board of directors is divided into three classes with only one class of directors being appointed in each year and each class (except for those directors appointed prior tothese figures, our first annual general meeting) serving a three-year term. In addition, as holders of our Class A ordinary shares, our public shareholders will not have the right to vote on the appointment of directors until after the consummation of our initial business combination, including the Proposed Transaction.
Because we are not limited to evaluating a target business in a particular industry sector, you will be unable to ascertain the merits or risks of any particular target business’s operations.
Our efforts to identify a prospective initial business combination target will not be limited to a particular industry, sector or geographic region. While we may pursue an initial business combination opportunity in any industry or sector, we intend to capitalize on the ability of our management team to identify and acquire a business or businesses that can benefit from our management team’s established global relationships and operating experience. In particular, we currently expect to complete the Proposed Transaction with Bakkt. Our management team has extensive experience in identifying and executing strategic investments globally and has done so successfully in a number of sectors, including the consumer brands sectors. Our amended and restated memorandum and articles of association prohibits us from effectuating a business combination with another blank check company or similar company with nominal operations. To the extent we complete the Proposed Transaction or another initial business combination, wereputation may be affected by numerous risks inherent in the businesssignificantly harmed and our results of operations or Bakkt or another target with which we combine. For example, if we combine with a financially unstable business or an entity lacking an established record of sales or earnings, we mayand financial condition could be affected by the risks inherent in the business and operations of a financially unstable or a development stage entity. Although our officers and directors will endeavor to evaluate the risks inherent in a particular target business, and have done so in connection with the Proposed Transaction, we cannot assure you that we have or will properly ascertain or assess all of the significant risk factors or that we will have adequate time to complete due diligence. Furthermore, some of these risks may be outside of our control and leave us with no ability to control or reduce the chances that those risks will adversely impact Bakkt or another target business. We also cannot assure you that an investment in our units will ultimately prove to be more favorable to investors than a direct investment, if such opportunity were available, in Bakkt or another business combination target. Accordingly, any shareholders who choose to remain shareholders following the business combination could suffer a reduction in the value of their securities. Such shareholders are unlikely to have a remedy for such reduction in value unless they are able to successfully claim that the reduction was due to the breach by our officers or directors of a duty of care or other fiduciary duty owed to them, or if they are able to successfully bring a private claim under securities laws that the proxy materials or tender offer documents, as applicable, relating to the business combination contained an actionable material misstatement or material omission.
We may seek business combination opportunities in industries or sectors that may be outside of our management’s areas of expertise.
We have and will consider business combinations outside of our management’s areas of expertise if a business combination candidate is presented to us and we determine that such candidate offers an attractive business combination opportunity for our company. Although our management will endeavor to evaluate the risks inherent in any particular business combination candidate, and it has endeavored to do so in connection with the Proposed Transaction, we cannot assure you that we have or will adequately ascertain or assess all of the significant risk factors. We also cannot assure you that an investment in our securities will not ultimately prove to be less favorable to investors in our securities than a direct investment, if an opportunity were available, in Baakt or another business
affected.combination candidate. In the event we elect to pursue a business combination outside of the areas of our management’s expertise, our management’s expertise may not be directly applicable to its evaluation or operation, and the information contained herein regarding the areas of our management’s expertise would not be relevant to an understanding of the business that we elect to acquire. As a result, our management may not be able to ascertain or assess adequately all of the relevant risk factors. Accordingly, any shareholders who choose to remain shareholders following the Proposed Transaction or another initial business combination could suffer a reduction in the value of their shares. Such shareholders are unlikely to have a remedy for such reduction in value.
Although we have identified general criteria and guidelines that we believe are important in evaluating prospective target businesses, we may enter into our initial business combination with a target that does not meet such criteria and guidelines, and as a result, the target business with which we enter into our initial business combination may not have attributes entirely consistent with our general criteria and guidelines.
Although we have identified general criteria and guidelines for evaluating prospective target businesses, it is possible that a target business with which we enter into our initial business combination will not have all of these positive attributes. If we complete our initial business combination with a target that does not meet some or all of these guidelines, such combination may not be as successful as a combination with a business that does meet all of our general criteria and guidelines. In addition, if we announce a prospective business combination with a target that does not meet our general criteria and guidelines, a greater number of shareholders may exercise their redemption rights, which may make it difficult for us to meet any closing condition with a target business that requires us to have a minimum net worth or a certain amount of cash. In addition, if shareholder approval of the transaction is required by law, or we decide to obtain shareholder approval for business or other legal reasons, it may be more difficult for us to attain shareholder approval of our initial business combination if the target business does not meet our general criteria and guidelines. If we are unable to complete our initial business combination, our public shareholders may only receive their pro rata portion of the funds in the trust account that are available for distribution to public shareholders, and our warrants will expire worthless.
We are not required to obtain an opinion from an independent investment banking firm or from a valuation or appraisal firm, and consequently, you may have no assurance from an independent source that the price we are paying for the business is fair to our shareholders from a financial point of view.
Unless we complete our initial business combination with an affiliated entity or our board of directors cannot independently determine the fair market value of the target business or businesses (including with the assistance of financial advisors), we are not required to obtain an opinion from an independent investment banking firm which is a member of FINRA or from a valuation or appraisal firm that the price we are paying is fair to our shareholders from a financial point of view. We do not expect to obtain such an opinion in connection with the Proposed Transaction. If no opinion is obtained, our shareholders will be relying on the judgment of our board of directors, who will determine fair market value based on standards generally accepted by the financial community. Such standards used will be disclosed in our proxy materials or tender offer documents, as applicable, related to the Proposed Transaction or any other initial business combination.
We may issue additional Class A ordinary shares or shares of preferred shares to complete our initial business combination, including the Proposed Transaction or under an employee incentive plan after completion of our initial business combination. We may also issue Class A ordinary shares upon the conversion of the founder shares at a ratio greater than one-to-one at the time of the Proposed Transaction or other initial business combination as a result of the anti-dilution provisions contained therein. Any such issuances would dilute the interest of our shareholders and likely present other risks.
Our amended and restated memorandum and articles of association authorizes the issuance of up to 200,000,000 Class A ordinary shares, par value $0.0001 per share, 20,000,000 Class B ordinary shares, par value $0.0001 per
share, and 1,000,000 preferred shares, par value $0.0001 per share. As of March 29, 2021 there are 179,267,798
and 14,815,700 authorized but unissued Class A ordinary shares and Class B ordinary shares, respectively, available for issuance which amount does not take into account shares reserved for issuance upon exercise of outstanding warrants or shares issuable upon conversion of the Class B ordinary shares. The Class B ordinary shares are automatically convertible into Class A ordinary shares concurrently with or immediately following the consummation of the Proposed Transaction or another initial business combination, initially at a one-for-one ratio but subject to adjustment as set forth herein and in our amended and restated memorandum and articles of association, including in certain circumstances in which we issue Class A ordinary shares or equity-linked securities related to such initial business combination. Currently, there are no preferred shares issued and outstanding.
We may issue a substantial number of additional Class A ordinary shares or preferred shares to complete the Proposed Transaction or another initial business combination or under an employee incentive plan after completion of the Proposed Transaction or such other initial business combination. We may also issue Class A ordinary shares upon conversion of the Class B ordinary shares at a ratio greater than one-to-one at the time of the Proposed Transaction or other initial business combination as a result of the anti-dilution provisions as set forth therein. However, our amended and restated memorandum and articles of association provides, among other things, that prior to our initial business combination, we may not issue additional shares that would entitle the holders thereof to (i) receive funds from the trust account or (ii) vote on any initial business combination. These provisions of our amended and restated memorandum and articles of association, like all provisions of our amended and restated memorandum and articles of association, may be amended with a shareholder vote. The issuance of additional ordinary or preferred shares:
may significantly dilute the equity interest of investors in the initial public offering;
may subordinate the rights of holders of Class A ordinary shares if preferred shares are issued with rights senior to those afforded our Class A ordinary shares;
could cause a change in control if a substantial number of Class A ordinary shares are issued, which may affect, among other things, our ability to use our net operating loss carry forwards, if any, and could result in the resignation or removal of our present officers and directors; and
may adversely affect prevailing market prices for our units, Class A ordinary shares and/or warrants.
Resources could be wasted in researching business combinations, such as the Proposed Transaction, that are not completed, which could materially adversely affect subsequent attempts to locate and acquire or merge with another business. If we are unable to complete the Proposed Transaction or another initial business combination, our public shareholders may only receive their pro rata portion of the funds in the Trust Account that are available for distribution to public shareholders, and our warrants will expire worthless.
We anticipate that the investigation of each specific target business and the negotiation, drafting and execution of relevant agreements, disclosure documents and other instruments will require substantial management time and attention and substantial costs for accountants, attorneys, consultants and others. If we decide not to complete the Proposed Transaction or another specific initial business combination, the costs incurred up to that point for such transaction likely would not be recoverable. We may fail to complete the Proposed Transaction for any number of reasons including those beyond our control. Furthermore, if we reach an agreement relating to a different specific target business, we may fail to complete our initial business combination with that businessfor any number of reasons including those beyond our control. Any such event will result in a loss to us of the related costs incurred which could materially adversely affect subsequent attempts to locate and acquire or merge with another business. If we are unable to complete the Proposed Transaction or another initial business combination, our public shareholders may only receive their pro rata portion of the funds in the Trust Account that are available for distribution to public shareholders, and our warrants will expire worthless.
We may be a passive foreign investment company, or “PFIC,” which could result in adverse United States federal income tax consequences to U.S. investors.
If we are a PFIC for any taxable year (or portion thereof) that is included in the holding period of a U.S. Holder (as defined in the section of this prospectus captioned “Taxation—United States Federal Income Tax Considerations—U.S. Holders”) of our Class A ordinary shares or warrants, the U.S. Holder may be subject to adverse U.S. federal income tax consequences and may be subject to additional reporting requirements. Our PFIC status for our current and subsequent taxable years may depend on whether we qualify for the PFIC start-up exception see the section of this report captioned “Taxation—United States Federal Income Tax Considerations—U.S. Holders—Passive Foreign Investment Company Rules”). Depending on the particular circumstances the application of the start-up exception may be subject to uncertainty, and there cannot be any assurance that we will qualify for the start-up exception. Accordingly, there can be no assurances with respect to our status as a PFIC for our current taxable year or any subsequent taxable year. Our actual PFIC status for any taxable year, however, will not be determinable until after the end of such taxable year. Moreover, if we determine we are a PFIC for any taxable year, upon written request, we will endeavor to provide to a U.S. Holder such information as the Internal Revenue Service (“IRS”) may require, including a PFIC annual information statement, in order to enable the U.S. Holder to makedevelop and maintain a “qualified electing fund” election, but there can be no assurance that we will timely provide such required information, and such election would be unavailable with respect to our warrants in all cases. We urge U.S. investors to consult their own tax advisors regarding the possible application of the PFIC rules. For a more detailed explanation of the tax consequences of PFIC classification to U.S. Holders, see the section of this report captioned “Taxation—United States Federal Income Tax Considerations—U.S. Holders—Passive Foreign Investment Company Rules.”
An investment in our securities may result in uncertain U.S. federal income tax consequences.
An investment in our securities may result in uncertain U.S. federal income tax consequences. For instance, because there are no authorities that directly address instruments similar to our units, the allocation an investor makes with respect to the purchase price of a unit between the Class A ordinary shares and the one-half of a warrant to purchase one Class A ordinary share included in each unit could be challenged by the IRS or courts. In addition, the U.S. federal income tax consequences of a cashless exercise of warrants included in our units is unclear under current law. Finally, it is unclear whether the redemption rights with respect to our ordinary shares suspend the running of a U.S. Holder’s (as defined in section titled “Taxation—United States Federal Income Tax Consideration—U.S. Holders”) holding period for purposes of determining whether any gain or loss realized by such holder on the sale or exchange of Class A ordinary shares is long-term capital gain or loss and for determining whether any dividend we pay would be considered “qualified dividend income” for U.S. federal income tax purposes. See the section titled “Taxation—United States Federal Income Tax Considerations” for a summary of the U.S. federal income tax considerations of an investment in our securities. Prospective investors are urged to consult their tax advisors with respect to these and other tax consequences when acquiring, owning or disposing of our securities.
We may reincorporate in another jurisdiction, as we plan to do in connection with the Proposed Transaction, which may result in taxes imposed on shareholders.
We may, in connection with our initial business combination or otherwise and subject to requisite shareholder approval by special resolution under the Companies Law, reincorporate in the jurisdiction in which the target company or business is located or in another jurisdiction. We plan to reincorporate in Delaware in connection with the Proposed Transaction. The transaction may require a shareholder to recognize taxable income in the jurisdiction in which the shareholder is a tax resident or in which its members are resident if it is a tax transparent entity. We do not intend to make any cash distributions to shareholders to pay such taxes. Shareholders may be subject to withholding taxes or other taxes with respect to their ownership of us after the reincorporation.
After the Proposed Transaction or another initial business combination, it is possible that a majority of our directors and officers will live outside the United States and all of our assets will be located outside the United States; therefore, investors may not be able to enforce federal securities laws or their other legal rights.
It is possible that after the Proposed Transaction or another initial business combination, a majority of our directors and officers will reside outside of the United States and all of our assets will be located outside of the United States. As a result, it may be difficult, or in some cases not possible, for investors in the United States to enforce their legal rights, to effect service of process upon all of our directors or officers or to enforce judgments of United States courts predicated upon civil liabilities and criminal penalties on our directors and officers under United States laws.
As the number of special purpose acquisition companies evaluating targets increases, attractive targets may become scarcer and there may be more competition for attractive targets. This could increase the cost of our initial business combination and could result in our inability to consummate an initial business combination.
In recent years, the number of special purpose acquisition companies has increased substantially. A number of potential targets for special purpose acquisition companies have already been acquired, and there are still many special purpose acquisition companies pursuing an initial business combination. As a result, fewer attractive targets may be available to consummate an initial business combination. In addition, because there are more special purpose acquisition companies seeking to enter into an initial business combination with available targets, the competition for targets may increase and, as a result, the terms of business combination transactions with available targets could become less favorable to us. Attractive transactions could also become scarcer for other reasons, such as economic or industry sector downturns, geopolitical tensions, or increases in the cost of additional capital needed to close business combinations or operate targets post-business combination. This could increase the cost of, delay or otherwise complicate or frustrate our ability to find and consummate an initial business combination, and may result in our inability to consummate an initial business combination on terms favorable to us.
We may engage in a business combination with one or more target businesses that have relationships with entities that may be affiliated with our sponsor, officers, directors or existing holders which may raise potential conflicts of interest.
In light of the involvement of our sponsor, officers and directors with other entities, we may decide to acquire one or more businesses affiliated with our sponsor, officers, directors or existing holders. Bakkt is not affiliated with our sponsor, officers, directors or existing holders. Our directors also serve as officers and board members for other entities. Such entities may compete with us for business combination opportunities. Our sponsor, officers and directors are not currently aware of any specific opportunities for us to complete our initial business combination with any entities with which they are affiliated, and there have been no substantive discussions concerning a business combination with any such entity or entities. Furthermore, we currently intend to complete the Proposed Transaction with Bakkt. Although we will not be specifically focusing on, or targeting, any transaction with any affiliated entities, we would pursue such a transaction if we determined that such affiliated entity met our criteria for a business combination and such transaction was approved by a majority of our independent and disinterested directors. Despite our agreement to obtain an opinion from an independent investment banking firm which is a member of FINRA or a valuation or appraisal firm regarding the fairness to our Company from aeffective internal controls over financial point of view of a business combination with one or more domestic or international businesses affiliated with our sponsor, officers, directors or existing holders, potential conflicts of interest still may exist and, as a result, the terms of the business combination may not be as advantageous to our public shareholders as they would be absent any conflicts of interest.
Since our sponsor, officers and directors will lose their entire investment in us if the Proposed Transaction or another initial business combination is not completed (other than with respect to public shares they may acquire during or after the initial public offering), a conflict of interest may arise in determining whether a particular business combination target, including Bakkt, is appropriate for our initial business combination.
On August 3, 2020, our Sponsor paid $25,000, or approximately $0.004 per share, to cover certain of our offering and formation costs in exchange for 5,750,000 founder shares. In September 2020, our sponsor transferred an aggregate of 60,000 founder shares to members of our board of directors, resulting in our sponsor holding 5,690,000 founder shares. Prior to the initial investment in the Company of $25,000 by the Sponsor, the Company had no assets, tangible or intangible. The purchase price of the founder shares was determined by dividing the amount of cash contributed to the Company by the number of founder shares issued. The number of founder shares issued was determined based on the expectation that the total size of our initial public offering would be a maximum of 23,000,000 units if the underwriters’ over-allotment option was exercised in full, and therefore that such founder shares would represent 20% of the outstanding shares after our initial public offering. Up to 750,000 of the founder shares were subject to surrender for no consideration depending on the extent to which the underwriters’ over-allotment was exercised. As a result of the underwriters’ election to partially exercise their over-allotment option and the forfeiture of the remaining over-allotment option, 565,700 founder shares were forfeited and 184,300 founder shares are no longer subject to forfeiture resulting in an aggregate of 5,184,300 founder shares outstanding at March 29, 2021. The founder shares will be worthless if we do not complete the Proposed Transaction or another initial business combination. In addition, our Sponsor purchased an aggregate of 6,147,550 private placement warrants, each exercisable for one Class A ordinary share at $11.50 per share, subject to adjustment as described herein, for an aggregate purchase price of $6,147,550, or $1.00 per warrant, that will also be worthless if we do not complete the Proposed Transaction or another initial business combination within the allocated time period. The personal and financial interests of our officers and directors may have influenced or may influence their motivation in identifying and selecting Bakkt, or another target business combination, completing the Proposed Transaction or another initial business combination and influencing the operation of the business following the initial business combination. This risk may become more acute as the 24-month anniversary of the closing of the initial public offering nears, which is the deadline for our completion of an initial business combination.
We may issue notes or other debt securities, or otherwise incur substantial debt, to complete the Proposed Transaction or another business combination, which may adversely affect our leverage and financial condition and thus negatively impact the value of our shareholders’ investment in us.
Although we have no commitments as of the date of this Annual Report on Form 10-K to issue any notes or other debt securities, or to otherwise incur outstanding debt, we may choose to incur substantial debt to complete the Proposed Transaction or another initial business combination. We and our officers have agreed that we will not incur any indebtedness unless we have obtained from the lender a waiver of any right, title, interest or claim of any kind in or to the monies held in the Trust Account. As such, no issuance of debt will affect the per share amount available for redemption from the Trust Account. Nevertheless, the incurrence of debt could have a variety of negative effects, including:
default and foreclosure on our assets if our operating revenues after the Proposed Transaction or other initial business combination are insufficient to repay our debt obligations;
acceleration of our obligations to repay the indebtedness even if we make all principal and interest payments when due if we breach certain covenants that require the maintenance of certain financial ratios or reserves without a waiver or renegotiation of that covenant;
our immediate payment of all principal and accrued interest, if any, if the debt is payable on demand;
our inability to obtain necessary additional financing if the debt contains covenants restricting our ability to obtain such financing while the debt is outstanding;
our inability to pay dividends on our Class A ordinary shares;
using a substantial portion of our cash flow to pay principal and interest on our debt, which will reduce the funds available for dividends on our Class A ordinary shares if declared, expenses, capital expenditures, acquisitions and other general corporate purposes;
limitations on our flexibility in planning for and reacting to changes in our business and in the industry in which we operate;
increased vulnerability to adverse changes in general economic, industry and competitive conditions and adverse changes in government regulation; and
limitations on our ability to borrow additional amounts for expenses, capital expenditures, acquisitions, debt service requirements, execution of our strategy and other purposes and other disadvantages compared to our competitors who have less debt.
We may only be able to complete one business combination with the proceeds of the initial public offering and the sale of the private placement warrants, which will cause us to be solely dependent on a single business which may have a limited number of products or services. This lack of diversification may negatively impact our operations and profitability.
The net proceeds from the initial public offering and the private placement provided us with $200,113,999.30 that we may use to complete the Proposed Transaction or another initial business combination (after taking into account the $7,258,020.70 of deferred underwriting commissions being held in the trust account).
Although the Merger Agreement contemplates an initial business combination with a single target business, Bakkt, we may effectuate another initial business combination with a single target business or multiple target businesses simultaneously or within a short period of time. However,reporting, we may not be able to effectuate such other initial business combination with more than one target business because of various factors, including the existence of complex accounting issuesproduce timely and the requirement that we prepare and file pro formaaccurate financial statements, with the SEC that present operating results and the financial condition of several target businesses as if they had been operated on a combined basis. By completing the Proposed Transaction or another initial business combination with only Bakkt or another single entity, our lack of diversification may subject us to numerous economic, competitive and regulatory developments. Further, we would not be able to diversify our operations or benefit from the possible spreading of risks or offsetting of losses, unlike other entities which may have the resources to complete several business combinations in different industries or different areas of a single industry. Accordingly, the prospects for our success may be:
solely dependent upon the performance of a single business, property or asset, or
dependent upon the development or market acceptance of a single or limited number of products, processes or services.
This lack of diversification may subject us to numerous economic, competitive and regulatory risks, any or all of which may have a substantial adverse impact upon the particular industry in which we may operate subsequent to the Proposed Transaction or other initial business combination.
We may attempt to simultaneously complete business combinations with multiple prospective targets, which may hinder our ability to complete our initial business combination and give rise to increased costs and risks that could negatively impact our operations and profitability.
If we determine to simultaneously acquire several businesses that are owned by different sellers, we will need for each of such sellers to agree that our purchase of its business is contingent on the simultaneous closings of the other business combinations, which may make it more difficult for us, and delay our ability, to complete our initial business combination. With multiple business combinations, we could also face additional risks, including
additional burdens and costs with respect to possible multiple negotiations and due diligence investigations (if there are multiple sellers) and the additional risks associated with the subsequent assimilation of the operations and services or products of the acquired companies in a single operating business. If we are unable to adequately address these risks, it could negatively impact our profitability and results of operations.
We are attempting to complete the Proposed Transaction with Bakkt, aprivate company, and if we do not complete the Proposed Transaction we may attempt to complete another initial business with a private company, about which little information is available, which may result in a business combination with Bakkt or another company that is not as profitable as we suspected, if at all.
We are attempting to complete the Proposed Transaction with Bakkt, a privately held company. In pursuing our business combination strategy if we do not completed the Proposed Transaction, we may seek to effectuate another initial business combination with a different privately held company. Very little public information generally exists about private companies, and we could be required to make our decision on whether to pursue a potential initial business combination on the basis of limited information, which may result in a business combination with Bakkt or another company that is not as profitable as we suspected, if at all.
We do not have a specified maximum redemption threshold. The absence of such a redemption threshold may make it possible for us to complete our initial business combination with which a substantial majority of our shareholders do not agree.
Our amended and restated memorandum and articles of association provide that in no event will we redeem our public shares in an amount that would cause our net tangible assets to be less than $5,000,001. In addition, the Proposed Transaction does, and any other proposed initial business combination may, impose a minimum cash requirement for: (i) cash consideration to be paid to the target or its owners, (ii) cash for working capital or other general corporate purposes or (iii) the retention of cash to satisfy other conditions. As a result, we may be able to complete the Proposed Transaction or another initial business combination even though a substantial majority of our public shareholders do not agree with the transaction and have redeemed their shares or, if we seek shareholder approval of the Proposed Transaction (as we expect to do) or another initial business combination and do not conduct redemptions in connection with the Proposed Transaction our initial business combination pursuant to the tender offer rules, have entered into privately negotiated agreements to sell their shares to our sponsor, officers, directors, advisors or any of their affiliates. In the event the aggregate cash consideration we would be required to pay for all Class A ordinary shares that are validly submitted for redemption plus any amount required to satisfy cash conditions pursuant to the terms of the Proposed Transaction or such other proposed business combination exceed the aggregate amount of cash available to us, we will not complete the Proposed Transaction or other business combination or redeem any shares, all Class A ordinary shares submitted for redemption will be returned to the holders thereof, and we instead may search for an alternate business combination.
In order to effectuate an initial business combination, special purpose acquisition companies have, in the recent past, amended various provisions of their charters and other governing instruments, including their warrant agreements. We cannot assure you that we will not seek to amend our amended and restated memorandum and articles of association or governing instruments in a manner that will make it easier for us to complete the Proposed Transaction or another initial business combination that our shareholders may not support.
In order to effectuate a business combination, special purpose acquisition companies have, in the recent past, amended various provisions of their charters and governing instruments, including their warrant agreements. For example, special purpose acquisition companies have amended the definition of business combination, increased redemption thresholds and extended the time to consummate an initial business combination and, with respect to their warrants, amended their warrant agreements to require the warrants to be exchanged for cash and/or other
securities. Amending our amended and restated memorandum and articles of association will require a special resolution under Cayman Islands law, being the affirmative vote of a majority of at least two-thirds of the shareholders who attend and vote at a general meeting of the Company, and amending our warrant agreement will require a vote of holders of at least 50% of the public warrants and, solely with respect to any amendment to the terms of the private placement warrants or any provision of the warrant agreement with respect to the private placement warrants, 50% of the then outstanding private placement warrants. In addition, our amended and restated memorandum and articles of association requires us to provide our public shareholders with the opportunity to redeem their public shares for cash if we propose an amendment to our amended and restated memorandum and articles of association (A) to modify the substance or timing of our obligation to allow redemption in connection with our initial business combination or to redeem 100% of our public shares if we do not complete an initial business combination by September 25, 2022 or (B) with respect to any other material provisions relating to shareholders’ rights or pre-initial business combination activity. To the extent any of such amendments would be deemed to fundamentally change the nature of the securities offered through this registration statement, we would register, or seek an exemption from registration for, the affected securities. We cannot assure you that we will not seek to amend our charter or governing instruments or extend the time to consummate an initial business combination in order to effectuate our initial business combination.
The provisions of our amended and restated memorandum and articles of association that relate to our pre-business combination activity (and corresponding provisions of the agreement governing the release of funds from our trust account) may be amended with the approval of holders of not less than two-third of our ordinary shares who attend and vote at a general meeting of the Company (or 65% of our ordinary shares with respect to amendments to the trust agreement governing the release of funds from our Trust Account), which is a lower amendment threshold than that of some other special purpose acquisition companies. It may be easier for us, therefore, to amend our amended and restated memorandum and articles of association to facilitate the completion of an initial business combination that some of our shareholders may not support.
Our amended and restated memorandum and articles of association provides that any of its provisions related to pre-business combination activity (including the requirement to deposit proceeds of the initial public offering and the private placement of warrants into the trust account and not release such amounts except in specified circumstances, and to provide redemption rights to public shareholders as described herein) may be amended if approved by special resolution, under Cayman Islands law being the affirmative vote of a majority of at least two-thirds of the shareholders who attend and vote at a general meeting of the Company and corresponding provisions of the trust agreement governing the release of funds from our trust account may be amended if approved by special resolution, under Cayman Islands law being the affirmative vote of a majority of at least two-thirds of the shareholders who attend and vote at a general meeting of the Company, and corresponding provisions of the trust agreement governing the release of funds from our Trust Account may be amended if approved by holders of 65% of our ordinary shares. Our initial shareholders, who collectively beneficially own 20% of our outstanding ordinary shares, may participate in any vote to amend our amended and restated memorandum and articles of association and/or trust agreement and will have the discretion to vote in any manner they choose. As a result, we may be able to amend the provisions of our amended and restated memorandum and articles of association which govern our pre-business combination behavior more easily than some other special purpose acquisition companies, and this may increase our ability to complete the Proposed Transaction or another business combination with which you do not agree. Our shareholders may pursue remedies against us for any breach of our amended and restated memorandum and articles of association.
Our sponsor, officers and directors have agreed, pursuant to written agreements with us, that they will not propose any amendment to our amended and restated memorandum and articles of association (A) to modify the substance or timing of our obligation to allow redemption in connection with our initial business combination or to redeem 100% of our public shares if we do not complete our initial business combination by September 25,
2022 or (B) with respect to any other material provisions relating to shareholders’ rights or pre-initial business combination activity, unless we provide our public shareholders with the opportunity to redeem their Class A
ordinary shares upon approval of any such amendment at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the trust account, including interest earned on the funds held in the trust account and not previously released to us to pay our taxes, divided by the number of then outstanding public shares. Our shareholders are not parties to, or third-party beneficiaries of, these agreements and, as a result, will not have the ability to pursue remedies against our sponsor, officers, directors or director nominees for any breach of these agreements. As a result, in the event of a breach, our shareholders would need to pursue a shareholder derivative action, subject to applicable law.
Our letter agreement with our sponsor, officers and directors may be amended without shareholder approval.
Our letter agreement with our Sponsor, officers and directors contain provisions relating to transfer restrictions of our founder shares and private placement warrants, indemnification of the Trust Account, waiver of redemption rights and participation in liquidating distributions from the trust account. The letter agreement may be amended without shareholder approval (although releasing the parties from the restriction not to transfer the founder shares for 185 days following the date of our initial public offering will require the prior written consent of the underwriters). While we do not expect our board to approve any amendment to the letter agreement prior to the completion of the Proposed Transaction or another initial business combination, it may be possible that our board, in exercising its business judgment and subject to its fiduciary duties, chooses to approve one or more amendments to the letter agreement. Any such amendments to the letter agreement would not require approval from our shareholders and may have an adverse effect on the value of an investment in our securities.
We may be unable to obtain additional financing to complete the Proposed Transaction or another initial business combination or to fund the operations and growth of a target business, which could compel us to restructure or abandon a particular business combination.
If the cash portion of the purchase price exceeds the amount available from the trust account, net of amounts needed to satisfy any redemption by public shareholders and the funds provided by the PIPE Investment, we may be required to seek additional financing to complete such proposed initial business combination. We cannot assure you that such financing will be available on acceptable terms, if at all. To the extent that additional financing proves to be unavailable when needed to complete the Proposed Transaction or another initial business combination, we would be compelled to either restructure the transaction or abandon that particular business combination and seek an alternative target business candidate. Further, we may be required to obtain additional financing in connection with the closing of the Proposed Transaction or another initial business combination for general corporate purposes, including for maintenance or expansion of operations of the post-transaction businesses, the payment of principal or interest due on indebtedness incurred in completing the Proposed Transaction or such other initial business combination, or to fund the purchase of other companies. If we are unable to complete the Proposed Transaction or another initial business combination, our public shareholders may only receive their pro rata portion of the funds in the trust account that are available for distribution to public shareholders, and our warrants will expire worthless. In addition, even if we do not need additional financing to complete the Proposed Transaction or another initial business combination, we may require such financing to fund the operations or growth of the target business. The failure to secure additional financing could have a material adverse effect on the continued developmentour business.
We have limited accounting and finance personnel and other resources and must develop our own internal controls and procedures consistent with SEC regulations. We intend to continue to evaluate actions to enhance our internal controls over financial reporting, but there is no assurance that we will identify control deficiencies or
growth of Bakkt or such other target business. None of our officers, directors or shareholders is required to provide any financing to us in connection with or after the Proposed Transaction or another initial business combination.Our initial shareholders control a substantial interest in us and thus may exert a substantial influence on actions requiring a shareholder vote, potentially in a manner that you do not support.
Our initial shareholders own 20% of our issued and outstanding ordinary shares. Accordingly, they may exert a substantial influence on actions requiring a shareholder vote, potentially in a manner that you do not support,
including amendments to our amended and restated memorandum and articles of association. If our initial shareholders purchase any units or additional Class A ordinary sharesmaterial weaknesses in the aftermarket or in privately negotiated transactions, this would increase their control. Neither our initial shareholders nor, to our knowledge, any of our officers or directors, have any current intention to purchase additional securities,future.
The Sarbanes-Oxley Act requires, among other
than as disclosed in this Annual Report on Form 10-K. Factorsthings, that
would be considered in making such additional purchases would include consideration of the current trading price of our Class A ordinary shares. In addition, our board of directors, whose members were appointed by our sponsor, is and will be divided into three classes, each of which will generally serve for a term for three years with only one class of directors being appointed in each year. We may not hold an annual or extraordinary general meeting to appoint new directors prior to the completion of the Proposed Transaction or another initial business combination, in which case all of the current directors will continue in office until at least the completion of the Proposed Transaction or other business combination. If there is an annual meeting, as a consequence of our “staggered” board of directors, only a minority of the board of directors will be considered for election and our initial shareholders, because of their ownership position, will have considerable influence regarding the outcome. . . . In addition, the founder shares, all of which are held by our initial shareholders, will, in a vote to continue the Company in a jurisdiction outside the Cayman Islands (which requires the approval of at least two thirds of the votes of all ordinary shares), including as required in connection with the Proposed Transaction, entitle the holders to ten votes for every founder share. This provision of our amended and restated memorandum and articles of association may only be amended by a special resolution passed by a majority of at least two-thirds of our ordinary shares voting in a general meeting. As a result, you will not have any influencewe maintain effective internal control over
our continuation in a jurisdiction outside the Cayman Islands prior to the completion of the Proposed Transaction or another initial business combination. Accordingly, our initial shareholders will continue to exert control at least until the completion of the Proposed Transaction or another initial business combination.Because we must furnish our shareholders with target business financial statements, we may lose the ability to complete an otherwise advantageous initial business combination with some prospective target businesses.
The federal proxy rules require that the proxy statement with respect to the vote on an initial business combination include historical and pro forma financial statement disclosure. We will include the same financial statement disclosure in connection with our tender offer documents, whether or not they are required under the tender offer rules. These financial statements may be required to be prepared in accordance with, or be reconciled to, accounting principles generally accepted in the United States of America (“GAAP”), or international financial reporting standards as issued by the International Accounting Standards Board (“IFRS”), depending on the circumstances and the historical financial statements may be requireddisclosure controls and procedures. Pursuant to be audited in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”). These financial statement requirements may limit the pool of potential target businesses we may acquire because some targets may be unable to provide such financial statements in time for us to disclose such statements in accordance with federal proxy rules and complete our initial business combination within the prescribed time frame.
Compliance obligations under the Sarbanes-Oxley Act may make it more difficult for us to effectuate the Proposed Transaction or another initial business combination, require substantial financial and management resources, and increase the time and costs of completing the Proposed Transaction or another initial business combination.
Only in the event we are deemed to be a large accelerated filer or an accelerated filer, and no longer qualify as an emerging growth company, will we be required to comply withmake a formal assessment of the independent registered public accounting firm attestation requirement oneffectiveness of our internal control over financial reporting. Further, for as long asreporting, and once we remaincease to be an “emerging growth company” under the JOBS Act, we will also be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm.
To comply with Section 404 of the Sarbanes-Oxley Act, we have incurred substantial cost, expended significant management time on compliance-related issues and hired additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. We expect these costs to increase once we cease to be an emerging growth company we will notand be required to comply with the independent registered public accounting firmprovide an attestation requirementreport on our internal controlcontrols over financial reporting. The fact that we are a blank check company makes compliance with the requirements of the Sarbanes-Oxley Act particularly burdensome on us as compared to other public companies because a target business, such as Bakkt with which we seek to complete the
Proposed Transaction, or another target business with which we seek to complete another initial business combination may not be in compliance with the provisions of the Sarbanes-Oxley Act regarding adequacy of its internal controls. The development of the internal control of any such entity to achieve compliance with the Sarbanes-Oxley Act may increase the time and costs necessary to complete any such business combination, including the Proposed Transaction.
The Proposed Transaction or another initial business combination and our structure thereafter may not be tax-efficient to our shareholders and warrant holders. As a result of the Proposed Transaction or such other business combination, our tax obligations may be more complex, burdensome and uncertain.
Although we have attempted to structure the Proposed Transaction, and would attempt to structure another initial business combination in a tax-efficient manner, tax structuring considerations are complex, the relevant facts and law are uncertain and may change, and we may prioritize commercial and other considerations over tax considerations. For example, in connection with our initial business combination and subject to any requisite shareholder approval, we may structure our business combination in a manner that requires shareholders and/or warrant holders to recognize gain or income for tax purposes, effect a business combination with a target company in another jurisdiction, or reincorporate in a different jurisdiction (including, but not limited to, the jurisdiction in which the target company or business is located). We do not intend to make any cash distributions to shareholders or warrant holders to pay taxes in connection with the Proposed Transaction, another business combination or thereafter. Accordingly, a shareholder or a warrant holder may need to satisfy any liability resulting from the Proposed Transaction or such other initial business combination with cash from its own funds or by selling all or a portion of the shares received. In addition, shareholders and warrant holders may also be subject to additional income, withholding or other taxes with respect to their ownership of us after our initial business combination.
In addition, we may effect a business combination with a target company that has business operations outside of the United States, and possibly, business operations in multiple jurisdictions. If we effect such a business combination, we could be subject to significant income, withholding and other tax obligations in a number of jurisdictions with respect to income, operations and subsidiaries related to those jurisdictions. Due to the complexity of tax obligations and filings in other jurisdictions, we may have a heightened risk related to audits or examinations by U.S. federal, state, local and non-U.S. taxing authorities. This additional complexity and risk could have an adverse effect on our after-tax profitability and financial condition.
We may engage one or more of our underwriters or one of their respective affiliates to provide additional services to us, which may include acting as financial advisor in connection with the Proposed Transaction or another initial business combination or as placement agent in connection with a related financing transaction. Our underwriters are entitled to receive deferred commissions that will released from the trust only on a completion of the Proposed Transaction or another initial business combination. These financial incentives may cause them to have potential conflicts of interest in rendering any such additional services to us, including, for example, in connection with the sourcing and consummation of the Proposed Transaction or another initial business combination.
We may engage one or more of our underwriters or one of their respective affiliates to provide additional services to us, including, for example, identifying potential targets, providing financial advisory services, acting as a placement agent in a private offering or arranging debt financing. We may pay such underwriter or its affiliate fair and reasonable fees or other compensation that would be determined at that time in an arm’s length negotiation. The underwriters are also entitled to receive deferred commissions that are conditioned on the completion of the Proposed Transaction or another initial business combination. The underwriters’ or their respective affiliates’ financial interests tied to the consummation of a business combination transaction may give rise to potential conflicts of interest in providing any such additional services to us, including potential conflicts of interest in connection with the sourcing and consummation of the Proposed Transaction or another initial business combination.
Risks Relating to the Post Business Combination Company
Subsequent to our completion of the Proposed Transaction or another initial business combination, we may be required to take write-downs or write-offs, restructuring and impairment or other charges that could have a significant negative effect on our financial condition, results of operations and the price of our securities, which could cause you to lose some or all of your investment.
EvenMoreover, if we conduct due diligence on a target business with which we combine, as we have done on Bakkt in connection with the Proposed Transaction, we cannot assure you that this diligence will identify all material issues that may be present with a Bakkt or another target business, that it would be possible to uncover all material issues through a customary amount of due diligence, or that factors outside of Bakkt or another target business and outside of our control will not later arise. As a result of these factors, we may be forced to later write-down or write-off assets, restructure our operations, or incur impairment or other charges that could result in our reporting losses. Even if our due diligence successfully identifies certain risks, unexpected risks may arise and previously known risks may materialize in a manner not consistent with our preliminary risk analysis. Even though these charges may be non-cash items and not have an immediate impact on our liquidity, the fact that we report charges of this nature could contribute to negative market perceptions about us or our securities. In addition, charges of this nature may cause us to violate net worth or other covenants to which we may be subject as a result of assuming pre-existing debt held by a target business or by virtue of our obtaining debt financing to partially finance the Proposed Transaction or other initial business combination or thereafter. Accordingly, any shareholders who choose to remain shareholders or following the Proposed Transaction or other business combination could suffer a reduction in the value of their securities. Such shareholders or warrant holders are unlikely to have a remedy for such reduction in value unless they are able to successfully claim that the reduction was due to the breach by our officers or directors of a duty of care or other fiduciary duty owed to them, or if they are able to successfully bring a private claim under securities laws that the proxy solicitation or tender offer materials or tender offer documents, as applicable, relating to the Proposed Transaction or other business combination contained an actionable material misstatement or material omission.
The officers and directors of Bakkt, or another acquisition candidate, may resign upon completion of our the Proposed Transaction or another initial business combination. The loss of Bakkt’s or another business combination target’s key personnel could negatively impact the operations and profitability of our post-combination business.
The role of Bakkt’s or another acquisition candidate’s key personnel upon the completion of the Proposed Transaction or another initial business combination cannot be ascertained at this time. Although we contemplate that certain members of Bakkt’s or another acquisition candidate’s management team will remain associated with Bakkt or such other acquisition candidate following the Proposed Transaction or other initial business combination, it is possible that members of the management of Bakkt or such other acquisition candidate will not wish to remain in place.
Our management may not maintain control of Bakkt after the Proposed Transaction or a different target business following another initial business combination. We cannot provide assurance that, upon loss of control of Bakkt or another target business, new management will possess the skills, qualifications or abilities necessary to profitably operate such business.
Although the Proposed Transaction is structured so that the post-transaction company in which our public shareholders own shares will own 100% of the equity interests of the target, if we do not complete the Proposed Transactionwe may structure another initial business combination so that the post-transaction company in which our public shareholders own shares will own less than 100% of the equity interests or assets of a target business, but we will only complete such business combination if the post-transaction company owns or acquires 50% or more of the outstanding voting securities of the target or otherwise acquires a controlling interest in the target sufficient for us not to be required to register as an investment company under the Investment Company Act. We will not consider any transaction that does not meet such criteria. Even if the post-transaction company owns
50% or more of the voting securities of the target, our shareholders prior to the business combination may collectively own a minority interest in the post business combination company, depending on valuations ascribed to the target and us in the business combination. For example, we could pursue a transaction in which we issue a substantial number of new Class A ordinary shares in exchange for all of the outstanding capital stock of a target. In this case, we would acquire a 100% interest in the target. However, as a result of the issuance of a substantial number of new Class A ordinary shares, our shareholders immediately prior to such transaction could own less than a majority of our outstanding Class A ordinary shares subsequent to such transaction. In addition, other minority shareholders may subsequently combine their holdings resulting in a single person or group obtaining a larger share of the company’s shares than we initially acquired. Accordingly, this may make it more likely that our management will not maintain control of the target business. If the Proposed Transaction is completed, our shareholders immediately prior to such transaction will own less than a majority of the post-business combination enity’s outstanding shares subsequent to such transaction.
We may have a limited ability to assess the management of Bakkt or another prospective target business and, as a result, may effect the Proposed Transaction or another initial business combination with a target business whose management may not have the skills, qualifications or abilities to manage a public company.
When evaluating the desirability of effecting the Proposed Transaction or anotherinitial business combination with a prospective target business, our ability to assess Bakkt’s or such othertarget business’s management may be limited due to a lack of time, resources or information. Our assessment of the capabilities of Bakkt’s or such othertarget business’s management, therefore, may prove to be incorrect and such management may lack the skills, qualifications or abilities we suspected. Should Bakkt’s or such othertarget business’s management not possess the skills, qualifications or abilities necessary to manage a public company, the operations and profitability of the post-combination business may be negatively impacted. Accordingly, any shareholders who choose to remain shareholders following the Proposed Transaction or other initial business combination could suffer a reduction in the value of their securities. Such shareholders are unlikely to have a remedy for such reduction in value unless they are able to successfully claim that the reduction was due to the breach by our officers or directors of a duty of care or other fiduciary duty owed to them, or if they are able to successfully bring a private claim under securities laws that the proxy solicitation or tender offer materials, as applicable, relating to the Proposed Transaction or other initial business combination contained an actionable material misstatement or material omission.
Risks Relating to Being an Entity Formed in a Foreign Country and Acquiring and Operating a Business in Foreign Countries
Because we are incorporated under the laws of the Cayman Islands, you may face difficulties in protecting your interests, and your ability to protect your rights through the U.S. Federal courts may be limited.
We are an exempted company incorporated under the laws of the Cayman Islands. As a result, it may be difficult for investors to effect service of process within the United States upon our directors or officers, or enforce judgments obtained in the United States courts against our directors or officers.
Our corporate affairs will be governed by our amended and restated memorandum and articles of association, the Companies Law (as the same may be supplemented or amended from time to time) and the common law of the Cayman Islands. We will also be subject to the federal securities laws of the United States. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, the decisions of whose courts are of persuasive authority, but are not binding on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are different from what they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the
Cayman Islands has a different body of securities laws as compared to the United States, and certain states, such as Delaware, may have more fully developed and judicially interpreted bodies of corporate law. In addition, Cayman Islands companies may not have standing to initiate a shareholders derivative action in a Federal court of the United States.
We have been advised by Maples and Calder (Cayman) LLP, our Cayman Islands legal counsel, that the courts of the Cayman Islands are unlikely (i) to recognize or enforce against us judgments of courts of the United States predicated upon the civil liability provisions of the federal securities laws of the United States or any state; and (ii) in original actions brought in the Cayman Islands, to impose liabilities against us predicated upon the civil liability provisions of the federal securities laws of the United States or any state, so far as the liabilities imposed by those provisions are penal in nature. In those circumstances, although there is no statutory enforcement in the Cayman Islands of judgments obtained in the United States, the courts of the Cayman Islands will recognize and enforce a foreign money judgment of a foreign court of competent jurisdiction without retrial on the merits based on the principle that a judgment of a competent foreign court imposes upon the judgment debtor an obligation to pay the sum for which judgment has been given provided certain conditions are met. For a foreign judgment to be enforced in the Cayman Islands, such judgment must be final and conclusive and for a liquidated sum, and must not be in respect of taxes or a fine or penalty, inconsistent with a Cayman Islands judgment in respect of the same matter, impeachable on the grounds of fraud or obtained in a manner, or be of a kind the enforcement of which is, contrary to natural justice or the public policy of the Cayman Islands (awards of punitive or multiple damages may well be held to be contrary to public policy). A Cayman Islands Court may stay enforcement proceedings if concurrent proceedings are being brought elsewhere.
As a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a United States company.
Although Bakkt is located in the United States, if we do not complete the Proposed Transaction and instead effect our initial business combination with a company located outside of the United States, we would be subject to a variety of additional risks that may adversely affect us.
Although Bakkt is located in the United States, if we do not complete the Proposed Transaction and instead pursue a target company with operations or opportunities outside of the United States for our initial business combination, we may face additional burdens in connection with investigating, agreeing to and completing such initial business combination, and if we effect such initial business combination, we would be subject to a variety of additional risks that may negatively impact our operations.
If we pursue a target a company with operations or opportunities outside of the United States for our initial business combination, we would be subject to risks associated with cross-border business combinations, including in connection with investigating, agreeing to and completing our initial business combination, conducting due diligence in a foreign jurisdiction, having such transaction approved by any local governments, regulators or agencies and changes in the purchase price based on fluctuations in foreign exchange rates.
If we effect our initial business combination with such a company, we would be subject to any special considerations or risks associated with companies operating in an international setting, including any of the following:
costs and difficulties inherent in managing cross-border business operations;
rules and regulations regarding currency redemption;
complex corporate withholding taxes on individuals;
laws governing the manner in which future business combinations may be effected;
exchange listing and/or delisting requirements;
tariffs and trade barriers;
regulations related to customs and import/export matters;
local or regional economic policies and market conditions;
unexpected changes in regulatory requirements;
challenges in managing and staffing international operations;
tax issues, such as tax law changes and variations in tax laws as compared to the United States;
currency fluctuations and exchange controls;
challenges in collecting accounts receivable;
cultural and language differences;
underdeveloped or unpredictable legal or regulatory systems;
protection of intellectual property;
social unrest, crime, strikes, riots and civil disturbances;
regime changes and political upheaval;
terrorist attacks and wars; and
deterioration of political relations with the United States.
We may not be able to adequately address these additional risks. If we were unable to do so, we may be unable to complete such initial business combination, or, if we complete such initial business combination, our operations might suffer, either of which may adversely impact our business, financial condition and results of operations.
If our management following our initial business combination is unfamiliar with United States securities laws, they may have to expend time and resources becoming familiar with such laws, which could lead to various regulatory issues.
Following the Proposed Transaction or another initial business combination, our management may resign from their positions as officers or directors of the company and the management of the target business at the time of the business combination will remain in place. Management of the target business may not be familiar with United States securities laws. If new management is unfamiliar with United States securities laws, they may have to expend time and resources becoming familiar with such laws. This could be expensive and time-consuming and could lead to various regulatory issues which may adversely affect our operations.
If we do not completed the Proposed Transaction, and instead complete another initial business combination, substantially all of our assets may be located in a foreign country and substantially all of our revenue will be derived from our operations in such country. Accordingly, our results of operations and prospects will be subject, to a significant extent, to the economic, political and legal policies, developments and conditions in the country in which we operate.
The economic, political and social conditions, as well as government policies, of the country in which our operations are located could affect our business. Economic growth could be uneven, both geographically and
among various sectors of the economy and such growth may not be sustained in the future. If in the future such country’s economy experiences a downturn or grows at a slower rate than expected, there may be less demand for spending in certain industries. A decrease in demand for spending in certain industries could materially and adversely affect our ability to find an attractive target business with which to consummate our initial business combination and if we effect our initial business combination, the ability of that target business to become profitable.
Exchange rate fluctuations and currency policies may cause a target business’ ability to succeed in the international markets to be diminished.
In the event we acquire a non-U.S. target, all revenues and income would likely be received in a foreign currency, and the dollar equivalent of our net assets and distributions, if any, could be adversely affected by reductions in the value of the local currency. The value of the currencies in our target regions fluctuate and are affected by, among other things, changes in political and economic conditions. Any change in the relative value of such currency against our reporting currency may affect the attractiveness of any target business or, following consummation of our initial business combination, our financial condition and results of operations. Additionally, if a currency appreciates in value against the dollar prior to the consummation of our initial business combination, the cost of a target business as measured in dollars will increase, which may make it less likely that we are able to consummate such transaction.
We may reincorporate in another jurisdiction in connection with our initial business combination, and the laws of such jurisdiction may govern some or all of our future material agreements and we may not be able to enforce our legal rights.
In connection with our initial business combination, we may relocate the home jurisdiction of our business from the Cayman Islands to another jurisdiction. If we determine to do this, the laws of such jurisdiction may govern some or all of our future material agreements. The system of laws and the enforcement of existing laws in such jurisdiction may not be as certain in implementation and interpretation as in the United States. The inability to enforce or obtain a remedy under any of our future agreements could result in a significant loss of business, business opportunities or capital.
We are subject to changing law and regulations regarding regulatory matters, corporate governance and public disclosure that have increased both our costs and the risk of non-compliance.
We are subject to rules and regulations by various governing bodies, including, for example, the Securities and Exchange Commission, which are charged with the protection of investors and the oversight of companies whose securities are publicly traded, and to new and evolving regulatory measures under applicable law. Our efforts to comply with new and changing laws and regulations have resulted in and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.
Moreover, because these laws, regulations and standards are subject to varying interpretations, their application in practice may evolve over time as new guidance becomes available. This evolution may result in continuing uncertainty regarding compliance matters and additional costs necessitated by ongoing revisions to our disclosure and governance practices. If we fail to address and comply with these regulations and any subsequent changes, we may be subject to penalty and our business may be harmed.
We employ a mail forwarding service, which may delay or disrupt our ability to receive mail in a timely manner
Mail addressed to the Company and received at its registered office will be forwarded unopened to the forwarding address supplied by Company to be dealt with. None of the Company, its directors, officers, advisors
or service providers (including the organization which provides registered office services in the Cayman Islands) will bear any responsibility for any delay howsoever caused in mail reaching the forwarding address, which may impair your ability to communicate with us.
Risks Relating to Our Sponsor and Management Team
We are dependent upon our officers and directors and their loss could adversely affect our ability to operate.
Our operations are dependent upon a relatively small group of individuals and, in particular, our officers and directors. We believe that our success depends on the continued service of our officers and directors, at least until we have completed The Proposed Transaction or another initial business combination. In addition, our officers and directors are not required to commit any specified amount of time to our affairs and, accordingly, will have conflicts of interest in allocating their time among various business activities, including identifying potential business combinations and monitoring the related due diligence. We do not have an employment agreement with, or key-man insurance on the life of, any of our directors or executive officers. The unexpected loss of the services of one or more of our directors or eofficers could have a detrimental effect on us.
Our ability to successfully effect the Proposed Transaction or another initial business combination and to be successful thereafter will be dependent upon the efforts of our key personnel, some of whom may join us following the Proposed Transaction or such other initial business combination. The loss of key personnel could negatively impact the operations and profitability of our post-combination business.
Our ability to successfully effect the Proposed Transaction or another initial business combination is dependent upon the efforts of our key personnel. The role of our key personnel in, Bakkt or such other the target business, however, cannot presently be ascertained. Although some of our key personnel may remain with Bakkt or such other target business in senior management or advisory positions following the Proposed Transaction or such other initial business combination, it is likely that some or all of the management of Bakkt or such other the target business will remain in place. While we intend to closely scrutinize any individuals we engage after the Proposed Transaction or such other initial business combination, we cannot assure you that our assessment of these individuals will prove to be correct. These individuals may be unfamiliar with the requirements of operating a company regulated by the SEC, which could cause us to have to expend time and resources helping them become familiar with such requirements.
Our officers and directors will allocate their time to other businesses thereby causing conflicts of interest in their determination as to how much time to devote to our affairs. This conflict of interest could have a negative impact on our ability to complete the Proposed Transaction or another initial business combination.
Our officers and directors are not required to, and will not, commit their full time to our affairs, which may result in a conflict of interest in allocating their time between our operations and our search for a business combination, including the Proposed Transaction, and their other businesses. We do not intend to have any full-time employees prior to the completion of the Proposed Transaction or another initial business combination. Each of our officers is engaged in several other business endeavors for which he may be entitled to substantial compensation, and our executive officers are not obligated to contribute any specific number of hours per week to our affairs. Our independent directors also serve as officers and board members for other entities. If our officers’ and directors’ other business affairs require them to devote substantial amounts of time to such affairs in excess of their current commitment levels, it could limit their ability to devote time to our affairs which may have a negative impact on our ability to complete the Proposed Transaction or another initial business combination.
Our officers and directors presently have, and any of them in the future may have additional, fiduciary or contractual obligations to other entities and, accordingly, may have conflicts of interest in determining to which entity a particular business opportunity should be presented.
Until we consummate the Proposed Transaction or another initial business combination, we intend to engage in the business of identifying and combining with one or more businesses. Each of our officers and directors presently has, and any of them in the future may have, additional fiduciary or contractual obligations to other entities pursuant to which such officer or director is or will be required to present a business combination opportunity to such entities. Accordingly, they may have conflicts of interest in determining to which entity a particular business opportunity should be presented. These conflicts may not be resolved in our favor and a potential target business may be presented to another entity prior to its presentation to us, subject to their fiduciary duties under Cayman Islands law. Our amended and restated memorandum and articles of association provide that we renounce our interest in any corporate opportunity offered to any director or officer unless such opportunity is expressly offered to such person solely in his or her capacity as a director or officer of the company and it is an opportunity that we are able to complete on a reasonable basis. In addition, our sponsor and our officers and directors may sponsor or form other special purpose acquisition companies similar to ours or may pursue other business or investment ventures during the period in which we are seeking an initial business combination. Any such companies, businesses or investments may present additional conflicts of interest in pursuing an initial business combination. However, we do not believe that such potential conflicts would materially affect our ability to complete the Proposed Transaction or another initial business combination.
In addition, our sponsor and our officers and directors may sponsor or form other special purpose acquisition companies similar to ours or may pursue other business or investment ventures during the period in which we are seeking an initial business combination. Any such companies, businesses or investments may present additional conflicts of interest in pursuing an initial business combination.
Our officers, directors, security holders and their respective affiliates may have competitive pecuniary interests that conflict with our interests.
We have not adopted a policy that expressly prohibits our directors, executive officers, security holders or affiliates from having a direct or indirect pecuniary or financial interest in any investment to be acquired or disposed of by us or in any transaction to which we are a party or have an interest. In fact, we may enter into a business combination with a target business that is affiliated with our sponsor, our directors or officers, although we do not intend to do so, Bakkt is not affiliated with our sponsor, our directors or officers. Nor do we have a policy that expressly prohibits any such persons from engaging for their own account in business activities of the types conducted by us. Accordingly, such persons or entities may have a conflict between their interests and ours.
The personal and financial interests of our directors and officers may influence their motivation in timely identifying and selecting a target business and completing a business combination. Consequently, our directors’ and officers’ discretion in identifying and selecting a suitable target business, including Bakkt, may have or may in the future, result in a conflict of interest when determining whether the terms, conditions and timing of a particular business combination, including the Proposed Transaction, are appropriate and in our shareholders’ best interest. If this were the case, it would be a breach of their fiduciary duties to us as a matter of Cayman Islands law and we or our shareholders might have a claim against such individuals for infringing on our shareholders’ rights. However, we might not ultimately be successful in any claim we may make against them for such reason.
We may not have sufficient funds to satisfy indemnification claims of our directors and officers.
We have agreed to indemnify our officers and directors to the fullest extent permitted by law. However, our officers and directors have agreed to waive any right, title, interest or claim of any kind in or to any monies in the trust account and to not seek recourse against the trust account for any reason whatsoever. Accordingly, any
indemnification provided will be able to be satisfied by us only if (i) we have sufficient funds outside of the trust Account or (ii) we consummate the Proposed Transaction or another initial business combination. Our obligation to indemnify our officers and directors may discourage shareholders from bringing a lawsuit against our officers or directors for breach of their fiduciary duty. These provisions also may have the effect of reducing the likelihood of derivative litigation against our officers and directors, even though such an action, if successful, might otherwise benefit us and our shareholders. Furthermore, a shareholder’s investment may be adversely affected to the extent we pay the costs of settlement and damage awards against our officers and directors pursuant to these indemnification provisions.
Risks Relating to our Securities
You will not have any rights or interests in funds from the trust account, except under certain limited circumstances. Therefore, to liquidate your investment, you may be forced to sell your public shares or warrants, potentially at a loss.
Our public shareholders will be entitled to receive funds from the trust account only upon the earliest to occur of: (i) our completion of an initial business combination, and then only in connection with those Class A ordinary shares that such shareholder properly elected to redeem, subject to the limitations and on the conditions described herein, (ii) the redemption of any public shares properly submitted in connection with a shareholder vote to amend our amended and restated memorandum and articles of association (A) to modify the substance or timing of our obligation to allow redemption in connection with our initial business combination or to redeem 100% of our public shares if we do not complete our initial business combination by September 25, 2022 or (B) with respect to any other material provisions relating to shareholders’ rights or pre-initial business combination activity, and (iii) the redemption of our public shares if we are unable to complete an initial business combination by September 25, 2022, subject to applicable law and as further described herein. In addition, if our plan to redeem our public shares if we are unable to complete an initial business combination by September 25, 2022 is not completed for any reason, compliance with Cayman Islands law may require that we submit a plan of dissolution to our then-existing shareholders for approval prior to the distribution of the proceeds held in our trust account. In that case, public shareholders may be forced to wait beyond 24 months from the closing of the initial public offering before they receive funds from our trust account. In no other circumstances will a public shareholder have any right or interest of any kind in the trust account. Holders of warrants will not have any right to the proceeds held in the trust account with respect to the warrants. Accordingly, to liquidate your investment, you may be forced to sell your public shares or warrants, potentially at a loss.
The securities in which we invest the proceeds held in the trust account could bear a negative rate of interest, which could reduce the interest income available for payment of taxes or reduce the value of the assets held in trust such that the per share redemption amount received by shareholders may be less than $10.00 per share.
The net proceeds of the initial public offering and certain proceeds from the sale of the private placement warrants, in the amount of $207,372,020, are held in an interest-bearing trust account. The proceeds held in the trust account may only be invested in direct U.S. Treasury obligations having a maturity of 185 days or less, or in certain money market funds which invest only in direct U.S. Treasury obligations. While short-term U.S. Treasury obligations currently yield a positive rate of interest, they have briefly yielded negative interest rates in recent years. Central banks in Europe and Japan pursued interest rates below zero in recent years, and the Open Market Committee of the Federal Reserve has not ruled out the possibility that it may in the future adopt similar policies in the United States. In the event of very low or negative yields, the amount of interest income (which we may withdraw to pay income taxes, if any) would be reduced. In the event that we are unable to complete our initial business combination, our public shareholders are entitled to receive their pro-rata share of the proceeds held in the trust account, plus any interest income. If the balance of the trust account is reduced below $207,372,020 as a result of negative interest rates, the amount of funds in the trust account available for distribution to our public shareholders may be reduced below $10.00 per share.
Nasdaq may delist our securities from trading on its exchange, which could limit investors’ ability to make transactions in our securities and subject us to additional trading restrictions.
We cannot assure you that our securities will be, or will continue to be, listed on the Nasdaq in the future or prior to our initial business combination. In order to continue listing our securities on the Nasdaq prior to our initial business combination, we must maintain certain financial, distribution and share price levels. Generally, we must maintain a minimum amount in Shareholders’ equity (generally $2,500,000) and a minimum number of holders of our securities (generally 300 public holders). Additionally, in connection with our initial business combination, we will be required to demonstrate compliance with the Nasdaq’s initial listing requirements, which are more rigorous than the Nasdaq’s continued listing requirements, in order to continue to maintain the listing of our securities on the Nasdaq. For instance, our share price would generally be required to be at least $4.00 per share and our Shareholders’ equity would generally be required to be at least $5.0 million. We cannot assure you that we will be able to meet those initial listing requirements at that time.
If the Nasdaq delists our securities from trading on its exchange and we are not able to list our securities on another national securities exchange, we expect our securities could be quoted on an over-the-counter market. If this were to occur, we could face significant material adverse consequences, including:
a limited availability of market quotations for our securities;
reduced liquidity for our securities;
a determination that our Class A ordinary shares are a “penny stock” which will require brokers trading in our Class A ordinary shares to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our securities;
a limited amount of news and analyst coverage; and
a decreased ability to issue additional securities or obtain additional financing in the future.
The National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred to as “covered securities.” Because we expect that our units and eventually our Class A ordinary shares and warrants will be listed on the Nasdaq, our units, Class A ordinary shares and warrants will qualify as covered securities under the statute. Although the states are preempted from regulating the sale of our securities, the federal statute does allow the states to investigate companies if there is a suspicion of fraud, and, if there is a finding of fraudulent activity, then the states can regulate or bar the sale of covered securities in a particular case. While we are not aware of a state having used these powers to prohibit or restrict the sale of securities issued by blank check companies, other than the State of Idaho, certain state securities regulators view blank check companies unfavorably and might use these powers, or threaten to use these powers, to hinder the sale of securities of blank check companies in their states. Further, if we were no longer listed on the Nasdaq, our securities would not qualify as covered securities under the statute and we would be subject to regulation in each state in which we offer our securities.
Unlike some other similarly structured special purpose acquisition companies, our initial shareholders will receive additional Class A ordinary shares if we issue certain shares to consummate an initial business combination.
The founder shares will automatically convert into Class A ordinary shares concurrently with or immediately following the consummation of our initial business combination on a one-for-one basis, subject to adjustment for share sub-divisions, share capitalizations reorganizations, recapitalizations and the like, and subject to further adjustment as provided herein. In the case that additional Class A ordinary shares or equity-linked securities are issued or deemed issued in connection with our initial business combination, the number of Class A ordinary shares issuable upon conversion of all founder shares will equal, in the aggregate, on an as-converted basis, 20% of the total number of Class A ordinary shares outstanding after such conversion (after giving effect to any redemptions of Class A ordinary shares by public shareholders), including the total number of Class A ordinary
shares issued, or deemed issued or issuable upon conversion or exercise of any equity-linked securities or rights issued or deemed issued, by the Company in connection with or in relation to the consummation of the initial business combination, excluding any Class A ordinary shares or equity-linked securities or rights exercisable for or convertible into Class A ordinary shares issued, or to be issued, to any seller in the initial business combination and any private placement warrants issued to our sponsor, officers or directors upon conversion of working capital loans, provided that such conversion of founder shares will never occur on a less than one-for-one basis. This is different than some other similarly structured special purpose acquisition companies in which the initial shareholders will only be issued an aggregate of 20% of the total number of shares to be outstanding prior to our initial business combination.
If we seek shareholder approval of our initial business combination and we do not conduct redemptions pursuant to the tender offer rules, and if you or a “group” of shareholders are deemed to hold in excess of 15% of our Class A ordinary shares, you will lose the ability to redeem all such shares in excess of 15% of our Class A ordinary shares.
If we seek shareholder approval of our initial business combination and we do not conduct redemptions in connection with our initial business combination pursuant to the tender offer rules, our amended and restated memorandum and articles of association provides that a public shareholder, together with any affiliate of such shareholder or any other person with whom such shareholder is acting in concert or as a “group” (as defined under Section 13 of the Exchange Act), will be restricted from seeking redemption rights with respect to more than an aggregate of 15% of the shares sold in the initial public offering without our prior consent, which we refer to as the “Excess Shares.” However, we would not be restricting our shareholders’ ability to vote all of their shares (including Excess Shares) for or against our initial business combination. Your inability to redeem the Excess Shares will reduce your influence over our ability to complete our initial business combination and you could suffer a material loss on your investment in us if you sell Excess Shares in open market transactions. Additionally, you will not receive redemption distributions with respect to the Excess Shares if we complete our initial business combination. And as a result, you will continue to hold that number of shares exceeding 15% and, in order to dispose of such shares, would be required to sell your shares in open market transactions, potentially at a loss.
Provisions in our amended and restated certificate memorandum and articles of association and Cayman Islands law may inhibit a takeover of us, which could limit the price investors might be willing to pay in the future for our Class A ordinary shares and could entrench management.
Our amended and restated memorandum and articles of association contains provisions that may discourage unsolicited takeover proposals that shareholders may consider to be in their best interests. These provisions include a staggered board of directors and the ability of the board of directors to designate the terms of and issue new series of preferred shares, which may make more difficult the removal of management and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities.
We may amend the terms of the warrants in a manner that may be adverse to holders of public warrants with the approval by the holders of at least 50% of the then outstanding public warrants. As a result, the exercise price of your warrants could be increased, the exercise period could be shortened and the number of Class A ordinary shares purchasable upon exercise of a warrant could be decreased, all without your approval.
Our warrants will be issued in registered form under a warrant agreement between Continental Stock Transfer & Trust Company, as warrant agent, and us. The warrant agreement provides that (a) the terms of the warrants may be amended without the consent of any holder for the purpose of curing any ambiguity, to correct any defective provision or mistake, including to conform the provisions of the warrant agreement to the description of the terms of the warrants and the warrant agreement set forth in the prospects for the Company’s initial public offering, (ii) adjusting the provisions relating to cash dividends on ordinary shares as contemplated
by and in accordance with the warrant agreement (or iii) adding or changing any provisions with respect to matters or questions arising under the warrant agreement as the parties to the warrant agreement may deem necessary or desirable and that the parties deem to not adversely affect the rights provided that, the approval of the holders of at least 50% of the then-outstanding public warrants is required to make any change that adversely affects the interests of the registered holders of public warrants. Accordingly, we may amend the terms of the public warrants in a manner adverse to a holder of public warrants if holders of at least 50%% of the then outstanding public warrants approve of such amendment. Although our ability to amend the terms of the public warrants with the consent of at least 50% of the then outstanding public warrants is unlimited, examples of such amendments could be amendments to, among other things, increase the exercise price of the warrants, convert the warrants into cash or shares, shorten the exercise period or decrease the number of Class A ordinary shares purchasable upon exercise of a warrant.
Our warrant agreement designates the courts of the State of New York or the United States District Court for the Southern District of New York as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by holders of our warrants, which could limit the ability of warrant holders to obtain a favorable judicial forum for disputes with our company.
Our warrant agreement provides that, subject to applicable law, (i) any action, proceeding or claim against us arising out of or relating in any way to the warrant agreement, including under the Securities Act, will be brought and enforced in the courts of the State of New York or the United States District Court for the Southern District of New York, and (ii) that we irrevocably submit to such jurisdiction, which jurisdiction shall be the exclusive forum for any such action, proceeding or claim. We will waive any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum.
Notwithstanding the foregoing, these provisions of the warrant agreement will not apply to suits brought to enforce any liability or duty created by the Exchange Act or any other claim for which the federal district courts of the United States of America are the sole and exclusive forum. Any person or entity purchasing or otherwise acquiring any interest in any of our warrants shall be deemed to have notice of and to have consented to the forum warrant agreement. If any action, the subject matter of which is within the scope the forum provisions of the warrant agreement, is filed in a court other than a court of the State of New York or the United States District Court for the Southern District of New York (a “foreign action”) in the name of any holder of our warrants, such holder shall be deemed to have consented to: (x) the personal jurisdiction of the state and federal courts located in the State of New York in connection with any action brought in any such court to enforce the forum provisions (an “enforcement action”), and (y) having service of process made upon such warrant holder in any such enforcement action by service upon such warrant holder’s counsel in the foreign action as agent for such warrant holder.
This choice-of-forum provision may limit a warrant holder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with our company, which may discourage such lawsuits. Alternatively, if a court were to find this provision of our warrant agreement inapplicable or unenforceable with respect to one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could materially and adversely affect our business, financial condition and results of operations and result in a diversion of the time and resources of our management and board of directors.
A provision of our warrant agreement may make it more difficult for us to consummate the Proposed Transaction or another business combination.
If (i) we issue additional ordinary shares or equity-linked securities for capital raising purposes in connection with the closing of our initial business combination at a Newly Issued Price of less than $9.20 per Class A ordinary share, (ii) the aggregate gross proceeds from such issuances represent more than 60% of the total equity proceeds, and interest thereon, available for the funding of our initial business combination, and (iii) the Market
Value of our Class A ordinary shares is below $9.20 per share, then the exercise price of the warrants will be adjusted (to the nearest cent) to be equal to 115% of the higher of the Market Value and the Newly Issued Price, and the $18.00 per share redemption trigger prices described below under “Description of Securities—Warrants—Public Warrants—Redemption of warrants when the price per Class A ordinary share equals or exceeds $18.00” and “Redemption of warrants when the price per Class A ordinary share equals or exceeds $10.00” will be adjusted (to the nearest cent) to be equal to 180% of the higher of the Market Value and the Newly Issued Price, and the $10.00 per share redemption trigger price described below under “Description of Securities—Warrants—Public Warrants—Redemption of warrants when the price per Class A ordinary share equals or exceeds $10.00” will be adjusted (to the nearest cent) to be equal to the higher of the Market Value and the Newly Issued Price. This may make it more difficult for us to consummate an initial business combination with a target business.
We may redeem your unexpired warrants prior to their exercise at a time that is disadvantageous to you, thereby making your warrants worthless.
We have the ability to redeem outstanding warrants at any time after they become exercisable and prior to their expiration, at a price of $0.01 per warrant, provided that the closing price of our Class A ordinary shares equals or exceeds $18.00 per share (as adjusted for share sub-divisions, share capitalizations, reorganizations, recapitalizations and the like) for any 20 trading days within a 30 trading-day period ending on the third trading day prior to the date on which we give proper notice of such redemption to the warrant holders and provided certain other conditions are met. We will not redeem the warrants unless an effective registration statement under the Securities Act covering the Class A ordinary shares issuable upon exercise of the warrants is effective and a current prospectus relating to those Class A ordinary shares is available throughout the 30-day redemption period, except if the warrants may be exercised on a cashless basis and such cashless exercise is exempt from registration under the Securities Act. If and when the warrants become redeemable by us, we may exercise our redemption right even if we are unable to register or qualify the underlying securities for sale under all applicable state securities laws. Redemption of the outstanding warrants could force you to (i) exercise your warrants and pay the exercise price therefor at a time when it may be disadvantageous for you to do so, (ii) sell your warrants at the then-current market price when you might otherwise wish to hold your warrants or (iii) accept the nominal redemption price which, at the time the outstanding warrants are called for redemption, is likely to be substantially less than the market value of your warrants.
In addition, we have the ability to redeem the outstanding public warrants at any time after they become exercisable and prior to their expiration, at a price of $0.10 per warrant upon a minimum of 30 days’ prior written notice of redemption; provided that the closing price of our Class A ordinary shares equals or exceeds $10.00 per share (as adjusted for adjustments to the number of shares issuable upon exercise or the exercise price of a warrant as described under the heading “—Warrants—Public Warrants—Redemption Procedures—Anti-dilution Adjustments” in Exhibit 4.5 filed herewith for any 20 trading days within a 30 trading-day period ending on the third trading day prior to proper notice of such redemption and provided that certain other conditions are met, including that holders will be able to exercise their warrants prior to redemption for a number of Class A ordinary shares determined based on the redemption date and the fair market value of our Class A ordinary shares. The value received upon exercise of the warrants (1) may be less than the value the holders would have received if they had been able to exercise their warrants at a later time at which the underlying share price is higher and (2) may not compensate the holders for the value of the warrants, including because the number of ordinary shares received is capped at 0.361 Class A ordinary shares per warrant (subject to adjustment) irrespective of the remaining life of the warrants. None of the private placement warrants will be redeemable by us so long as they are held by our sponsor or its permitted transferees.
You will not be permitted to exercise your warrants unless we register and qualify the underlying Class A ordinary shares or certain exemptions are available.
If the issuance of the Class A ordinary shares upon exercise of the warrants is not registered, qualified or exempt from registration or qualification under the Securities Act and applicable state securities laws, holders of warrants
will not be entitled to exercise such warrants and such warrants may have no value and expire worthless. In such event, holders who acquired their warrants as part of a purchase of units will have paid the full unit purchase price solely for the Class A ordinary shares included in the units.
We are not registering the Class A ordinary shares issuable upon exercise of the warrants under the Securities Act or any state securities laws at this time. However, under the terms of the warrant agreement, we have agreed that, as soon as practicable, but in no event later than 15 business days, after the closing the Proposed Transaction or another initial business combination, we will use our best efforts to file with the SEC a registration statement covering the registration under the Securities Act of the Class A ordinary shares issuable upon exercise of the warrants and thereafter will use our best efforts to cause the same to become effective within 60 business days following the Proposed Transaction or other initial business combination and to maintain a current prospectus relating to the Class��A ordinary shares issuable upon exercise of the warrants until the expiration of the warrants in accordance with the provisions of the warrant agreement. We cannot assure you that we will be able to do so if, for example, any facts or events arise which represent a fundamental change in the information set forth in the registration statement or prospectus, the financial statements contained or incorporated by reference therein are not current or correct or the SEC issues a stop order.
If the Class A ordinary shares issuable upon exercise of the warrants are not registered under the Securities Act, under the terms of the warrant agreement, holders of warrants who seek to exercise their warrants will not be permitted to do so for cash and, instead, will be required to do so on a cashless basis in accordance with Section 3(a)(9) of the Securities Act or another exemption.
In no event will warrants be exercisable for cash or on a cashless basis, and we will not be obligated to issue any shares to holders seeking to exercise their warrants, unless the issuance of the shares upon such exercise is registered or qualified under the securities laws of the state of the exercising holder, or an exemption from registration or qualification is available.
If our Class A ordinary shares are at the time of any exercise of a warrant not listed on a national securities exchange such that they satisfy the definition of “covered securities” under Section 18(b)(1) of the Securities Act, we may, at our option, not permit holders of warrants who seek to exercise their warrants to do so for cash and, instead, require them to do so on a cashless basis in accordance with Section 3(a)(9) of the Securities Act; in the event we so elect, we will not be required to file or maintain in effect a registration statement or register or qualify the shares underlying the warrants under applicable state securities laws, and in the event we do not so elect, we will use our best efforts to register or qualify the shares underlying the warrants under applicable state securities laws to the extent an exemption is not available.
In no event will we be required to net cash settle any warrant, or issue securities (other than upon a cashless exercise as described above) or other compensation in exchange for the warrants in the event that we are unable to register or qualify the shares underlying the warrants under the Securities Act or applicable state securities laws.
You may only be able to exercise your public warrants on a “cashless basis” under certain circumstances, and if you do so, you will receive fewer Class A ordinary shares from such exercise than if you were to exercise such warrants for cash.
The warrant agreement provides that in the following circumstances holders of warrants who seek to exercise their warrants will not be permitted to do for cash and will, instead, be required to do so on a cashless basis in accordance with Section 3(a)(9) of the Securities Act: (i) if the Class A ordinary shares issuable upon exercise of the warrants are not registered under the Securities Act in accordance with the terms of the warrant agreement; (ii) if we have so elected and the Class A ordinary shares are at the time of any exercise of a warrant not listed on a national securities exchange such that they satisfy the definition of “covered securities” under Section 18(b)(1) of the Securities Act and (iii) if we have so elected and we call the public warrants for redemption. If you
exercise your public warrants on a cashless basis under the circumstances described in clauses (i) and (ii) in the preceding sentence, you would pay the warrant exercise price by surrendering the warrants for that number of Class A ordinary shares equal to the quotient obtained by dividing (x) the product of the number of Class A ordinary shares underlying the warrants, multiplied by the excess of the “fair market value” of our Class A ordinary shares (as defined in the next sentence) over the exercise price of the warrants by (y) the fair market value. The “fair market value” is the average reported closing price of the Class A ordinary shares for the 10 trading days ending on the third trading day prior to the date on which the notice of exercise is received by the warrant agent or on which the notice of redemption is sent to the holders of warrants, as applicable. As a result, you would receive fewer Class A ordinary shares from such exercise than if you were to exercise such warrants for cash.
The grant of registration rights to our initial shareholders and holders of our private placement warrants may make it more difficult to complete our initial business combination, and the future exercise of such rights may adversely affect the market price of our Class A ordinary shares.
The holders of the founder shares, private placement warrants and warrants that may be issued upon conversion of working capital loans (and any Class A ordinary shares issuable upon the exercise of the private placement warrants and warrants that may be issued upon conversion of working capital loans and upon conversion of the founder shares) are entitled to registration rights pursuant to a registration rights agreement requiring us to register such securities and any other securities of the company acquired by them prior to the consummation of our initial business combination for resale. The holders of these securities are entitled to make up to three demands, excluding short form demands, that we register such securities. In addition, the holders have certain “piggy-back” registration rights with respect to registration statements filed subsequent to our completion of our initial business combination. We will bear the cost of registering these securities. The registration and availability of such a significant number of securities for trading in the public market may have an adverse effect on the market price of our Class A ordinary shares. In addition, the existence of the registration rights may make our initial business combination more costly or difficult to conclude. This is because the shareholders of the target business may increase the equity stake they seek in the combined entity or ask for more cash consideration to offset the negative impact on the market price of our Class A ordinary shares that is expected when the ordinary shares owned by our initial shareholders, holders of our private placement warrants or holders of our working capital loans or their respective permitted transferees are registered.
In addition, the Merger Agreement contemplates that, at the Closing, the Sponsor, the Company, Bakkt equity holders and certain of their respective affiliates will enter into the Registration Rights Agreement, pursuant to which the Company will agree to register for resale, pursuant to Rule 415 under the Securities Act, certain of the Company’s shares of Class A common stock and warrants that are held by the parties thereto from time to time. This Registration Rights Agreement will terminate and replace the existing registration rights agreement currently in place between the Company, the Sponsor and certain of their respective affiliates. Each of the Stockholders (as defined in the Registration Rights Agreement) and their respective transferees will be entitled to request to sell all or a portion of their registrable securities in underwritten shelf takedown offerings, in each case subject to certain offering thresholds, applicable lock-up restrictions, issuer suspension periods and certain other conditions. Demanding Holders (as defined in the Registration Rights Agreement) are limited to three demand underwritten offerings for the term of the Registration Rights Agreement. In addition, the Stockholders (as defined in the Registration Rights Agreement) have certain “piggy-back” registration rights, subject to customary underwriter cutbacks, issuer suspension periods and certain other conditions. The Registration Rights Agreement includes customary indemnification provisions. The Company will bear the expenses incurred in connection with the filing of any registration statements filed pursuant to the terms of the Registration Rights Agreement, including the fees of one legal counsel to each of the Stockholders (as defined in the Registration Rights Agreement).
Our warrants may have an adverse effect on the market price of our Class A ordinary shares and make it more difficult to effectuate our initial business combination.
We issued warrants to purchase 10,368,601 of our Class A ordinary shares as part of the units sold in the initial public offering and, simultaneously with the closing of the initial public offering, we issued in a private
placement an aggregate of 6,147,440 private placement warrants, each exercisable to purchase one Class A ordinary share at $11.50 per share, subject to adjustment as described herein. In addition, if our sponsor makes any working capital loans it may convert those loans into up to an additional 1,500,000 private placement warrants, at the price of $1.00 per warrant. To the extent we issue ordinary shares to effectuate a business transaction, the potential for the issuance of a substantial number of additional Class A ordinary shares upon exercise of these warrants could make us a less attractive acquisition vehicle to a target business. Such warrants, when exercised, will increase the number of issued and outstanding Class A ordinary shares and reduce the value of the Class A ordinary shares issued to complete the business transaction. Therefore, our warrants may make it more difficult to effectuate a business transaction or increase the cost of acquiring the target business.
Because each unit contains one-half of one warrant and only a whole warrant may be exercised, the units may be worth less than units of other special purpose acquisition companies.
Each unit contains one-half of one warrant. Pursuant to the warrant agreement, no fractional warrants will be issued upon separation of the units, and only whole units will trade. If, upon exercise of the warrants, a holder would be entitled to receive a fractional interest in a share, we will, upon exercise, round down to the nearest whole number the number of Class A ordinary shares to be issued to the warrant holder. This is different from other offerings similar to ours whose units include one ordinary share and one warrant to purchase one whole share. We have established the components of the units in this way in order to reduce the dilutive effect of the warrants upon completion of a business combination since the warrants will be exercisable in the aggregate for one-half of the number of shares compared to units that each contain a whole warrant to purchase one share, thus making us, we believe, a more attractive merger partner for target businesses. Nevertheless, this unit structure may cause our units to be worth less than if it included a warrant to purchase one whole share.
General Risk Factors
We are a blank check company with no operating history and no revenues, and you have no basis on which to evaluate our ability to achieve our business objective.
We are a blank check company incorporated as a Cayman Islands exempted company with no operating results, and we will not commence operations until obtaining funding through the initial public offering. Because we lack an operating history, you have no basis upon which to evaluate our ability to achieve our business objective of completing our initial business combination. We have no plans, arrangements or understandings with any prospective target business concerning a business combination and may be unable to complete our initial business combination. If we fail to complete our initial business combination, we will never generate any operating revenues.
Past performance by our management team and their affiliates, including investments and transactions in which they have participated and businesses with which they have been associated, may not be indicative of future performance of an investment in the Company.
Information regarding our management team and their affiliates, including investments and transactions in which they have participated and businesses with which they have been associated, is presented for informational purposes only. Any past experience and performance by our management team and their affiliates and the businesses with which they have been associated, is not a guarantee that we have or will be able to successfully identify a suitable candidate for our initial business combination, that we will be able to provide positive returns to our shareholders, or of any results with respect to the Proposed Transaction or any other initial business combination we may consummate. You should not rely on the historical experiences of our management team and their affiliates, including investments and transactions in which they have participated and businesses with which they have been associated, as indicative of the future performance of an investment in us or as indicative of every prior investment by each of the members of our management team or their affiliates. The market price of our securities may be influenced by numerous factors, many of which are beyond our control, and our securityholders may experience losses on their investment in our securities.
Cyber incidents or attacks directed at us could result in information theft, data corruption, operational disruption and/or financial loss.
We depend on digital technologies, including information systems, infrastructure and cloud applications and services, including those of third parties with which we may deal. Sophisticated and deliberate attacks on, or security breaches in, our systems or infrastructure, or the systems or infrastructure of third parties or the cloud, could lead to corruption or misappropriation of our assets, proprietary information and sensitive or confidential data. As an early stage company without significant investments in data security protection, we may not be sufficiently protected against such occurrences. We may not have sufficient resources to adequately protect against, or to investigate and remediate any vulnerability to, cyber incidents. It is possible that any of these occurrences, or a combination of them, could have adverse consequences on our business and lead to financial loss.
We are an emerging growth company and a smaller reporting company within the meaning of the Securities Act, and if we take advantage of certain exemptions from disclosure requirements available to emerging growth companies or smaller reporting companies, this could make our securities less attractive to investors and may make it more difficult to compare our performance with other public companies.
We are an “emerging growth company” within the meaning of the Securities Act, as modified by the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor internal controls attestation requirements of Section 404 of the Sarbanes-Oxley Act reduced disclosure obligations regarding executive compensationin a timely manner or if we or our independent registered public accounting firm identify deficiencies in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. As a result, our shareholders may not have accessinternal control over financial reporting that are deemed to certain information they may deem important. Webe material weaknesses, we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.
Any failure to maintain effective disclosure controls and procedures or internal control over financial reporting could have an emerging growth company for up to five years, although circumstances couldadverse effect on our business and operating results, and cause us to lose that status earlier, including ifa decline in the market valueprice of our Class A ordinary shares held by non-affiliates exceeds $700 million as of any June 30 before that time, in which case we would no longer be an emerging growth company as of the following December 31. We cannot predict whether investors will findsecurities.
If our
securities less attractive because we will rely on these exemptions. If some investors find our securities less attractive as a result of our reliance on these exemptions, the trading prices of our securities may be lower than they otherwise would be, there may be a less active trading market for our securities and the trading prices of our securities may be more volatile.Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with newestimates or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such an election to opt out is irrevocable. We have elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of our financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
Additionally, we are a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company until the last day of the fiscal year in which (1) the market value of our ordinary shares held by non-affiliates exceeds $250 million as of the prior June 30, or (2) our annual revenues exceeded $100 million during such
completed fiscal year and the market value of our ordinary shares held by non-affiliates exceeds $700 million as of the prior June 30. To the extent we take advantage of such reduced disclosure obligations, it may also make comparison of our financial statements with other public companies difficult or impossible.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our executive offices are located at 150 North Riverside Plaza, Suite 5200, Chicago, IL. Our executive offices are provided to us by an affiliate of the Sponsor and we have agreed to pay such affiliate of the Sponsor a total of $10,000 per month for office space, utilities and secretarial and administrative support. We consider our current office space adequate for our current operations.
Item 3. Legal Proceedings.
We are not currently subject to any material legal proceedings, nor,judgments relating to our knowledge, is any material legal proceeding threatened against us or any of our officers or directors in their corporate capacity.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our units, Class A ordinary shares and warrants are traded on the Nasdaq Stock Market under the symbols “VIHAU,” “VIH” and “VIHAW,” respectively.
Holders
As of March 19, 2021, there was 1 holder of record of our units, 1 holder of record of our Class A ordinary shares and 2 holders of record of our warrants.
Dividends
We have not paid any cash dividends on our ordinary shares to date and do not intend to pay cash dividends prior to the completion of an initial business combination. The payment of cash dividends in the future will be dependent upon our revenues and earnings, if any, capital requirements and general financial conditions subsequent to completion of an initial business combination. The payment of any cash dividends subsequent to an initial business combination will be within the discretion of our board of directors at such time. If we incur any indebtedness, our ability to declare dividends may be limited by restrictive covenants we may agree to in connection therewith.
Securities Authorized for Issuance Under Equity Compensation Plans
None.
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Offerings
On August 3, 2020, our Sponsor, paid $25,000, or approximately $0.004 per share, to cover certain of our offering costs in exchange for 5,750,000 Class B ordinary shares. In September 2020, our Sponsor transferred an aggregate of 60,000 Class B ordinary shares to member of our board of directors, resulting in our Sponsor holding 5,690,000 Class B ordinary shares. Such securities were issued in connection with our organization pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act. The number of founder shares issued was determined based on the expectation that the total size of our initial public offering would be a maximum of 23,000,000 units if the underwriters’ over-allotment option was exercised in full and therefore that such founder shares would represent 20% of the outstanding shares after our initial public offering. Up to 750,000 of the founder shares were subject to forfeiture for no consideration depending on the extent to which the underwriters’ over-allotment was exercised. In connection with the underwriters’ partial exercise of the over-allotment option and the forfeiture of the remaining over-allotment option on October 1, 2020, 565,700 founder shares were forfeited and 184,300 founder shares are no longer subject to forfeiture resulting in an aggregate of 5,184,300 Founder Shares outstanding at December 31, 2020.
On September 25, 2020, we consummated our Initial Public Offering of 20,000,000 Units. On October 1, 2020, in connection with underwriters’ election to partially exercise their option to purchase additional Units, we sold an additional 737,202 Units., at a price of $10.00 per Unit, generating total gross proceeds of $207,372,020. Jefferies LLC acted as the sole book-running manager. The securities sold in the offering were registered under the Securities Act on registration statements on Form S-1 (No. 333-248619). The registration statements became effective on September 22, 2020.
Simultaneously with the consummation of the Initial Public Offering, and the exercise of the over-allotment option in part and the sale of the Private Placement Warrants, we consummated a private placement of 6,147,440
Private Placement Warrants to our Sponsor at a price of $1.00 per Private Placement Warrant, generating total proceeds of $6,147,440. Such securities were issued pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act.
The Private Placement Warrants are identical to the Public Warrants underlying the Units sold in the Initial Public Offering, except that the Private Placement Warrants are not transferable, assignable or salable until 30 days after the completion of a Business Combination, subject to certain limited exceptions.
Of the gross proceeds received from the Initial Public Offering including the partial exercise of the option to purchase additional Units, and the sale of the Private Placement Warrants, $207,372,020 was placed in the Trust Account.
We paid a total of $4,147,440 in underwriting discounts and commissions and $501,146 for other offering costs related to the Initial Public Offering. In addition, the underwriters agreed to defer $7,258,021 in underwriting discounts and commissions.
There has been no material change in the planned use of proceeds from the public offering as described in the prospectus filed by the Company on September 24, 2020.
On January 11, 2021, concurrently with the execution of the Merger Agreement, we entered into the Subscription Agreements with the PIPE Investors, pursuant to, and on the terms and subject to the conditions of which, the PIPE Investors have collectively subscribed for 32,500,000 the Company’s shares of Class A common stock. The PIPE Investment will be consummated immediately prior to the Closing. The Subscription Agreements will terminate with no further force and effect upon the earliest to occur of: (a) such date and time as the Merger Agreement is terminated in accordance with its terms; (b) the mutual written agreement of the parties to such Subscription Agreement; and (c) December 31, 2021. Such securities have not been registered under the Securities Act in reliance upon the exemption from registration contained in Section 4(a)(2) of the Securities Act. The Subscription Agreements provide for certain customary registration rights for the PIPE Investors.
Item 6. Selected Financial Data
Not applicable.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
References to “we”, “us”, “our” or the “Company” are to VPC Impact Acquisition Holdings, except where the context requires otherwise. The following discussion should be read in conjunction with our financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K.
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievementscritical accounting policies prove to be materially different from any futureincorrect, our results levels of activity, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “continue,” or the negative of such terms or other similar expressions. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those described in our other SEC filings.
Overview
We are a blank check company incorporated on July 31, 2020 as a Cayman Islands exempted company for the purpose of effecting a Business Combination. We intend to effectuate our initial Business Combination using cash from the proceeds of our Initial Public Offering and the sale of the private placement warrants, our shares, debt or a combination of cash, equity and debt.
We expect to continue to incur significant costs in the pursuit of our acquisition plans. We cannot assure you that our plans to complete a Business Combination willoperations could be successful.
Recent Developments
Agreement for Business Combination
On January 11, 2021, the Company entered into the Merger Agreement, with the Merger Sub, and Bakkt. The Merger Agreement provides that, among other things and upon the terms and subject to the conditions thereof, the following Proposed Transaction:
(i) at the Closing, in accordance with the DLLCA, the Merger with and into Bakkt will occur, the separate corporate existence of Merger Sub will cease and Bakkt will be the surviving limited liability company, to be renamed Bakkt Opco Holdings, LLC;
(ii) immediately prior to the closing of the PIPE Investment (as defined below) and the effective time of the Merger, in connection with the Domestication described below, VIH will be renamed “Bakkt Holdings, Inc.”; and
(iii) as a result of the Merger, the aggregate consideration to be received in respect of the Merger by all of the Bakkt interest holders will be an aggregate of 208,200,000 Bakkt Opco Units and 208,200,000 shares of class V common stock of Bakkt PubCo, which will be non-economic, voting shares of Bakkt Pubco.
The board of directors of the Company has unanimously (i) approved and declared advisable the Merger Agreement, the Proposed Transaction and the other transactions contemplated thereby and (ii) resolved to recommend approval of the Merger Agreement and related matters by the shareholders of VIH.
Prior to the Closing, subject to the approval of our shareholders, and in accordance with the DGCL, the CICA and our amended and restated memorandum and articles of association, we will effect a Domestication and be renamed “Bakkt Holdings, Inc.”
Upon the Closing, Bakkt Pubco will be organized in an “Up-C” structure in which substantially all of the assets and the business of Bakkt Pubco will be held by Bakkt Opco and its subsidiaries, and Bakkt Pubco’s only direct assets will consist of Bakkt Opco Units. Assuming no redemptions of public shares in connection with the Proposed Transaction, upon the Closing Bakkt Pubco is expected to own approximately 22% of Bakkt Opco Units and will be the managing member of Bakkt Opco. All remaining Bakkt Opco Units will be owned by the Bakkt Equity Holders.
On January 11, 2021, concurrently with the execution of the Merger Agreement, we entered into subscription agreements with the PIPE Investors, which include certain existing equity holders of the Company and Bakkt, pursuant to, and on the terms and subject to the conditions of which, the PIPE Investors, which include certain existing equity holders of the Company and Bakkt, have collectively subscribed for the PIPE Investment.
The consummation of the proposed business combination described herein is subject to certain conditions as further described in the Merger Agreement.
For more information about the Merger Agreement and the proposed business combination, see our Current Report on Form 8-K filed with the SEC on January 11, 2021 (File No. 001-39544) and the Bakkt Disclosure
adversely affected.Statement that we will file with the SEC. Unless specifically stated, this Annual Report does not give effect to the Proposed Transaction and does not contain the risks associated with the Proposed Transaction. Such risks and effects relating to the Proposed Transaction will be included in the Bakkt Disclosure Statement.
Results of Operations
We have neither engaged in any operations (other than searching for a Business Combination after our Initial Public Offering) nor generated any revenues to date. Our only activities from inception to December 31, 2020 were organizational activities, those necessary to prepare for the Initial Public Offering, described below, and, after the Initial Public Offering, identifying a target company for a Business Combination. We do not expect to generate any operating revenues until after the completion of our Business Combination, at the earliest. We generate non-operating income in the form of interest income on marketable securities held in a trust account (the “Trust Account”). We incur expenses as a result of being a public company (for legal, financial reporting, accounting and auditing compliance), as well as for due diligence expenses in connection with completing a Business Combination.
For the period from July 31, 2020 (inception) through December 31, 2020, we had a net loss of $1,002,669, which consisted of formation and operating expenses of $1,006,862, offset by interest earned on marketable securities held in the Trust Account of $4,193.
Liquidity and Capital Resources
Until the consummation of the Initial Public Offering, our only source of liquidity was an initial purchase of ordinary shares by the Sponsor and loans from our Sponsor.
On September 25, 2020, we consummated the Initial Public Offering of the Units, at a price of $10.00 per Unit, generating gross proceeds of $200,000,000. Simultaneously with the closing of the Initial Public Offering, we consummated the sale the Private Placement Warrants to the Sponsor at a price of $1.00 per Private Placement Warrant generating gross proceeds of $6,000,000.
Following the Initial Public Offering and the sale of the Private Placement Warrants, a total of $200,000,000 was placed in the Trust Account, and we had $1,205,178 of cash held outside of the Trust Account, after payment of costs related to the Initial Public Offering, and available for working capital purposes. We incurred $11,501,146 in transaction costs, including $4,000,000 of underwriting fees, $7,000,000 of deferred underwriting fees and $501,146 of other offering costs.
On October 1, 2020, in connection with the underwriters’ election to partially exercise of their over-allotment option, we consummated the sale of an additional 737,202 Units and the sale of an additional 147,440 Private Placement Warrants, generating total gross proceeds of $7,519,460. A total of $7,372,020 of the net proceeds was deposited into the Trust Account, bringing the aggregate proceeds held in the Trust Account to $207,372,020. We incurred $11,906,606 in transaction costs, including $4,147,440 of underwriting fees, $7,258,021 of deferred underwriting fees and $501,146 of other offering costs.
For the period from July 31, 2020 (inception) through December 31, 2020, net cash used in operating activities was $341,800, which consisted of our net loss of $1,002,669, interest earned on investments of $4,193, formation expenses paid by the Sponsor of $6,606 and changes in operating assets and liabilities, which used $658,456 of cash from operating activities.
At December 31, 2020, we had investments held in the Trust Account of $207,376,213. We intend to use substantially all of the funds held in the Trust Account, including any amounts representing interest earned on the Trust Account, which interest shall be net of taxes payable and excluding deferred underwriting commissions, to complete our Business Combination. We may withdraw interest from the Trust Account to pay taxes, if any. To the extent that our share capital or debt is used, in whole or in part, as consideration to complete a Business
Combination, the remaining proceeds held in the Trust Account will be used as working capital to finance the operations of the target business or businesses, make other acquisitions and pursue our growth strategies.
At December 31, 2020, we had cash of $1,177,678 held outside of the Trust Account. We intend to use the funds held outside the Trust Account primarily to identify and evaluate target businesses, perform business due diligence on prospective target businesses, travel to and from the offices, plants or similar locations of prospective target businesses or their representatives or owners, review corporate documents and material agreements of prospective target businesses, structure, negotiate and complete a Business Combination.
In order to fund working capital deficiencies or finance transaction costs in connection with a Business Combination, our Sponsor or an affiliate of our Sponsor or certain of our officers and directors may, but are not obligated to, loan us funds as may be required. If we complete a Business Combination, we may repay such loaned amounts out of the proceeds of the Trust Account released to us. In the event that a Business Combination does not close, we may use a portion of the working capital held outside the Trust Account to repay such loaned amounts, but no proceeds from our Trust Account would be used for such repayment. Up to $1,500,000 of such loans may be convertible into warrants, at a price of $1.00 per warrant, at the option of the lender. The warrants would be identical to the Private Placement Warrants.
We do not believe we will need to raise additional funds in order to meet the expenditures required for operating our business. However, if our estimate of the costs of identifying a target business, undertaking in-depth due diligence and negotiating a Business Combination are less than the actual amount necessary to do so, we may have insufficient funds available to operate our business prior to our initial Business Combination. Moreover, we may need to obtain additional financing either to complete our Business Combination or because we become obligated to redeem a significant number of our public shares upon completion of our Business Combination, in which case we may issue additional securities or incur debt in connection with such Business Combination.
Off-Balance Sheet Financing Arrangements
We have no obligations, assets or liabilities, which would be considered off-balance sheet arrangements as of December 31, 2020. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or purchased any non-financial assets.
Contractual Obligations
We do not have any long-term debt obligations, capital lease obligations, operating lease obligations, purchase obligations or long-term liabilities, other than an agreement to pay our Sponsor a monthly fee of $10,000 for office space, secretarial and administrative services. We began incurring these fees on September 25, 2020 and will continue to incur these fees monthly until the earlier of the completion of a Business Combination and the Company’s liquidation.
Underwriting Agreement
The underwriters were paid a cash underwriting discount of $0.20 per Unit, or $4,147,440.40 in the aggregate. In addition, $0.35 per Public Share, or approximately $7,258,021 in the aggregate will be payable to the underwriters for deferred underwriting commissions. The deferred fee will become payable to the underwriters from the amounts held in the Trust Account solely in the event that we complete a Business Combination, subject to the terms of the underwriting agreement.
Critical Accounting Policies
The preparation of condensed financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of AmericaGAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed financial statements and income and expenses during the periodperiods reported. Actual results could materially differ from those estimates. estimates and the amounts reported in our consolidated financial statements and accompanying notes appearing elsewhere in this Annual Report on Form 10-K. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of revenue and expenses that are not readily apparent from other sources. Significant estimates and judgments involve those related to revenue recognition, internal-use software development costs, valuation of our stock-based compensation awards, including the determination of fair value of our common stock, accounting for income taxes, the carrying value of operating lease right-of-use assets and useful lives of long-lived assets, among others. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the market price of our securities.
Our management has limited experience in operating a public company.
Certain of our executive officers and directors have limited experience in the management of a publicly traded company. Such limited experience in dealing with the complex laws pertaining to public companies could be a disadvantage and result in a significant amount of their time being devoted to these activities, which will result in less time being devoted to our management and growth.
We have identifiedincurred and continue to incur increased costs as a public company, and our management is required to devote substantial time to compliance matters.
As a public company, we have incurred and expect to continue to incur significant legal, accounting, reporting and other expenses we did not incur as a private company, including costs associated with public company reporting requirements (which expenses may increase once we no longer qualify as an “emerging growth company” under the JOBS Act) and costs of recruiting and retaining non-executive directors. We also have incurred, and will continue to incur, costs associated with compliance with the rules and regulations of the SEC, the listing requirements of NYSE, and various other costs of a public company. The expenses generally incurred by public companies for reporting and corporate governance purposes have been increasing. Our management needs to devote a substantial amount of time to ensure that we comply with all of these requirements. These laws and regulations also could make it more difficult and costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult to attract and retain qualified persons to serve on our Board and Board committees and serve as executive officers.
Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our securities, fines, sanctions and other regulatory action and potentially civil litigation.
We are an “emerging growth company” and a “smaller reporting company” and any decision to comply with certain reduced reporting and disclosure requirements applicable to emerging growth companies and smaller reporting companies could make our securities less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including:
•not being required to have an independent registered public accounting firm audit our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act;
•reduced disclosure obligations regarding executive compensation in our periodic reports and annual report on Form 10-K; and
•exemptions from the requirements of holding non-binding advisory votes on executive compensation and stockholder approval of any golden parachute payments not previously approved.
As a result, our stockholders may not have access to certain information that they may deem important. Our status as an emerging growth company will end as soon as any of the following takes place:
•the last day of the fiscal year in which we had at least $1.235 billion in annual revenue;
•the date we qualify as a “large accelerated filer,” with at least $700.0 million of equity securities held by non-affiliates;
•the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; or
•December 31, 2025.
Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to take advantage of this extended transition period and as a result, our financial statements may not be comparable with similarly situated public companies. To the extent that we continue to qualify as a “smaller reporting company,” as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), after we cease to qualify as an emerging growth company, we will continue to be permitted to make certain reduced disclosures in our periodic reports and other documents that we file with the SEC.
If some investors find our securities less attractive because we rely on any of these exemptions, there may be a less active trading market for such securities and the market price of such securities may be more volatile and may decline.
Future changes in financial accounting standards may significantly change our reported results of operations.
GAAP is subject to standard setting or interpretation by the Financial Accounting Standards Board (“FASB”), the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results. For example, the accounting treatment for revenues from cryptocurrency transactions is under review and subject to change. To the extent we account for revenue from cryptocurrency transactions in a manner that is different than the manner ultimately established by the SEC and GAAP, such revenue information, and the timing of revenue recognition, could vary materially and require subsequent adjustment. Any such adjustment could materially impact our reported results of operations, which could have negative outcomes for us and harm our reputation and could affect the reporting of transactions completed before the announcement of a change.
VIH identified a material weakness in its internal control over financial reporting prior to the VIH Business Combination. Although such material weakness was remediated as of the date of this Annual Report on Form 10-K, other material weaknesses or control deficiencies could occur that could adversely affect our ability to report our results of operations and financial condition accurately and in a timely manner.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Our management is likewise required, on a quarterly basis, to evaluate the effectiveness of our internal controls and to disclose any changes and material weaknesses identified through such evaluation in those internal controls. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
As described in VIH’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Annual Report”), a material weakness in our internal control over financial reporting was identified related the accounting for complex financial instruments. As a result of this material weakness, VIH management concluded that VIH’s internal control over financial reporting was not effective as of December 31, 2020. The material weakness resulted in a material misstatement of VIH’s warrant liabilities, change in fair value of warrant liabilities, Class A Common Stock subject to possible redemption, additional paid-in capital, accumulated deficit, and earnings per share and related financial disclosures as of and for the period ended December 31, 2020 (the “Affected Period”).
On October 15, 2021, VIH completed the VIH Business Combination with Bakkt, following which the Company appointed a new Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, among others. The Company, among other things, has established enhanced procedures whereby the post-VIH Business Combination management team provides enhanced access to accounting literature, research materials and documents, and has increased communication with the Company’s third-party professionals regarding complex accounting applications. These enhancements remediated the material weakness reported by VIH in the 2020 Annual Report. The remediation of this material weakness may not prevent any future material weakness or significant deficiency in our internal control over financial reporting. If other material weaknesses or control deficiencies occur in the future, we may be unable to report our financial results accurately on a timely basis, which could cause our reported financial results to be materially misstated and result in the loss of investor confidence and cause the market price of our common stock to decline. Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.
We can give no assurance that any additional material weaknesses or restatements of financial results will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting or circumvention of these controls. In addition, even if we are successful in strengthening our controls and procedures, in the future those controls and procedures may not be adequate to prevent or identify irregularities or errors or to facilitate the fair presentation of our consolidated financial statements.
Risks Related to Our Securities
Our warrants are exercisable for Class A Common Stock. Any such exercise increases the number of shares outstanding and eligible for future resale in the public market and results in dilution to our stockholders.
As of December 31, 2022, our warrants to purchase an aggregate of 7,140,814 shares of Class A Common Stock are exercisable in accordance with the terms of the warrant agreement. To the extent such warrants are exercised, additional shares of Class A Common Stock will be issued, which will result in dilution to the holders of Class A Common Stock and increase the number of shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public market or the fact that such warrants may be exercised could adversely affect the market price of Class A Common Stock.
We may issue additional shares of common stock or other equity securities without stockholder approval, which would dilute stockholders’ ownership interest in us and may reduce the market price of our securities.
We may issue additional shares of our Class A Common Stock or other equity securities in the future in connection with, among other things, future acquisitions, repayment of outstanding indebtedness or grants under the 2021 Omnibus Incentive Plan (the “Equity Incentive Plan”) without stockholder approval in a number of circumstances. The issuance of additional Class A Common Stock or other equity securities could have, among other things, one or more of the following effects:
•our existing stockholders’ proportionate ownership interest will decrease;
•the amount of cash available per share, including for payment of dividends in the future, may decrease;
•the relative voting strength of each previously outstanding share of our common stock may be diminished; and
•the market price of our Class A Common Stock and/or Warrants may decline.
If securities and industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the prices and trading volumes of our securities could decline.
The trading market for our securities depends, in part, on the research and reports that securities and industry analysts publish about us and our business. If securities and industry analysts downgrade our securities or publish inaccurate or unfavorable research about our business, the market price of our securities would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our stock could decrease, which might cause the market price and trading volume of our securities to decline.
Delaware law and our Certificate of Incorporation and By-Laws contain certain provisions, including anti-takeover provisions that limit the ability of stockholders to take certain actions and could delay or discourage takeover attempts that stockholders may consider favorable.
Our certificate of incorporation (the “Certificate of Incorporation”) and our by-laws (the “By-Laws”) contain provisions that could have the effect of rendering more difficult, delaying, or preventing an acquisition deemed undesirable by the Board and therefore depress the trading price of our securities. These provisions could also make it difficult for stockholders to take certain actions, including electing directors who are not nominated by the current members of the Board or taking other corporate actions, including effecting changes in management. Among other things, the Certificate of Incorporation and By-Laws include provisions regarding:
•a classified Board with three-year staggered terms, which could delay the ability of stockholders to change the membership of a majority of the Board;
•the ability of the Board to issue shares of Preferred Stock, including “blank check” preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;
•the limitation of the liability of, and the indemnification of, our directors and officers;
•the right of the Board to elect a director to fill a vacancy created by the expansion of the Board or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on the Board;
•the requirement that directors may only be removed from the Board for cause and upon the affirmative vote of the holders of at least 66 2/3% of the total voting power of then outstanding Class A Common Stock;
•a prohibition on stockholder action by written consent (except for actions by the holders of Class V Common Stock or as required for holders of future series of Preferred Stock), which forces stockholder action to be taken at an annual or special meeting of stockholders and could delay the ability of stockholders to force consideration of a stockholder proposal or to take action, including the removal of directors;
•the requirement that a special meeting of stockholders may be called only by the Board, the Chairman of the Board or our Chief Executive Officer, which could delay the ability of stockholders to force consideration of a proposal or to take action, including the removal of directors;
•controlling the procedures for the conduct and scheduling of the Board and stockholder meetings;
•the requirement for the affirmative vote of holders of at least 66 2/3% of the total voting power of all of the then outstanding shares of the voting stock, voting together as a single class, to amend, alter, change or repeal certain provisions in the Certificate of Incorporation which could preclude stockholders from bringing matters before annual or special meetings of stockholders and delay changes in the Board and also may inhibit the ability of an acquirer to effect such amendments to facilitate an unsolicited takeover attempt;
•the ability of the Board to amend the By-Laws, which may allow the Board to take additional actions to prevent an unsolicited takeover and inhibit the ability of an acquirer to amend the By-Laws to facilitate an unsolicited takeover attempt; and
•advance notice procedures with which our stockholders must comply to nominate candidates to the Board or to propose matters to be acted upon at a stockholders’ meeting, which could preclude stockholders from bringing matters before annual or special meetings of stockholders and delay changes in the Board and also may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control.
These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in the Board or management.
Our Certificate of Incorporation designates a state or federal court located within the State of Delaware as the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to choose the judicial forum for disputes with us or our directors, officers, or employees.
Our Certificate of Incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware, or if such court does not have subject matter jurisdiction, any other court located in the State of Delaware with subject matter jurisdiction, will be the sole and exclusive forum for (a) any derivative action or proceeding brought on behalf of us, (b) any action asserting a claim of breach of a fiduciary duty owed by any current or former director, officer, other employee or stockholder of ours to us or our stockholders, (c) any action asserting a claim against us or our officers or directors arising pursuant to any provision of the DGCL or the Certificate of Incorporation or By-Laws or as to which the DGCL confers jurisdiction on the Court of Chancery of the State of Delaware, (d) any action to interpret, apply, enforce or determine the validity of the Certificate of Incorporation or the By-Laws or any provision thereof, (e) any action asserting a claim against us or any current or former director, officer, employee, stockholder or agent of ours governed by the internal affairs doctrine of the law of the State of Delaware or (f) any action asserting an “internal corporate claim” as defined in Section 115 of the DGCL.
Section 22 of the Securities Act of 1933 (the “Securities Act”) creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. Accordingly, both state and federal courts have jurisdiction to entertain such Securities Act claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, the Certificate of Incorporation provides that, unless we consent in writing to the selection of an alternative forum, to the fullest extent permitted by law, the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act; however, there is uncertainty as to whether a court would enforce such provision, and investors cannot waive compliance with federal securities laws and the rules and regulations thereunder. Notwithstanding the foregoing, the Certificate of Incorporation provides that the exclusive forum provision will not apply to suits brought to enforce any cause of action arising under the Securities Act, any duty or liability created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder.
Any person or entity purchasing or otherwise acquiring any interest in any of our securities will be deemed to have notice of and consented to this provision. These exclusive-forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum of its choosing for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers and other employees. If a court were to find these exclusive-forum provisions to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving the dispute in other jurisdictions, which could harm our results of operations.
Our Certificate of Incorporation does not limit the ability of ICE to compete with us.
ICE and its affiliates engage in a broad spectrum of activities, including investments in the financial services and technology industries. In the ordinary course of its business activities, ICE and its respective affiliates may engage in activities where their interests conflict with our interests, or those of our other stockholders. The Certificate of Incorporation provides that ICE and its affiliates (including any non-employee directors of ours appointed by ICE) have no duty to refrain from (1) engaging in and possessing interests in other business ventures of every type and description, including those engaged in the same or similar business activities or lines of business in which we now engage or propose to engage or (2) otherwise competing with us, on their own account, in partnership with, or as an employee, officer, director or shareholder of any other individual, corporation, general or limited partnership, limited liability company, joint venture, trust, association or any other entity. ICE also may pursue, in its capacity other than as directors of the Board, acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. In addition, ICE may have an interest in pursuing acquisitions, divestitures and other transactions that, in its judgment, could enhance its investment, even though such transactions might involve risks to our other stockholders. ICE will not be liable to us, our stockholders any of our affiliates for breach of any fiduciary duty solely by reason of the fact that they engage or have engaged in any such activities.
Certain significant stockholders and members of management whose interests may differ from those of other stockholders have the ability to significantly influence our business and management.
Pursuant to the Stockholders Agreement that we entered into with the Sponsor and the Opco Equity Holders, the Sponsor and the Opco Equity Holders agreed to designate one director nominated by the Sponsor, one director nominated by Opco, and up to seven directors jointly nominated by the Sponsor and Opco. Accordingly, the parties to the Stockholders Agreement will be able to designate all of the members of the Board. Such stockholders will retain such influence with respect to our management, business plans and policies, including the appointment and removal of our officers. In particular, the parties to the Stockholders Agreement could influence whether acquisitions, dispositions and other change of control transactions are approved.
ICE may exert significant influence over us and its interests may conflict with yours or those of other stockholders in the future.
Each share of Class A Common Stock and Class V Common Stock entitles its holder to one vote on all matters presented to stockholders generally. Accordingly, ICE is able to exert significant influence over the election and removal of our directors and thereby significantly influence corporate and management policies, including potential mergers or acquisitions, payment of dividends, asset sales, amendment of our Certificate of Incorporation and By-Laws and other significant corporate transactions for so long as it retains significant ownership. This concentration of ownership may delay or deter possible changes in control, which may reduce the value of an investment in our securities. So long as ICE continues to own a significant amount of the combined voting power, even if such amount is less than 50%, ICE will continue to be able to strongly influence our decisions. While the Voting Agreement (as defined below) limits ICE to vote only an aggregate of 30% of its voting power, such amount may result in substantial influence in voting matters. The Voting Agreement provides that this limitation on ICE’s voting power will terminate at such time as its ownership is less than a majority of the outstanding voting power, at which time ICE will be entitled to vote all of its voting shares, which may result in an increase in its potential influence.
The price of our securities may be volatile.
The trading market for our securities has in the past been and could in the future be impacted by market volatility. The price of our securities may fluctuate due to a variety of factors, including:
•changes in the industries in which we operate, including, in particular, the crypto industry;
•changes in laws and regulations affecting our business;
•developments involving our competitors or other companies in our industries;
•variations in our operating performance and the performance of our competitors in general;
•actual or anticipated fluctuations in our quarterly or annual operating results;
•publication of research reports by securities analysts about us or our competitors or our industry;
•the public’s reaction to our press releases, our other public announcements and our filings with the SEC;
•actions by stockholders;
•additions and departures of key personnel;
•commencement of, or involvement in, litigation involving the combined companies;
•changes in our capital structure, such as future issuances of securities or the incurrence of debt;
•the volume of our Class A Common Stock available for public sale; and
•general economic and political conditions, such as recessions, inflation, volatility in the markets, increases in interest rates, local and national elections, fuel prices, international currency fluctuations, corruption, political instability, pandemics or other public health emergencies and acts of war or terrorism, such as the ongoing geopolitical tensions related to Russia’s actions in Ukraine, resulting sanctions imposed by the U.S. and other countries, and retaliatory actions taken by Russia in response to such sanctions.
These market and industry factors may materially reduce the market price of our securities regardless of our operating performance.
Because there are no current plans to pay cash dividends on the Class A Common Stock for the foreseeable future, you may not receive any return on investment unless you sell your Class A Common Stock at a price greater than what you paid for it.
We intend to retain future earnings, if any, for future operations, expansion and debt repayment and there are no current plans to pay any cash dividends for the foreseeable future. The declaration, amount and payment of any future dividends on shares of Class A Common Stock will be at the sole discretion of the Board. The Board may take into account general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions, implications of the payment of dividends by us to our stockholders or by our subsidiaries to us and such other factors as the Board may deem relevant. As a result, you may not receive any return on an investment in Class A Common Stock unless you sell your Class A Common Stock for a price greater than that which you paid for it.
The NYSE may delist our securities from trading on its exchange, which could limit investors’ ability to make transactions in our securities and subject us to additional trading restrictions.
Our securities are currently listed on NYSE. However, we cannot assure you that we will be able to meet the NYSE’s continued listing requirements for our common stock or our warrants in the future.
If the NYSE delists our securities from trading on its exchange and we are not able to list its securities on another national securities exchange, we expect our securities could be quoted on an over-the-counter market. If this were to occur, we could face significant material adverse consequences, including:
•a limited availability of market quotations for our securities;
•reduced liquidity for our securities;
•determination that our Class A Common Stock is a “penny stock,” which will require brokers trading in the common stock to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our securities;
•a limited amount of news and analyst coverage; and
•a decreased ability to issue additional securities or obtain additional financing in the future.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Facilities
We lease facilities under operating leases in Alpharetta, Georgia, our corporate headquarters, one for approximately 50,000 square feet with an expiration date in October 2032, and another for approximately 44,000 square feet with an expiration date in April 2026, in Scottsdale, Arizona, our principal customer service center, for approximately 21,000 square feet with an expiration date in April 2023, and in New York, New York, our satellite corporate office, for approximately 10,000 square feet with an expiration date in 2030. In March 2023, we signed an amendment to our Scottsdale, Arizona lease that extended the lease term through September 2030. Additionally, ICE provides us with approximately 800 square feet in its facilities in Sandy Springs, Georgia pursuant to the Transition Services Agreement.
Item 3. Legal Proceedings
From time to time we are subject to legal proceedings and claims arising in the ordinary course of business. Based on our current knowledge, we believe that the amount or range of reasonably possible losses will not, either individually or in the aggregate, have a material adverse effect on our business, results of operations, or financial condition.
The results of any litigation cannot be predicted with certainty, and an unfavorable resolution in any legal proceedings could materially affect our future business, results of operations, or financial condition. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.
For information on legal proceedings, refer to Note 14in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Item 4. Mine Safety Disclosure
Not applicable.
PART II
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters, And Issuer Purchases Of Equity Securities
Market Information and Holders
Our Class A Common Stock and Public Warrants trade on NYSE under the trading symbols “BKKT” and “BKKT WS,” respectively.
As of March 20, 2023, we had 82,287,949 shares of Class A Common Stock issued and outstanding held of record by 25 holders, 183,279,887 shares of Class V Common Stock issued and outstanding held of record by 5 holders, and 7,140,808 Public Warrants issued and outstanding, each exercisable for one share of Class A Common Stock, held of record by one holder. There is no public market for our Class V Common Stock.
Dividend Policy
We have never declared or paid any cash dividends on our capital stock, and we do not currently intend to pay any cash dividends on our capital stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to support operations and to finance the growth and development of our business. Any future determination to pay dividends will be made at the discretion of the Board subject to applicable laws and will depend upon, among other factors, our operating results, financial condition, contractual restrictions and capital requirements. Our future ability to pay cash dividends on our capital stock may be limited by any future debt instruments or preferred securities.
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
Unregistered Sales of Equity Securities
None.
Item 7. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
The following discussion and analysis of financial condition and results of operations should be read together with our audited consolidated financial statements and the related notes included under Item 8 of this Annual Report on Form 10-K (the “audited consolidated financial statements”). References in this section to “we,” “us,” “our,” “Bakkt” or the “Company” and like terms refer to (i) Bakkt Opco Holdings, LLC and its subsidiaries (the “Predecessor”) for the period from January 1, 2021 through October 14, 2021 (the "Predecessor Period") and (ii) Bakkt Holdings, Inc. and its subsidiaries (the “Successor”) for the period from October 15, 2021 through December 31, 2021 and for the year ended December 31, 2022 (each referred to herein as a “Successor Period”), unless the context otherwise requires. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements. Such forward-looking statements are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors detailed elsewhere in this Annual Report on Form 10-K.
Overview
Founded in 2018, Bakkt builds technology that connects the digital economy by offering one ecosystem for crypto and loyalty points. We enable our clients to deliver new opportunities to their customers through software as a service (“SaaS”) and API solutions that unlock crypto and drive loyalty, powering engagement and performance. The global
market for crypto, while nascent, is rapidly evolving and expanding. We believe we are well-positioned to provide innovative, multi-faceted product solutions and grow with this evolving market. Our platform is uniquely positioned to power commerce by enabling consumers, brands, and financial institutions to better manage, transact with and monetize crypto in exciting new ways.
Our platform is built to operate across various cryptoassets and offers clients the flexibility to choose some or all of our capabilities, and the manner in which these capabilities are enabled for consumers, based on their needs and objectives. Some clients may choose to enable our capabilities directly in their experience, while others may want a “ready-to-go” storefront and leverage capabilities such as our web-based technology. Our institutional-grade platform, born out of our former parent company, Intercontinental Exchange, Inc. (“ICE”), supports "know your customer" ("KYC"), anti-money laundering ("AML"), and other anti-fraud measures to combat financial crime.
Recent Developments
On February 8, 2023, we acquired 100% of the units of Bumped, a broker-dealer registered with the SEC and FINRA, for cash consideration of $575,000. This acquisition required Bumped to file a CMA with FINRA, and FINRA is currently reviewing the CMA to ensure that Bumped will continue to meet its regulatory obligations if the filing is approved. After FINRA’s assessment, the CMA will be approved, denied or approved with restrictions.
On November 2, 2022, we entered into a definitive agreement with Apex Fintech Solutions, Inc. (“AFS”) pursuant to which we agreed to acquire all of the membership interests of Apex Crypto, LLC (“Apex”), a financial technology company with an integrated crypto trading platform, for consideration consisting of an initial purchase price of $55.0 million in cash, up to $45.0 million shares of Class A common stock that may be earned if Apex achieves certain profitability growth targets for the fourth quarter of 2022, and up to an additional $100.0 million in shares of our Class A common stock depending on Apex’s achievement of certain financial targets through 2025. Apex’s profitability in the fourth quarter of 2022 results in Class A common stock consideration of $9.0 million based on the earn-out target mechanics. The transaction, which is subject to regulatory approvals, is expected to close in the first half of 2023. Under the terms of the transaction, Bakkt and AFS will, among other things, enter into a commercial agreement that memorializes the continued relationship and provision of Bakkt crypto solutions for AFS’s clients. This acquisition is expected to provide immediate scale and meaningful transaction volume from Apex’s active client base. We expect to leverage Apex’s proprietary trading platform and existing relationships with liquidity providers to provide a wider range of assets and competitive pricing to our clients. Furthermore, on November 2, 2022, Bakkt and certain parties related to the seller entered into a Stockholders’ Agreement, pursuant to which such counterparties agreed to certain lock-up, standstill, and short sale restrictions.
Key Factors Affecting Our Performance
Growing Our Client Base
Our ability to increase our revenue stream depends on our ability to grow clients on our platform. We collaborate with leading brands and have built an extensive network across numerous industries including financial institutions, merchants and travel and entertainment. To date, management has been focused on building through clients within a business-to-business-to-consumer (“B2B2C”) model. Our goal is to provide these clients opportunities to leverage our capabilities either through their existing environment or by leveraging our platform. Our acquisition of Apex complements our B2B2C growth strategy by broadening our business partnerships to fintechs and neo-banks. Our ability to grow our
client and revenue base through the Apex acquisition is dependent on successful integration of the businesses post-transaction close.
Product Expansion and Innovation
The crypto marketplace is rapidly evolving. Our ability to continue innovating our platform will increase the attractiveness of our platform to clients. Our ability to meet the capability demands of our clients will allow us to continue to grow revenue.
Competition
The crypto marketplace is highly competitive with numerous participants competing for the same clients. We believe we are uniquely positioned with our ability to provide capabilities around emerging cryptoassets alongside loyalty points on a single, highly secure, institutional-grade technology platform.
General Economic and Market Conditions
Our performance is impacted by the strength of the overall macroeconomic environment and crypto market conditions, which are beyond our control. Negative market conditions may hinder client activity, including extended decision timelines around implementing crypto strategies. In 2022, the crypto markets were impacted by, among other things, significant volatility in cryptoasset prices, bankruptcies of several cryptocurrency exchanges, regulatory actions and adverse publicity. Although we did not have any exposure to the companies that halted activities in 2022, we were nonetheless impacted by the broader conditions in the crypto markets. In addition, during 2022, macroeconomic conditions—including rising interest rates, spikes in inflation rates and market volatility, along with geopolitical concerns, including the war in Ukraine and the sanctions and other measures that have been and continue to be imposed in response to the war—created uncertainty and volatility in the global economy. We expect the macroeconomic environment and the state of the crypto markets to remain dynamic in the near-term, and we will continue to monitor macroeconomic and crypto market conditions, and the potential impacts that any of the foregoing may have on our business.
Regulations in U.S. Markets
We are subject to many complex, uncertain and overlapping local, state and federal laws, rules, regulations, policies and legal interpretations (collectively, “laws and regulations”) in the markets in which we operate. These laws and regulations govern, among other things, consumer protection, privacy and data protection, labor and employment, anti-money laundering, money transmission, competition, and marketing and communications practices. These laws and regulations will likely have evolving interpretations and applications, particularly as we introduce new products and services and expand into new jurisdictions.
We are seeking to bring trust and transparency to crypto. We will progressively be subject to laws and regulations relating to the collection, use, retention, security, and transfer of information, including the personally identifiable information of our clients and all of the users in the information chain. We have developed and frequently evaluate and update our compliance models to ensure that we are complying with applicable restrictions.
We continue to work with regulators to address the emerging global landscape for crypto. As investment continues, the intersection of technology and finance will require ongoing engagement as new applications emerge. Cryptoasset and distributed ledger technology have significant, positive potential with proper collaboration between industry and regulators. For more information around regulations, please see “Item 1. Business”.
COVID-19 Impacts
In March 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. The COVID-19 pandemic has adversely affected global economic activity and, in 2020, contributed to significant declines and
volatility in financial markets. For the year ended December 31, 2022, our business operations have continued to recover from the impacts of the pandemic, and revenue from the travel loyalty transactions has also continued to recover.
VIH Business Combination
On October 15, 2021, Bakkt (f/k/a VPC Impact Acquisition Holdings, a Cayman Islands exempted company (“VIH”)) and VIH completed the VIH Business Combination contemplated by the Merger Agreement. Pursuant to the Merger Agreement, VIH acquired a majority voting interest in Bakkt Opco Holdings, LLC (“Opco”) through a series of mergers, with Opco becoming a direct subsidiary of VIH. In connection with the completion of the VIH Business Combination, VIH changed its jurisdiction of incorporation from the Cayman Islands to the State of Delaware and changed its name to “Bakkt Holdings, Inc.”
The VIH Business Combination resulted in Bakkt continuing as the surviving entity and being organized as an umbrella partnership corporation, or “up-C,” structure in which substantially all our assets and business are held by Opco and its subsidiaries, with the existing owners of Opco being considered as noncontrolling interests in the audited consolidated financial statements.
Upon completion of the VIH Business Combination, VIH was deemed the accounting acquirer and Opco the accounting acquiree. Under the acquisition method of accounting, VIH’s assets and liabilities retained their carrying values and the assets and liabilities associated with Opco were recorded at their fair values measured as of the acquisition date. The excess of the purchase price over the estimated fair values of the net assets acquired was recorded as goodwill. In connection with the VIH Business Combination, all outstanding membership interests and rights to acquire membership interests in Opco were exchanged for an aggregate of 208,200,000 Opco Common Units and an equal number of newly issued shares of our Class V common stock, par value $0.0001 per share (“Class V common stock”), which are non-economic, voting shares of the Company, of which 207,406,648 were outstanding and 793,352 reserved for issuance upon the exercise of a warrant agreement. Each Opco Common Unit, when coupled with one share of our Class V common stock is referred to as a “Paired Interest.” Paired Interests may be exchanged for one share of our Class A common stock or a cash amount in accordance with the Third Amended and Restated Limited Liability Company Agreement of Opco, and the Exchange Agreement between the Company and certain holders of Bakkt Common Units, dated as of October 15, 2021. Following the Closing, the Company owned approximately 20.3% of the Opco Common Units, with the remaining Opco Common Units being owned by the equity owners of Opco prior to the Merger.
As a result of the VIH Business Combination, our financial results are broken out between the Predecessor period (January 1, 2021 through October 14, 2021) and the Successor periods (October 15, 2021 through December 31, 2021 and January 1, 2022 through December 31, 2022).
Safeguarding Obligation Liability and Safeguarding Asset Related to Crypto Held for Other Parties
As detailed in Note 18, upon the adoption of Staff Accounting Bulletin 121 (“SAB 121”), we recorded a safeguarding obligation liability and a corresponding safeguarding asset related to the crypto held for other parties. As of December 31, 2022, the safeguarding obligation liability related to crypto held for other parties was $15.8 million. We have taken steps to mitigate the potential risk of loss for the crypto we hold for other parties, including holding insurance coverage specifically for certain cryptoasset incidents and using secure cold storage to store the vast majority of crypto that we hold. SAB 121 also asks us to consider the legal ownership of the crypto held for other parties, including whether the crypto held for other parties would be available to satisfy general creditor claims in the event of our bankruptcy.
The legal rights with respect to crypto held on behalf of third parties by a custodian, such as us, upon the custodian’s bankruptcy have not yet been settled by courts and are highly fact-dependent. However, based on the terms of our terms of service and applicable law, in the event that we were to enter bankruptcy, we believe the crypto that we hold in custody for users of our platform should be respected as users’ property (and should not be available to satisfy the claims of our general creditors). We do not allow users to purchase crypto on margin, and crypto held on our platform does not serve as collateral for margin loans. We hold crypto in custody for users in one or more omnibus cryptoasset wallets; we do
not presently utilize third-party custodians. We hold cryptographic key information and maintain internal record keeping for the crypto we hold in custody for users, and we are obligated to secure such assets from loss or theft. Our contractual arrangements state that our customers and clients retain legal ownership of the crypto custodied by us on their behalf; they also benefit from the rewards and bear the risks associated with their ownership, including as a result of any price fluctuations. We have been monitoring and will continue to actively monitor legal and regulatory developments and may consider further steps, as appropriate, to support this contractual position so that in the event of our bankruptcy, the crypto custodied by us should not be deemed to be part of our bankruptcy estate. We do not expect potential future cash flows associated with the cryptoasset safeguarding obligation liability.
Key Performance Indicators
We have previously disclosed two key performance indicators (“KPIs”) that are key to understanding our business performance, as they reflect the different ways we enable clients to engage with our platform.
•Transacting accounts. We define transacting accounts as unique accounts that perform transactions on our platform each month. We use transacting accounts to reflect how users across our platform use the variety of services we offer, such as redeeming loyalty points for travel or merchandise, buying and selling crypto to facilitate everyday purchases, or converting loyalty points to cash or gift cards. There were 3.0 million unique monthly transacting accounts in 2022, including 1.0 million in the fourth quarter of 2022.
•Digital asset conversion volume. This KPI refers to the dollar value of transaction volume across our platform, including loyalty redemption, crypto buy/sell and gift card purchase transactions. Our digital asset conversion volume was $832.3 million in 2022, $262.8 million of which occurred in the fourth quarter of 2022.
Results of Operations
The following table is our consolidated statements of operations for the Successor periods and the Predecessor period (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Year Ended December 31, 2022 | | October 15, 2021 through December 31, 2021 | | | January 1, 2021 through October 14, 2021 |
| Revenues: | | | | | | |
Net revenues (includes related party net revenues of $42 and $71, respectively, and affiliate net revenues of $136)(1) | $ | 54,567 | | | $ | 11,481 | | | | $ | 27,956 | |
| Operating expenses: | | | | | | |
| Compensation and benefits | 139,049 | | | 62,180 | | | | 91,275 | |
| Professional services | 11,483 | | | 3,034 | | | | 5,175 | |
| Technology and communication | 17,079 | | | 3,056 | | | | 10,384 | |
| Selling, general and administrative | 35,414 | | | 8,521 | | | | 20,309 | |
| Acquisition-related expenses | 5,675 | | | 1,603 | | | | 24,793 | |
| Depreciation and amortization | 25,350 | | | 5,422 | | | | 9,620 | |
Related party expenses (affiliate in Predecessor period)(1) | 1,168 | | | 617 | | | | 1,484 | |
| Goodwill and intangible assets impairments | 1,822,089 | | | — | | | | — | |
| Impairment of long-lived assets | 11,494 | | | 1,196 | | | | 3,598 | |
| Restructuring expenses | 2,336 | | | — | | | | — | |
| Other operating expenses | 2,343 | | | 398 | | | | 1,379 | |
| Total operating expenses | 2,073,480 | | | 86,027 | | | | 168,017 | |
| Operating loss | (2,018,913) | | | (74,546) | | | | (140,061) | |
| Interest income (expense), net | 1,877 | | | 11 | | | | (247) | |
| Gain (loss) from change in fair value of warrant liability | 16,638 | | | (79,373) | | | | — | |
| Other income (expense), net | (856) | | | 832 | | | | 487 | |
| Loss before income taxes | (2,001,254) | | | (153,076) | | | | (139,821) | |
| Income tax benefit (expense) | 11,320 | | | (11,751) | | | | 602 | |
| Net loss | (1,989,934) | | | (164,827) | | | | $ | (139,219) | |
| Less: Net loss attributable to noncontrolling interest | (1,411,829) | | | (120,832) | | | | |
| Net loss attributable to Bakkt Holdings, Inc. | $ | (578,105) | | | $ | (43,995) | | | | |
| | | | | | |
| Net loss per share attributable to Class A common stockholders: | | | | | | |
| Basic | $ | (8.12) | | | $ | (0.81) | | | | (2) |
| Diluted | $ | (8.12) | | | $ | (0.81) | | | | (2) |
(1)As a result of the VIH Business Combination, ICE and its affiliates are no longer our affiliates.
(2)Basic and diluted loss per share is not presented for the Predecessor period due to lack of comparability with the Successor periods.
The comparability of our operating results for the year ended December 31, 2022 as compared to the periods from October 15, 2021 through December 31, 2021 and January 1, 2021 through October 14, 2021 was impacted by the VIH Business Combination in October 2021. We have prepared our discussion of the results of operations by comparing the results of the year ended December 31, 2022 and the combined year ended December 31, 2021, comprising the Successor period from October 15, 2021 through December 31, 2021 and the Predecessor period from January 1, 2021 through October 14, 2021 (together, the “combined 2021 period”). We believe this approach provides the most meaningful basis of comparison and is more useful than a separate analysis of the Predecessor and Successor periods of 2021 in identifying current business trends for the periods presented. The amounts relating to the combined 2021 period
included in our discussion below are not considered to be prepared in accordance with U.S. GAAP and have not been prepared as pro forma results under applicable regulations. This should not be viewed as a substitute for the results of operations of the Predecessor and Successor periods presented in accordance with U.S. GAAP.
Year Ended December 31, 2022 (Successor) Compared to October 15, 2021 through December 31, 2021 (Successor) and January 1, 2021 through October 14, 2021 (Predecessor)
Financial Summary
The year ended December 31, 2022 included the following notable items relative to the periods October 15, 2021 through December 31, 2021 and January 1, 2021 through October 14, 2021:
•Revenue increased $15.1 million, or 38%, primarily driven by strong transaction revenue from the loyalty redemption business and higher subscription and service revenue from expansion of services for an existing Loyalty client;
•Operating expenses increased $1,819.4 million primarily driven by non-cash goodwill and intangible asset impairment charges
Revenue
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | | | |
| ($ in thousands) | Year Ended December 31, 2022 | | October 15, 2021 through December 31, 2021 | | | January 1, 2021 through October 14, 2021 | | $ Change(1) | | % Change(1) |
| Net revenues | $ | 54,567 | | | $ | 11,481 | | | | $ | 27,956 | | | $ | 15,130 | | | 38.4 | % |
(1)Change represents the year ended December 31, 2022 compared to the combined 2021 periods.
Net Revenues
Net revenues consist of transaction revenue and subscription and service revenue. We receive revenue when consumers use our services to buy, sell, and spend crypto and loyalty points. We generate revenue across our platform in the following key areas:
•Subscription and service revenue. We receive a recurring subscription revenue stream from client platform fees as well as service revenue from software development fees and call center support.
•Transaction revenue. We generate transaction revenue though loyalty redemption volumes where we receive a percentage fee based on the volume and from crypto buy/sell where we earn a spread on both legs of the transaction.
Our revenue has seasonality and is typically higher in the fourth quarter, driven by holiday spending and the booking of travel. Revenue generated from our crypto services has been immaterial to date. However, we expect that revenues from cryptoasset trades, spending crypto and other transactions and subscription fees will be significant drivers of our business, and we expect those revenues to increase as we grow our client base and our customers. As a result, over time, we expect loyalty revenue, which has been the source of substantially all of our revenue historically, to decrease as a percentage of overall revenue as the revenue from our other product and service offerings grows.
Transaction revenue is net of incentives, rebates and liquidity payments, reductions in connection with the contribution agreement entered into between Bakkt and ICE in connection with ICE’s formation of Bakkt (the “Contribution Agreement”), and consideration payable to a customer pursuant to an agreement with a strategic partner.
Net revenues increased by $15.1 million, or 38.4%, for the year ended December 31, 2022 compared to the combined 2021 period. The increase was comprised of $11.5 million of increased transaction revenue and $3.6 million of increased subscription and service revenue. The increase in transaction revenue was primarily driven by $7.6 million from higher customer activity in our loyalty redemption services business and $2.5 million from increased interchange fees. The increase in subscription and service revenue was primarily related to the addition of new services for an existing loyalty client, partially offset by reduced development services.
Operating Expenses
Operating expenses consist of compensation and benefits, professional services, technology and communication expenses, selling, general and administrative expenses, acquisition-related expenses, depreciation and amortization, affiliate expenses, impairment of indefinite-lived intangible assets, long-lived assets, and goodwill, restructuring charges, and other operating expenses.
Compensation and Benefits
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | | | |
| ($ in thousands) | Year Ended December 31, 2022 | | October 15, 2021 through December 31, 2021 | | | January 1, 2021 through October 14, 2021 | | $ Change(1) | | % Change(1) |
| Compensation and benefits | $ | 139,049 | | | $ | 62,180 | | | | $ | 91,275 | | | $ | (14,406) | | | (9.4 | %) |
(1)Change represents the year ended December 31, 2022 compared to the combined 2021 periods.
Compensation and benefits expense include all salaries and benefits, compensation for contract labor, incentive programs for employees, payroll taxes, unit-based compensation and other employee related costs. Upon the consummation of the VIH Business Combination on October 15, 2021, one-third of the awards in the Equity Plan vested, which resulted in recognition of $77.8 million of incremental unit-based compensation expense in the combined 2021 period ($30.6 million in the Predecessor period and $47.2 million in the Successor period). The second and third tranches vest on the one-year and two-year anniversary date of the transaction close, respectively.
Headcount increased in 2022 across functions as we invested in strengthening our service offerings and enhancing our systems, processes, and controls. We granted equity awards as part of the compensation package for new employees. We expect that our compensation and benefits expenses will decrease as a percentage of our revenue over time. Compensation and benefits decreased by $14.4 million, or 9.4%, for the year ended December 31, 2022 compared to the combined 2021 period. The decrease was primarily due a decrease of $48.0 million in non-cash compensation due to the recognition of one time incremental unit-based compensation expense related to the VIH Business Combination in the combined 2021 period, which was partially offset by additional expense from new equity awards granted during the year ended December 31, 2022. The decrease in non-cash compensation was partially offset by increases of $21.9 million in additional salaries, wages and benefits, $10.0 million in contract labor for software development, $1.3 million in payroll taxes, and $1.4 million in severance costs. The majority of the increase in these costs, excluding the amounts related to the VIH Business Combination, resulted from increases in headcount to support the projected growth in our business and increased compliance and reporting requirements as a public company. Compensation and benefits expense is the most significant component of our operating expenses, and we expect that this will continue to be the case after the restructuring efforts in the fourth quarter of 2022 and the first quarter of 2023.
Professional Services
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | | | |
| ($ in thousands) | Year Ended December 31, 2022 | | October 15, 2021 through December 31, 2021 | | | January 1, 2021 through October 14, 2021 | | $ Change(1) | | % Change(1) |
| Professional services | $ | 11,483 | | | $ | 3,034 | | | | $ | 5,175 | | | $ | 3,274 | | | 39.9 | % |
(1)Change represents the year ended December 31, 2022 compared to the combined 2021 periods.
Professional services expense includes fees for accounting, legal and regulatory fees. Professional services increased by $3.3 million, or 39.9%, for the year ended December 31, 2022 compared to the combined 2021 period. The increase was primarily due to increases of $2.2 million in legal fees and $2.1 million in audit and tax fees, which was partially offset by a decrease in other professional fees of $1.0 million.
Technology and Communication
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | | | |
| ($ in thousands) | Year Ended December 31, 2022 | | October 15, 2021 through December 31, 2021 | | | January 1, 2021 through October 14, 2021 | | $ Change(1) | | % Change(1) |
| Technology and Communication | $ | 17,079 | | | $ | 3,056 | | | | $ | 10,384 | | | $ | 3,639 | | | 27.1 | % |
(1)Change represents the year ended December 31, 2022 compared to the combined 2021 periods.
Technology and communication costs represent all non-headcount related costs to deliver technological solutions. Such costs principally include amounts paid for software licenses and software-as-a-service arrangements utilized for operating, administrative and information security activities, fees paid for third-party data center hosting arrangements, and fees paid to telecommunications service providers and for telecommunication software platforms necessary for operation of our customer support operations. These costs are driven by client requirements, system capacity, functionality and redundancy requirements.
Technology and communications expense also includes fees paid for access to external market data and associated licensing costs, which may be impacted by growth in electronic contract volume, our capacity requirements, changes in the number of telecommunications hubs, and connections with customers to access our electronic platforms directly. Technology and communications expense increased by $3.6 million, or 27.1%, for the year ended December 31, 2022 compared to the combined 2021 period. The increase was primarily due to an increase of $3.8 million in hardware and software license fees.
Selling, General and Administrative
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | | | |
| ($ in thousands) | Year Ended December 31, 2022 | | October 15, 2021 through December 31, 2021 | | | January 1, 2021 through October 14, 2021 | | $ Change(1) | | % Change(1) |
| Selling, General and Administrative | $ | 35,414 | | | $ | 8,521 | | | | $ | 20,309 | | | $ | 6,584 | | | 22.8 | % |
(1)Change represents the year ended December 31, 2022 compared to the combined 2021 periods.
Selling, general and administrative expenses include marketing, advertising, business insurance, rent and occupancy, bank service charges, dues and subscriptions, travel and entertainment, and other general and administrative costs. Our marketing activities primarily consist of web-based promotionalcampaigns, promotional activities with clients,
conferences and user events, and brand-building activities. Selling, general and administrative expenses do not include any headcount cost, which is reflected in the compensation and benefits financial statement line item. Our selling, general and administrative expenses will continue to increase in absolute dollars to support the projected growth in our business and requirements of being a public company, including increased insurance premiums and disclosure processes. However, we expect these costs will decrease as a percentage of our revenue in future years as we gain improved operating leverage from our projected revenue growth.
Selling, general and administrative costs increased by $6.6 million, or 22.8%, for the year ended December 31, 2022 compared to the combined 2021 period. The increase was primarily due to increases of $12.4 million in insurance expense and $2.4 million in occupancy costs, partially offset by a reduction of marketing expenses of $10.1 million. The majority of marketing expenses are web-based promotional campaigns. We expect to increase marketing efforts as part of our broader growth initiatives, which is expected to result in increased selling, general and administrative expenses in future periods.
Acquisition-related Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | | | |
| ($ in thousands) | Year Ended December 31, 2022 | | October 15, 2021 through December 31, 2021 | | | January 1, 2021 through October 14, 2021 | | $ Change(1) | | % Change(1) |
| Acquisition-related expenses | $ | 5,675 | | | $ | 1,603 | | | | $ | 24,793 | | | $ | (20,721) | | | (78.5 | %) |
(1)Change represents the year ended December 31, 2022 compared to the combined 2021 periods.
Acquisition-related expenses decreased by $20.7 million, or 78.5%, for the year ended December 31, 2022 compared to the combined 2021 period. Acquisition-related expenses for the year ended December 31, 2022 consist of fees for investment banking advisors, lawyers, accountants, tax advisors and public relations firms directly related to the acquisition of Apex and Bumped. Acquisition-related expenses for the combined 2021 period consisted of fees for investment banking advisors, lawyers, accountants, tax advisors and public relations firms directly related to the VIH Business Combination. The amount and timing of acquisition-related expenses is expected to vary across periods based on potential transaction activities.
Depreciation and Amortization
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | | | |
| ($ in thousands) | Year Ended December 31, 2022 | | October 15, 2021 through December 31, 2021 | | | January 1, 2021 through October 14, 2021 | | $ Change(1) | | % Change(1) |
| Depreciation and amortization | $ | 25,350 | | | $ | 5,422 | | | | $ | 9,620 | | | $ | 10,308 | | | 68.5 | % |
(1)Change represents the year ended December 31, 2022 compared to the combined 2021 periods.
Depreciation and amortization expense consists of amortization of intangible assets from business acquisitions, internally developed software and depreciation of purchased software and computer and office equipment over their estimated useful lives. Intangible assets subject to amortization consist primarily of acquired technology and client relationships from the VIH Business Combination. Depreciation and amortization increased by $10.3 million, or 68.5%, for the year ended December 31, 2022 compared to the combined 2021 period. The increase was primarily due to an increase of $12.2 million related to the step-up in basis of the technology and client relationships acquired in connection with the VIH Business Combination, partially offset by a decrease of $1.9 million related to amortization of capitalized software.
Impairment of goodwill and other intangible assets
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | | | |
| ($ in thousands) | Year Ended December 31, 2022 | | October 15, 2021 through December 31, 2021 | | | January 1, 2021 through October 14, 2021 | | $ Change(1) | | % Change(1) |
| Goodwill and intangible assets impairments | $ | 1,822,089 | | | $ | — | | | | $ | — | | | $ | 1,822,089 | | | n/m |
(1)Change represents the year ended December 31, 2022 compared to the combined 2021 periods.
We recorded an impairment of goodwill and other intangible assets of $1,822.1 million during the year ended December 31, 2022. Refer to Note 5 in our consolidated financial statements included in this Report on Form 10-K for further information. Impairment of our remaining goodwill or intangible assets may be necessary in the future.
Impairment of long-lived assets
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | | | |
| ($ in thousands) | Year Ended December 31, 2022 | | October 15, 2021 through December 31, 2021 | | | January 1, 2021 through October 14, 2021 | | $ Change(1) | | % Change(1) |
| Impairment of long-lived assets | $ | 11,494 | | | $ | 1,196 | | | | $ | 3,598 | | | $ | 6,700 | | | 139.8 | % |
(1)Change represents the year ended December 31, 2022 compared to the combined 2021 periods.
Impairment of long-lived assets expense increased by $6.7 million, or 139.8%, for the year ended December 31, 2022 compared to the combined 2021 period. During the year ended December 31, 2022, we recorded impairment charges of $8.7 million related to certain internally developed software assets pursuant to our fourth quarter impairment described in Note 5 to the consolidated financial statements included in this report on Form 10-K and $2.8 million in unrelated charges for another software product that was cancelled prior to being placed in service. During the combined 2021 period, we recorded impairment charges of $1.2 million in the Successor period related to the termination of a software license agreement and $3.6 million in the Predecessor period to measure the fair value of a customer consideration asset at $0 after reassessing the future consideration expected to be received less cost of services from our relationship with a strategic client. Impairment of our remaining long-lived assets may be necessary in the future.
Restructuring expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | | | |
| ($ in thousands) | Year Ended December 31, 2022 | | October 15, 2021 through December 31, 2021 | | | January 1, 2021 through October 14, 2021 | | $ Change(1) | | % Change(1) |
| Restructuring expenses | $ | 2,336 | | | $ | — | | | | $ | — | | | $ | 2,336 | | | n/m |
(1)Change represents the year ended December 31, 2022 compared to the combined 2021 periods.
Restructuring expenses of $2.3 million for the year ended December 31, 2022 consist of severance costs as part of our business simplification initiatives to focus on capabilities with strong product market fit and scalability.
Gain (loss) from Change in Fair Value of Warrant Liability
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | | | |
| ($ in thousands) | Year Ended December 31, 2022 | | October 15, 2021 through December 31, 2021 | | | January 1, 2021 through October 14, 2021 | | $ Change(1) | | % Change(1) |
| Gain (loss) from change in fair value of warrant liability | $ | 16,638 | | | $ | (79,373) | | | | $ | — | | | $ | 96,011 | | | (121.0 | %) |
(1)Change represents the year ended December 31, 2022 compared to the combined 2021 periods.
We recorded a gain of $16.6 million during the year ended December 31, 2022 for the change in fair value on the revaluation of our warrant liability associated with our public warrants. We recorded a loss of $79.4 million during the period from October 15, 2021 through December 31, 2021 for the change in fair value on the revaluation of our warrant liability associated with our public warrants. This is a non-cash charge and is driven by fluctuations in the market price of our warrants.
Other income (expense), net
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | | | |
| ($ in thousands) | Year Ended December 31, 2022 | | October 15, 2021 through December 31, 2021 | | | January 1, 2021 through October 14, 2021 | | $ Change(1) | | % Change(1) |
| Other income (expense), net | $ | (856) | | | $ | 832 | | | | $ | 487 | | | $ | (2,175) | | | (164.9 | %) |
(1)Change represents the year ended December 31, 2022 compared to the combined 2021 periods.
Other income (expense), net primarily consists of non-operating gains and losses. During the year ended December 31, 2022, we recorded expense of $1.2 million for the loss on sale of assets, partially offset by $0.3 million of foreign currency transaction gains. During the combined 2021 period, we recorded income of $1.3 million for the extinguishment of the liability associated with the software license agreement in the Successor period and income of $1.0 million for the sale of crypto outside of the normal course of business in the Predecessor. This income was partially offset by $0.6 million of foreign currency transaction losses in the combined 2021 period.
Income tax (expense) benefit
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | | | |
| ($ in thousands) | Year Ended December 31, 2022 | | October 15, 2021 through December 31, 2021 | | | January 1, 2021 through October 14, 2021 | | $ Change(1) | | % Change(1) |
| Income tax benefit (expense) | $ | 11,320 | | | $ | (11,751) | | | | $ | 602 | | | $ | 22,469 | | | (201.5 | %) |
(1)Change represents the year ended December 31, 2022 compared to the combined 2021 periods.
Income tax expense in the year ended December 31, 2022 primarily consists of $11.6 million of deferred tax benefit resulting from book-tax differences stemming from investments in Opco and its subsidiaries. Income tax expense in the period from October 15, 2021 through December 31, 2021 primarily consists of $11.7 million of deferred tax expense resulting from book-tax differences stemming from investments in Opco and its subsidiaries. Those future tax liabilities will change prospectively due to ongoing book-tax differences, which include, but are not limited to, (i) differences between book and tax loss allocation from Opco to the Company, (ii) mark-to-market activity related to warrants to purchase the Company's stock, and (iii) exchanges of Opco common units (and the corresponding shares of the Company’s Class V common stock) for shares of the Company’s Class A common stock or cash in lieu of Class A common stock. In
the predecessor period, Opco and its subsidiaries were classified as partnerships for U.S. federal income tax purposes or other pass through entities resulting in minimal impacts from income tax.
Supplemental Unaudited Pro Forma Financial operations
The following supplemental unaudited pro forma financial information for the year ended December 31, 2021 presents the combined results of operations as if the VIH Business Combination had occurred as of January 1, 2021.
Management believes the supplemental unaudited pro forma information presented below provides a meaningful comparison of operating results; however, it should not be viewed as a substitute for the historical financial results of Bakkt and VIH. The supplemental unaudited pro forma financial information presented below should be read in conjunction with our historical audited consolidated financial statements for the year ended December 31, 2022 and the periods from October 15, 2021 through December 31, 2021 and January 1, 2021 through October 14, 2021 included in Item 8 of this Annual Report on Form 10-K.
The supplemental unaudited pro forma financial information as presented below is for illustrative purposes and does not purport to represent what the results of operations would actually have been if the business combinations occurred as of the date indicated or what the results would be for any future periods. In addition, future results may vary significantly from those reflected in the supplemental unaudited pro forma financial information in the table below and should not be relied upon as an indication of any of our future results of operations. The unaudited pro forma results reflect the step-up amortization adjustments for the fair value of intangible assets acquired, acquisition-related expenses, nonrecurring post-combination compensation expense, unit-based compensation expense under the new capital structure and the related adjustment to the income tax provision. The pro forma information does not reflect any operating efficiencies, post-acquisition synergies or cost savings that we may achieve with respect to the combined companies.
| | | | | |
| (in thousands) | Year Ended December 31, 2021 |
| Bakkt gross revenue | $ | 1,029 | |
| Bakkt contra-revenue | (2,085) | |
| VIH revenue | — | |
| Bridge2 Solutions revenue | 40,493 | |
| Pro forma revenue | $ | 39,437 | |
| | | | | |
| (in thousands) | Year Ended December 31, 2021 |
| Pro forma net loss | $ | (198,467) | |
| Less: pro forma loss attributable to noncontrolling interest | (165,136) | |
| Pro forma net loss attributable to Bakkt Holdings, Inc. | $ | (33,331) | |
Liquidity and Capital Resources
Our predecessor principally financed its operations through equity financings in the form of capital contributions from its members and, to a lesser degree, from client revenues. In addition, in 2018, ICE contributed certain developed assets and rights to use exchange and clearing licenses enabling Bakkt to commence operations. In connection with the closing of the VIH Business Combination, our predecessor’s cash position was supplemented by $532.4 million, which included $325.0 million in proceeds from the closing of a private placement of shares of our Class A common stock and $207.4 million that had previously been held in trust.
As of December 31, 2022, we had $98.3 million and $16.5 million of cash and cash equivalents and restricted cash, respectively. Restricted cash is held to satisfy certain minimum capital requirements pursuant to regulatory
requirements as well as satisfy covenants under our commercial purchasing card facility. Additionally, as of December 31, 2022 we had $141.1 million of available for sale debt securities that mature over the next 2 to 9 months.
We intend to use our unrestricted cash and proceeds from maturity of available for sale debt securities to (i) maintain our sales and marketing efforts and activate crypto clients, (ii) maintain our research and product development efforts, (iii) optimize our technology infrastructure and operational support and (iv) fund the $55.0 million cash purchase price to acquire Apex. We expect to limit future hiring and leverage the team we have built in 2022 as well as our Apex acquisition to execute our growth strategy. Excluding the cash purchase price to acquire Apex, we expect our cash usage in 2023 to decline from 2022 levels driven by the combined impact of increased revenue and expense reductions related to the completion of large-dollar investments in 2022 and benefits from restructuring actions. In addition, we may in the future enter into arrangements to acquire or invest in complementary businesses, services, technologies or intellectual property rights. However, we have no agreements or commitments with respect to any such acquisitions or investments at this time.
Our expected uses of the available funds are based upon our present plans, objectives and business condition. We have not determined all of the particular uses for the available funds, and management has not estimated the amount of funds, or the range of funds, to be used for any particular purpose. As a result, our management retain broad discretion over the available funds.
Our future cash requirements will depend on many factors, including our revenue growth rate, the timing and extent of hiring and associated overhead to support projected growth in our business, sales and marketing costs to drive revenue growth, and software development investments to continue adding features and functionality to our technology platforms to align with market needs. We expect to augment our personnel with employees acquired in the Apex transaction. We believe that we substantially completed the necessary investment in our platforms in 2022, which enables us to simplify our organization and focus on the core capabilities that are critical to our strategy. We may also enter into other arrangements to acquire or invest in complementary businesses, services, and technologies which will likely require us to increase our cash consumption.
In addition, we have evaluated the impact of the COVID-19 pandemic on our liquidity and capital needs, and we anticipate that its effects will be largely neutral.
Depending on the foregoing and other factors that may affect our business in the future, we may be required to seek additional capital contributions or debt financing in the future. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all.
The following table summarizes our cash flows for the periods presented:
| | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Year Ended December 31, 2022 | | October 15, 2021 through December 31, 2021 | | | January 1, 2021 through October 14, 2021 |
| Net cash flows used in operating activities | $ | (117,597) | | | $ | (83,387) | | | | $ | (50,915) | |
| Net cash flows provided by (used in) investing activities | $ | (171,961) | | | $ | 27,259 | | | | $ | (10,342) | |
| Net cash flows provided by (used in) financing activities | $ | (2,584) | | | $ | 256,925 | | | | $ | (97) | |
Operating Activities
Since our inception, we have yet to achieve positive cash flow from operations. Our primary uses of cash include compensation and benefits for headcount-related expenses, investment in software and product development of our technology platforms, most significantly our consumer app, and associated non-headcount technology and communication cost to develop, operate and support our customer-facing technology platforms.
Net cash used in operating activities of $117.6 million for the year ended December 31, 2022 was primarily related to our net loss of $1,989.9 million, offset by non-cash charges of $1,869.4 million and changes in our operating assets and liabilities of $2.9 million. The non-cash charges for the year ended December 31, 2022 primarily consisted of goodwill and intangible assets impairments of $1,822.1 million, share-based compensation of $31.6 million, depreciation and amortization of $25.4 million, gain from change in fair value of warrant liability of $16.6 million, deferred tax expense of $11.6 million and impairment of long-lived assets of $11.5 million. Net cash inflows from changes in our operating assets and liabilities for the year ended December 31, 2022 resulted primarily from a decrease in prepaid insurance of $9.4 million, an increase in operating lease liabilities of $4.2 million, and an increase in accounts payable and accrued liabilities of $0.7 million, which were partially offset by an increase in accounts receivable of $7.2 million, an increase in other assets and liabilities of $2.4 million and an decrease in deferred revenue of $2.4 million.
Net cash used in operating activities of $134.3 million for the combined 2021 period was primarily related to our combined 2021 period net loss of $304.0 million, offset by non-cash charges of $193.8 million and changes in our operating assets and liabilities of $24.1 million. The non-cash charges for the combined 2021 period primarily consisted of loss from change in fair value of warrant liability of $79.4 million, unit-based compensation of $78.8 million, depreciation and amortization of $15.0 million and impairment of long-lived assets of $4.8 million. Net cash inflows from changes in our operating assets and liabilities for the combined 2021 period resulted primarily from an increase in accounts payable and accrued liabilities of $3.6 million and the return of a deposit with our clearinghouse affiliate of $20.2 million, which were partially offset by an increase in prepaid insurance of $31.5 million, an increase in other assets and liabilities of $8.1 million and an increase in accounts receivable of $7.7 million.
Investing Activities
Net cash flows used in investing activities of $172.0 million for the year ended December 31, 2022 primarily consisted of $306.6 million related to the purchase of available for sale debt securities and $30.5 million of capitalized costs of internally developed software for our technology platforms, partially offset by the receipt of $165.2 million of proceeds from the sale of available-for-sale securities.
Net cash flows provided by investing activities of $16.9 million for the combined 2021 period primarily consisted of $30.8 million of cash acquired through the VIH Business Combination and $1.8 million of proceeds from sale of shares of affiliate stock, partially offset by $15.7 million of capitalized costs of internally developed software. Capital expenditures were primary related to capitalized expenses associated with internally developed software for our technology platforms.
Financing Activities
Net cash flows used in financing activities of $2.6 million for the year ended December 31, 2022 resulted from proceeds from the repurchase and retirement of Class A common stock of $2.6 million.
Net cash flows provided by financing activities of $256.8 million for the combined 2021 period resulted from proceeds from PIPE investments and proceeds from the exercise of warrants amounting to $312.0 million and $37.1 million, respectively which is partially offset by cash outflow due to repurchase of redeemed Class A ordinary shares amounting to $84.5 million and also offset by payment of deferred underwriting fees amounting to $7.3 million.
Tax Receivable Agreement
Concurrently with the completion of the VIH Business Combination, we entered into a Tax Receivable Agreement (“TRA”) with certain Bakkt Equity Holders. Pursuant to the TRA, among other things, holders of Bakkt Common Units may, subject to certain conditions, from and after April 15, 2022, exchange such Common Units (along with a corresponding number of shares of our Common Stock), for Class A common stock on a one-for-one basis, subject to the terms of the Exchange Agreement, including our right to elect to deliver cash in lieu of Class A common stock and, in certain cases, adjustments as set forth therein. Bakkt will have in effect an election under Section 754 of the Internal
Revenue Code for each taxable year in which an exchange of Bakkt Common Units for Class A common stock (or cash) occurs.
The exchanges are expected to result in increases in the tax basis of the tangible and intangible assets of Bakkt. 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 Bakkt Common Units of 85% of certain net income tax benefits, if any, that we realize (or in certain cases is deemed to realize) as a result of these increases in tax basis 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 Bakkt. 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 Bakkt as a result of Bakkt having an election in effect under Section 754 of the Code for each taxable year in which an exchange of Bakkt Common Units for Class A common stock occurs and had we not entered into the TRA. Such change will be calculated under the TRA without regard to any transfers of Bakkt Common Units or distributions with respect to such Bakkt Common Units before the exchange under the Exchange Agreement to which Section 743(b) or 734(b) of the Code applies. As of December 31, 2022, 22,475,871 Opco common units were exchanged for Class A common stock. Based on the Company's history of taxable losses, the Company has concluded that it is not probable to expect cash tax payments in the foreseeable future and as such, no value has been recorded under the TRA.
Contractual Obligations and Commitments
The following is a summary of our significant contractual obligations and commitments as of December 31, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments Due by Period |
| Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years | | Total |
Purchase obligations(1) | $ | 2,250 | | | $ | 15,500 | | | $ | — | | | $ | — | | | $ | 17,750 | |
Future minimum operating lease payments(2) | 4,271 | | | 9,301 | | | 6,397 | | | 12,319 | | | 32,288 | |
| Total contractual obligations | 6,521 | | | 24,801 | | | 6,397 | | | 12,319 | | | 50,038 | |
(1)Represents minimum commitment payments under a four-year cloud computing arrangement.
(2)Represents rental payments under operating leases with remaining non-cancellable terms in excess of one year.
Additionally, we, through our loyalty business, 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 that we 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 for us. 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 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.
Non-GAAP Financial Measures
We use non-GAAP financial measures to assist in comparing our performance on a consistent basis for purposes of business decision-making by removing the impact of certain items that management believes do not directly reflect our core operations. We believe that presenting non-GAAP financial measures is useful to investors because it (a) provides investors with meaningful supplemental information regarding financial performance by excluding certain items that we believe do not directly reflect our core operations, (b) permits investors to view performance using the same tools that we use to budget, forecast, make operating and strategic decisions, and evaluate historical performance, and (c) otherwise provides supplemental information that may be useful to investors in evaluating our results.
We believe that the presentation of the following non-GAAP financial measures, when considered together with the corresponding GAAP financial measures and the reconciliations to those measures provided herein, provides investors with an additional understanding of the factors and trends affecting our business that could not be obtained absent these disclosures.
Adjusted EBITDA
We present Adjusted EBITDA as a non-GAAP financial measure.
We believe that Adjusted EBITDA provides relevant and useful information, which is used by management in assessing the performance of our business. Adjusted EBITDA is defined as earnings before interest, income taxes, depreciation, amortization, acquisition-related expenses, share-based and unit-based compensation expense, goodwill and intangible assets impairments, restructuring charges, changes in the fair value of our warrant liability and certain other non-cash and/or non-recurring items that do not contribute directly to our evaluation of operating results and are not components of our core business operations. Adjusted EBITDA provides management with an understanding of earnings before the impact of investing and financing transactions and income taxes, and the effects ofaforementioned items that do not reflect the ordinary earnings of our operations. This measure may be useful to an investor in evaluating our performance. Adjusted EBITDA is not a measure of our financial performance under GAAP and should not be considered as an alternative to net income (loss) or other performance measures derived in accordance with GAAP. Our definition of Adjusted EBITDA may not be comparable to similarly titled measures used by other companies.
Non-GAAP financial measures like Adjusted EBITDA have limitations, should be considered as supplemental in nature and are not meant as a substitute for the related financial information prepared in accordance with GAAP. The non-GAAP financial measures should be considered alongside other financial performance measures, including net loss and our other financial results presented in accordance with GAAP.
The following table presents a reconciliation of net loss, the most directly comparable GAAP operating performance measure, to our Adjusted EBITDA for each of the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Year Ended December 31, 2022 | | October 15, 2021 through December 31, 2021 | | | January 1, 2021 through October 14, 2021 |
| Net loss | $ | (1,989,934) | | | $ | (164,827) | | | | $ | (139,219) | |
| Depreciation and amortization | 25,350 | | | 5,422 | | | | 9,620 | |
| Interest (income) expense | (1,877) | | | (11) | | | | 247 | |
| Income tax (benefit) expense | (11,320) | | | 11,751 | | | | (602) | |
| EBITDA | (1,977,781) | | | (147,665) | | | | (129,954) | |
| Acquisition-related expenses | 5,675 | | | 1,603 | | | | 24,793 | |
| Share-based and unit-based compensation expense | 32,114 | | | 45,914 | | | | 33,877 | |
| Cancellation of common units | (185) | | | (192) | | | | — | |
| (Gain) loss from change in fair value of warrant liability | (16,638) | | | 79,373 | | | | — | |
| Goodwill and intangible assets impairments | 1,822,089 | | | — | | | | — | |
| Impairment of long-lived assets | 11,494 | | | 1,196 | | | | 3,598 | |
| Restructuring expenses | 2,336 | | | — | | | | — | |
| ICE transition services expense | 1,168 | | | 617 | | | | — | |
| Gain on extinguishment of software license liability | — | | | (1,301) | | | | — | |
| Non-recurring bitcoin sale income, net | — | | | — | | | | (1,024) | |
| Adjusted EBITDA loss | $ | (119,728) | | | $ | (20,455) | | | | $ | (68,709) | |
Adjusted EBITDA loss for the year ended December 31, 2022 increased by $30.6 million, or 34.3%, as compared to the combined 2021 period. The increase was primarily due to a $33.9 million increase in compensation and benefits resulting from an increase in headcount to support the projected growth in our business, a $14.8 million increase in insurance premiums and occupancy costs, a $4.3 million increase in audit, tax and legal professional services fees and a $3.8 million increase in hardware and software license fees. The increases in these expenses were partially offset by the increases in revenue of $15.1 million and a reduction of marketing expenses of $10.1 million.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP, which requires us to make estimates and apply judgments that affect the reported amounts. In our notes to the audited consolidated financial statements, we describe the significant accounting policies used in preparing the consolidated financial statements. Our management has discussed the development, selection, and disclosure of our critical accounting
policies:Class A Ordinary Shares Subject to Possible Redemption
policies and estimates with the Audit Committee of our Board of Directors. The following items require significant estimation or judgement:
Business Combinations
We account for our Class A ordinary shares subjectbusiness combinations using the acquisition accounting method, which requires us to possible redemptiondetermine the fair value of identifiable assets acquired and liabilities assumed, including any contingent consideration, to properly allocate the purchase price to the individual assets acquired and liabilities assumed and record any residual purchase price as goodwill in accordance with the guidance inFinancial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 480 “Distinguishing Liabilities805, Business Combinations. We identify and attribute fair values and estimated lives to the intangible assets acquired and allocate the total cost of an acquisition to the underlying net assets based on their respective estimated fair values. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and involves the use of significant estimates, including projections of future cash inflows and outflows, discount rates and asset lives. These determinations will affect the amount of amortization expense recognized in future periods. We
base our fair value estimates on assumptions we believe are reasonable but recognize that the assumptions are inherently uncertain.
For business combinations effected through a common control transaction, we measure the recognized net assets of the acquiree at the carrying amounts of the net assets previously recognized by our related party. We reflect the operations of entities acquired through a common control transaction in our financial statements as of the first date in the reporting period or as of the date that the entity was acquired by our related party, as applicable.
If the initial accounting for the business combination has not been completed by the end of the reporting period in which the business combination occurs, provisional amounts are reported to present information about facts and circumstances that existed as of the acquisition date. Once the measurement period ends, which in no case extends beyond one year from Equity.” Class A ordinary shares subjectthe acquisition date, revisions to mandatory redemptionthe accounting for the business combination are recorded in earnings.
All acquisition-related costs, other than the costs to issue debt or equity securities, are accounted for as expenses in the period in which they are incurred.
Goodwill and Other Intangible Assets
Goodwill and intangible assets that have indefinite useful lives are accounted for in accordance with ASC 350, Intangibles — Goodwill and Other. We allocate the cost of an acquired entity to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the acquisition consideration transferred over the fair value of the net assets acquired, including other intangible assets, is classifiedrecorded as goodwill. Goodwill is tested for impairment at the reporting unit level, and we are organized and operate as a single reporting unit. Goodwill and indefinite-lived intangible assets are tested at least annually or more frequently when events or circumstances occur that indicate that it is more likely than not that an impairment has occurred. In assessing goodwill and intangible assets for impairment, we first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. In the qualitative assessment, we may consider factors such as economic conditions, industry and market conditions and developments, overall financial performance and other relevant entity-specific events in determining whether it is more likely than not that the fair value of the reporting unit is less than the carrying amount. Should we conclude that it is more likely than not that the recorded goodwill and intangible assets amounts have been impaired, we would perform the impairment test. An impairment loss is recognized in earnings if the estimated fair value of a reporting unit or indefinite lived intangible asset is less than the carrying amount of the reporting unit or intangible asset. Significant judgment is applied when goodwill and intangible assets are assessed for impairment.
Identifiable intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives and are also reviewed at least annually for impairment or more frequently if conditions exist that indicate that an asset may be impaired.
We recorded impairment of goodwill and other intangible assets of $1,822.1 million during the year ended December 31, 2022. See Note 5 to our audited consolidated financial statements for additional disclosures related to the impairment of goodwill and other intangible assets. The carrying value of our tradename intangible asset was equal to its fair value and our single reporting unit had no cushion on its goodwill impairment analysis immediately after the impairment was recorded. Therefore if there are further delays in our ability to execute on our strategy or negative deviations from the budgets utilized in these analyses further impairment of our assets is possible. We did not record any impairment charges related to goodwill and intangible assets during the periods from October 15, 2021 through December 31, 2021 and January 1, 2021 through October 14, 2021.
Loyalty Redemption Platform Revenue Recognition
We host, operate and maintain a loyalty redemption platform connecting loyalty programs to ecommerce merchants allowing loyalty point holders to redeem a spectrum of loyalty currencies for crypto, merchandise and services. Our customer in these arrangements is generally the loyalty program sponsor (our client). Our contracts related to our
loyalty redemption platform consist of two performance obligations: (1) access to our SaaS-based redemption platform and customer support services and (2) facilitation of order fulfillment services. We are the principal related to providing access to our redemption platform. We are acting as the agent to facilitate order fulfillment services on behalf of the loyalty program sponsor. Revenues generated from our loyalty redemption platform are included in “Net revenues” include the following:
•Platform subscription fees: Monthly fixed fee charged to clients to access the redemption platform and receive customer support services. We recognize revenue for these fees on a straight-line basis over the related contract term as the client receives benefits evenly throughout the term of the contract. These fees are allocated to our performance obligation to provide access to our redemption platform, and thus are recognized on a gross basis. Revenue from our platform subscription fees is included in “Subscription and services revenue” in the disaggregation of revenue table by service type in Note 3 to our audited consolidated financial statements.
•Transaction fees: Transaction fees are earned for most transactions processed through our platform. These fees are allocated to our performance obligation to provide order placement services on behalf of the loyalty program sponsor, and therefore are recognized net of the related redemption cost. We allocate transaction fees to the period in which the related transaction occurs. Revenue from our transaction fees is included in “Transaction revenue, net” in the disaggregation of revenue table by service type in Note 3 to our audited consolidated financial statements.
•Revenue share fees: We are entitled to revenue share fees in the form of rebates from third-party commerce merchants and other clients which provide services facilitating redemption order fulfillment. We allocate revenue share fees to the period in which the related transaction occurs. Revenue from our revenue share fees is included in “Transaction revenue, net” in the disaggregation of revenue table by service type in Note 3 to our audited consolidated financial statements.
•Service fees: We earn fees for certain software development activities associated with the implementation of new clients on our loyalty redemption platform and other development activities if a client requests that we customize certain features and functionalities for their loyalty program. We also earn fees from providing call center services to clients. We recognize service fees as revenue on a straight-line basis, beginning when the internally developed software resulting from such implementation or other development activities are operational in our platform over the longer of the remaining anticipated client life and 3 years, which represents the estimated useful life of our internally developed software. Implementation and development service fees are generally billed when the implementation and development activities are performed. We recognize deferred revenue when all such fees are billed. Revenue from our services fees is included in “Subscription and services revenue” in the disaggregation of revenue table by service type in Note 3 to our audited consolidated financial statements.
Deferred Revenue
Deferred revenue includes amounts invoiced prior to us meeting the criteria for revenue recognition. We invoice clients for service fees at the time the service is performed, and such fees are recognized as revenue over time as we satisfy our performance obligation. The portion of deferred revenue to be recognized in the succeeding twelve-month period is recorded as current deferred revenue, and the remaining portion is recorded as non-current deferred revenue. We have determined that these arrangements do not contain a significant financing component, and therefore the transaction price is not adjusted.
Warrants
We account for our ordinary share warrants in accordance with applicable accounting guidance provided in ASC Topic 815, Derivatives and Hedging—Contracts in Entity’s Own Equity (“ASC Topic 815”), as either derivative liabilities or as equity instruments depending on the specific terms of the warrant agreement. We classify as equity any equity-linked contracts that (1) require physical settlement or net-share settlement or (2) give us a choice of net-cash settlement or
settlement in our own shares (physical settlement or net-share settlement). We classify as assets or liabilities any equity-linked contracts that (1) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event is outside our control) or (2) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). All public and private placement warrants issued by us were deemed to qualify for liability instrumentclassification.
Impairment of Long-Lived Assets
Our long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. We also evaluate the period of depreciation and isamortization of long-lived assets to determine whether events or circumstances warrant revised estimates of useful lives. When indicators of impairment are present, we determine the recoverability of our long-lived assets by comparing the carrying value of our long-lived assets to future undiscounted net cash flows expected to result from the use of the assets and their eventual disposition. If the estimated future undiscounted cash flows demonstrate the long-lived assets are not recoverable, an impairment loss would be calculated based on the excess of the carrying amounts of the long-lived assets over their fair value. See Note 6 to our audited consolidated financial statements for additional disclosures related to impairment of long-lived assets.
Unit-Based Compensation
The Successor period unit-based compensation expense relates to the replacement incentive units and phantom units (“participation” units) granted during the Predecessor period that were issued to employees as purchase consideration. The replacement incentive units and participation units were measured at fair value. Conditionally redeemable ordinary shares (including ordinary shares that features redemption rights that is either withinvalue on the controlClosing Date, and we recognize expense in “Compensation and benefits” in the accompanying consolidated statements of operations and comprehensive loss over the requisite service period. Additionally, we recognize variable compensation expense for liability-classified participation units based on changes to the fair value of the holder orawards at each reporting date. We elect to account for forfeitures as they occurred. See Note 11 to our audited consolidated financial statements for additional disclosures related to unit-based compensation.
The Predecessor period unit-based compensation expense related to incentive units and participation units granted to employees and was measured at fair value on the date of grant and recognized as expense in “Compensation and benefits” in the accompanying consolidated statements of operations and comprehensive loss over the requisite service period, subject to redemption uponacceleration if certain performance or market conditions were met. Additionally, we recognized variable compensation expense for liability-classified participation units based on changes to the occurrencefair value of uncertain events not solely withinthe awards at each reporting date. The Predecessor elected to account for forfeitures as they occurred. See Note 11 to our control) is classified as temporary equity. At all other times, ordinary shares are classified as shareholders’ equity. Our ordinary shares feature certain redemption rightsaudited consolidated financial statements for additional disclosures related to unit-based compensation.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that
are consideredaffect the amounts reported in our audited consolidated financial statements and accompanying notes. We base our estimates and assumptions on various judgments that we believe to be
outside of our control and subject to occurrence of uncertain future events. Accordingly, Class A ordinary shares subject to possible redemption is presented as temporary equity, outside of the shareholders’ equity section of our condensed balance sheet.Net Income (Loss) Per Ordinary Share
We apply the two-class method in calculating earnings per share. Net income per ordinary share, basic and diluted for Class A redeemable ordinary shares is calculated by dividing the interest income earned on the Trust Account by the weighted average number of Class A redeemable ordinary shares outstanding since original issuance. Net loss per common share, basic and diluted for Class B non-redeemable ordinary shares is calculated by dividing the net income (loss), less income attributable to Class A redeemable ordinary shares, by the weighted average number of Class B non-redeemable ordinary shares outstanding for the periods presented.
Recent Accounting Standards
Management does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on our condensed financial statements.
JOBS Act
The Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) contains provisions that, among other things, relax certain reporting requirements for qualifying public companies. We qualify as an “emerging growth company” andreasonable under the JOBS Act are allowed to comply with new or revised accounting pronouncements based on the effective date for private (not publicly traded) companies. We are electing to delay the adoption of new or revised accounting standards,circumstances. The significant estimates and as a result, we may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. As a result,assumptions that affect the financial statements may include, but are not limited to, those that are related to income tax valuation allowances, useful lives of intangible assets and property, equipment and software, fair value of financial assets and liabilities, determining provision for doubtful accounts, valuation of acquired tangible and intangible assets, the impairment of intangible assets and goodwill, and fair market value of Bakkt common units, incentive units and participation units. Actual results and outcomes may differ from management’s estimates and assumptions and such differences may be comparablematerial to companies that comply with new or revisedour audited consolidated financial statements.
Recently Issued and Adopted Accounting Pronouncements
Recently issued and adopted accounting pronouncements as of public company effective dates.Additionally, we are described in the process of evaluating the benefits of relying on the other reduced reporting requirements provided by the JOBS Act. SubjectNote 2 to certain conditions set forth in the JOBS Act, if, as an “emerging growth company,” we choose to rely on such exemptions we may not be required to, among other things, (i) provide an auditor’s attestation report on
our system of internal controls over financial reporting pursuant to Section 404, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and theaudited consolidated financial statements (auditor discussion and analysis) and (iv) disclose certain executive compensation related items such as the. correlation between executive compensation and performance and comparisons of the CEO’s compensation to median employee compensation. These exemptions will apply for a period of five years following the completion of our Initial Public Offering or until we are no longer an “emerging growth company,” whichever is earlier.
Recent Accounting Pronouncements
Our management does not believe there are any other recently issued, but not yet effective, accounting pronouncements, if currently adopted, that would have a material effect on our financial statements.
Item 7A.
Qualitative And Quantitative
and Qualitative Disclosures About Market Risk
We are a smaller reporting company as defined by Rule 12b-2
Not applicable.
Item 8. Financial Statements andAnd Supplementary Data.Data
VPC IMPACT ACQUISITION HOLDINGS
INDEX TO FINANCIAL STATEMENTS
Index to Consolidated Financial Statements | | | | | |
| Page |
| | 60 |
Financial Statements:
| | |
| | 61 |
| | 62 |
| | 63 |
| |
| | 64 |
| | 65 to 78 |
Report of Independent Registered Public Accounting Firm
To the
ShareholdersStockholders and
the Board of Directors of
VPC Impact Acquisition Bakkt Holdings,
Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheetsheets of VPC Impact AcquisitionBakkt Holdings, Inc. (the “Company”)Company) as of December 31, 2020,2022 and 2021, and the related statementconsolidated statements of operations, comprehensive loss, changes in shareholders’stockholders’ equityand cash flows for the year ended December 31, 2022 and for the period October 15, 2021 to December 31, 2021 (“the Successor”) and the related consolidated statements of operations, comprehensive loss, changes in members’ equity and mezzanine equity and cash flows for the period from July 31, 2020 (inception) through December 31, 2020,January 1, 2021 to October 14, 2021 (“the Predecessor”) and the related notes (collectively referred to as the “financial“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as ofat December 31, 2020,2022 and 2021, and the results of its operations and its cash flows for the period from July 31, 2020 (inception) through December 31, 2020,Successor and Predecessor periods, in conformity with accounting principlesU.S. generally accepted in the United States of America.accounting principles.
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our
audit.audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
(“PCAOB”)(PCAOB) and are required to be independent with respect to the Company in accordance with the
U.S.U.S federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our
auditaudits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our
auditaudits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the
Company’sCompany's internal control over financial reporting. Accordingly, we express no such opinion.
Our auditaudits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our auditaudits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit providesaudits provide a reasonable basis for our opinion.
/s/
WithumSmith+Brown, PCErnst & Young LLP
We have served as the Company’s auditor since
2020.New York, New York
2018.
Atlanta, GA
March 30, 202124, 2023
VPC IMPACT ACQUISITION HOLDINGS
Table of ContentsBALANCE SHEETDECEMBER 31, 2020
| | | | |
ASSETS
| | | | |
Current assets
| | | | |
Cash
| | | 1,177,678 | |
Prepaid expenses
| | | 234,959 | |
| | | | |
Total Current Assets
| | | 1,412,637 | |
Cash and marketable securities held in Trust Account
| | | 207,376,213 | |
| | | | |
TOTAL ASSETS
| | | 208,788,850 | |
| | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY
| | | | |
Liabilities
| | | | |
Current liabilities
| | | | |
Accrued expenses
| | | 893,415 | |
Accrued offering costs
| | | 2,230 | |
| | | | |
Total Current Liabilities
| | | 895,645 | |
Deferred underwriting fee payable
| | | 7,258,021 | |
| | | | |
Total Liabilities
| | | 8,153,666 | |
| | | | |
| |
Commitments and Contingencies (Note 6)
| | | | |
Class A ordinary shares subject to possible redemption, 19,563,518 shares at $10.00 per share
| | | 195,635,180 | |
| |
Shareholders’ Equity
| | | | |
Preference shares, $0.0001 par value; 1,000,000 shares authorized; no shares issued and outstanding
| | | — | |
Class A ordinary shares, $0.0001 par value; 200,000,000 shares authorized; 1,173,684 shares issued and outstanding (excluding 19,563,518 shares subject to possible redemption)
| | | 118 | |
Class B ordinary shares, $0.0001 par value; 20,000,000 shares authorized; 5,184,300 shares issued and outstanding(1)
| | | 518 | |
Additional paid-in capital
| | | 6,002,037 | |
Accumulated deficit
| | | (1,002,669 | ) |
| | | | |
Total Shareholders’ Equity
| | | 5,000,004 | |
| | | | |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
| | | 208,788,850 | |
| | | | |
(1) | In connection with the underwriters’ partial exercise of the over-allotment option and the forfeiture of the remaining over-allotment option on October 1, 2020, 565,700 Founder Shares were forfeited and 184,300 Founder Shares are no longer subject to forfeiture resulting in an aggregate of 5,184,300 Founder Shares outstanding at December 31, 2020.
|
Bakkt Holdings, Inc.
Consolidated Balance Sheets
(in thousands, except unit data)
| | | | | | | | | | | |
| Successor |
| As of December 31, 2022 | | As of December 31, 2021 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 98,332 | | | $ | 391,364 | |
| Restricted cash | 16,500 | | | 16,500 | |
| Customer funds | 591 | | | 551 | |
| Available-for-sale securities | 141,062 | | | — | |
| Accounts receivable, net | 25,306 | | | 18,142 | |
| Prepaid insurance | 22,822 | | | 32,206 | |
| Safeguarding asset for crypto | 15,792 | | | — | |
| Other current assets | 6,060 | | | 4,784 | |
| Total current assets | 326,465 | | | 463,547 | |
| Property, equipment and software, net | 19,744 | | | 6,121 | |
| Goodwill | 15,852 | | | 1,527,118 | |
| Intangible assets, net | 55,833 | | | 388,469 | |
| Deposits with clearinghouse | 15,150 | | | 15,151 | |
| Other assets | 22,458 | | | 13,879 | |
| Total assets | $ | 455,502 | | | $ | 2,414,285 | |
| Liabilities and stockholders’ equity | | | |
| Current liabilities: | | | |
| Accounts payable and accrued liabilities | $ | 66,787 | | | $ | 64,090 | |
| Customer funds payable | 591 | | | 551 | |
| Deferred revenue, current | 3,972 | | | 4,629 | |
| Due to related party | 1,168 | | | 617 | |
| Safeguarding obligation for crypto | 15,792 | | | — | |
| Other current liabilities | 3,819 | | | 3,717 | |
| Total current liabilities | 92,129 | | | 73,604 | |
| Deferred revenue, noncurrent | 3,112 | | | 4,819 | |
| Warrant liability | 785 | | | 17,424 | |
| Deferred tax liabilities, net | — | | | 11,593 | |
| Other noncurrent liabilities | 23,402 | | | 12,674 | |
| Total liabilities | 119,428 | | | 120,114 | |
| Commitments and contingencies (Note 14) | | | |
| Stockholders’ equity: | | | |
Class A common stock ($0.0001 par value, 750,000,000 shares authorized, 80,926,843 shares issued and outstanding as of December 31, 2022 and 57,164,388 shares issued and outstanding as of December 31, 2021) | 8 | | | 6 | |
Class V common stock ($0.0001 par value, 250,000,000 shares authorized, 183,482,777 shares issued and outstanding as of December 31, 2022 and 206,271,792 shares issued and outstanding as of December 31, 2021) | 19 | | | 21 | |
| Additional paid-in capital | 772,973 | | | 566,766 | |
| Accumulated other comprehensive loss | (290) | | | (55) | |
| Accumulated deficit | (676,447) | | | (98,342) | |
| Total stockholders' equity | 96,263 | | | 468,396 | |
| Noncontrolling interest | 239,811 | | | 1,825,775 | |
| Total equity | 336,074 | | | 2,294,171 | |
| Total liabilities and stockholders’ equity | $ | 455,502 | | | $ | 2,414,285 | |
The accompanying notes are an integral part of these consolidated financial statements.statements
VPC IMPACT ACQUISITION HOLDINGS
Table of ContentsSTATEMENT OF OPERATIONSFOR THE PERIOD FROM JULY 31, 2020 (INCEPTION) THROUGH DECEMBER 31, 2020
| | | | |
Formation and operating costs | | $ | 1,006,862 | |
| | | | |
Loss from operations | | | (1,006,862 | ) |
Other income: | | | | |
Interest earned on marketable securities held in Trust Account | | | 4,193 | |
| | | | |
Net Loss | | $ | (1,002,669 | ) |
| | | | |
| | | | |
Weighted average shares outstanding of Class A redeemable ordinary shares | | | 20,737,202 | |
| | | | |
Basic and diluted net income per share, Class A | | $ | — | |
| | | | |
Weighted average shares outstanding of Class B non-redeemable ordinary shares(1) | | | 5,184,300 | |
| | | | |
Basic and diluted net loss per share, Class B | | $ | (0.19 | ) |
| | | | |
(1) | In connection with the underwriters’ partial exercise of the over-allotment option and the forfeiture of the remaining overallotment option on October 1, 2020, 565,700 Founder Shares were forfeited and 184,300 Founder Shares are no longer subject to forfeiture resulting in an aggregate of 5,184,300 Founder Shares outstanding at December 31, 2020.
|
Bakkt Holdings, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Year Ended December 31, 2022 | | October 15, 2021 through December 31, 2021 | | | January 1, 2021 through October 14, 2021 |
| Revenues: | | | | | | |
Net revenues (includes related party net revenues of $42 and $71, respectively, and affiliate net revenues of $136)(1) | $ | 54,567 | | | $ | 11,481 | | | | $ | 27,956 | |
| Operating expenses: | | | | | | |
| Compensation and benefits | 139,049 | | | 62,180 | | | | 91,275 | |
| Professional services | 11,483 | | | 3,034 | | | | 5,175 | |
| Technology and communication | 17,079 | | | 3,056 | | | | 10,384 | |
| Selling, general and administrative | 35,414 | | | 8,521 | | | | 20,309 | |
| Acquisition-related expenses | 5,675 | | | 1,603 | | | | 24,793 | |
| Depreciation and amortization | 25,350 | | | 5,422 | | | | 9,620 | |
Related party expenses (affiliate in Predecessor period)(1) | 1,168 | | | 617 | | | | 1,484 | |
| Goodwill and intangible assets impairments | 1,822,089 | | | — | | | | — | |
| Impairment of long-lived assets | 11,494 | | | 1,196 | | | | 3,598 | |
| Restructuring expenses | 2,336 | | | — | | | | — | |
| Other operating expenses | 2,343 | | | 398 | | | | 1,379 | |
| Total operating expenses | 2,073,480 | | | 86,027 | | | | 168,017 | |
| Operating loss | (2,018,913) | | | (74,546) | | | | (140,061) | |
| Interest income (expense), net | 1,877 | | | 11 | | | | (247) | |
| Gain (loss) from change in fair value of warrant liability | 16,638 | | | (79,373) | | | | — | |
| Other income (expense), net | (856) | | | 832 | | | | 487 | |
| Loss before income taxes | (2,001,254) | | | (153,076) | | | | (139,821) | |
| Income tax benefit (expense) | 11,320 | | | (11,751) | | | | 602 | |
| Net loss | (1,989,934) | | | (164,827) | | | | $ | (139,219) | |
| Less: Net loss attributable to noncontrolling interest | (1,411,829) | | | (120,832) | | | | |
| Net loss attributable to Bakkt Holdings, Inc. | $ | (578,105) | | | $ | (43,995) | | | | |
| | | | | | |
| Net loss per share attributable to Class A common stockholders: | | | | | | |
| Basic | $ | (8.12) | | | $ | (0.81) | | | | (2) |
| Diluted | $ | (8.12) | | | $ | (0.81) | | | | (2) |
(1)As a result of the VIH Business Combination, ICE and its affiliates are no longer our affiliates. Refer to Note 8 for our related party disclosures.
(2)Basic and diluted loss per share is not presented for the Predecessor period due to lack of comparability with the Successor periods.
The accompanying notes are an integral part of these consolidated financial statements.statements.
VPC IMPACT ACQUISITION HOLDINGS
Table of ContentsSTATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITYFOR THE PERIOD FROM JULY 31, 2020 (INCEPTION) THROUGH DECEMBER 31, 2020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Class A Ordinary Shares | | | Class B Ordinary Shares | | | Additional Paid in | | | Retained | | | Total Shareholders’ | |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | Earnings | | | Equity | |
Balance—July 31, 2020 (inception) | | | — | | | $ | — | | | | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Issuance of Class B ordinary shares to Sponsor(1) | | | — | | | | — | | | | 5,750,000 | | | | 575 | | | | 24,425 | | | | — | | | | 25,000 | |
Forfeiture of 565,700 Sponsor shares | | | — | | | | — | | | | (565,700 | ) | | | (57 | ) | | | 57 | | | | — | | | | — | |
Sale of 20,737,202 Units, net of underwriting discounts and offering costs | | | 20,737,202 | | | | 2,074 | | | | — | | | | — | | | | 195,463,339 | | | | — | | | | 195,465,413 | |
Sale of 6,147,440 Private Placement Warrants | | | — | | | | — | | | | — | | | | — | | | | 6,147,440 | | | | — | | | | 6,147,440 | |
Ordinary shares subject to possible redemption | | | (19,563,518 | ) | | | (1,956 | ) | | | — | | | | — | | | | (195,633,224 | ) | | | — | | | | (195,635,180 | |
Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,002,669 | ) | | | (1,002,669 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance—December 31, 2020 | | | 1,173,684 | | | $ | 118 | | | | 5,184,300 | | | $ | 518 | | | $ | 6,002,037 | | | $ | (1,002,669 | ) | | $ | 5,000,004 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) | In connection with the underwriters’ partial exercise of the over-allotment option and the forfeiture of the remaining overallotment option on October 1, 2020, 565,700 Founder Shares were forfeited and 184,300 Founder Shares are no longer subject to forfeiture resulting in an aggregate of 5,184,300 Founder Shares outstanding at December 31, 2020.
|
Bakkt Holdings, Inc.
Consolidated Statements of Comprehensive Loss
(in thousands)
| | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Year Ended December 31, 2022 | | October 15, 2021 through December 31, 2021 | | | January 1, 2021 through
October 14, 2021 |
| Net loss | $ | (1,989,934) | | | $ | (164,827) | | | | $ | (139,219) | |
| Currency translation adjustment, net of tax | (850) | | | (259) | | | | 248 | |
| Unrealized gains on available-for-sale securities, net of tax | 59 | | | — | | | | — | |
| Comprehensive loss | $ | (1,990,725) | | | $ | (165,086) | | | | $ | (138,971) | |
| Comprehensive loss attributable to noncontrolling interest | (1,412,385) | | | (121,036) | | | | |
| Comprehensive loss attributable to Bakkt Holdings, Inc. | $ | (578,340) | | | $ | (44,050) | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
VPC IMPACT ACQUISITION HOLDINGS
Table of ContentsSTATEMENT OF CASH FLOWSFOR THE PERIOD FROM JULY 31, 2020 (INCEPTION) THROUGH DECEMBER 31, 2020
| | | | |
Cash Flows from Operating Activities: | | | | |
Net income (loss) | | $ | (1,002,669 | ) |
Adjustments to reconcile net income (loss) to net cash used in operating activities: | | | | |
Interest earned on marketable securities held in Trust Account | | | (4,193 | ) |
Formation costs paid by Sponsor in exchange for Founder shares | | | 6,606 | |
Changes in operating assets and liabilities: | | | | |
Prepaid expenses | | | (234,959 | ) |
Accrued expenses | | | 893,415 | |
| | | | |
Net cash used in operating activities | | | (341,800 | ) |
| | | | |
| | | | |
Cash Flows from Investing Activities: | | | | |
Investment of cash in Trust Account | | | (207,372,020 | ) |
| | | | |
Net cash used in investing activities | | | (207,372,020 | ) |
| | | | |
| | | | |
Cash Flows from Financing Activities: | | | | |
Proceeds from sale of Units, net of underwriting discounts paid | | | 203,224,580 | |
Proceeds from sale of Private Placements Warrants | | | 6,147,440 | |
Repayment of promissory note—related party | | | (82,729 | ) |
Payment of offering costs | | | (397,793 | ) |
| | | | |
Net cash provided by financing activities | | | 208,891,498 | |
| | | | |
| |
Net Change in Cash | | | 1,177,678 | |
Cash—Beginning | | | — | |
| | | | |
Cash—Ending | | $ | 1,177,678 | |
| | | | |
| |
Non-Cash Investing and Financing Activities: | | | | |
Initial classification of Class A ordinary shares subject to possible redemption | | $ | 196,631,240 | |
| | | | |
Change in value of Class A ordinary shares subject to possible redemption | | $ | (996,060 | ) |
| | | | |
Deferred underwriting fee payable | | $ | 7,258,021 | |
| | | | |
Payment of offering costs through promissory note | | $ | 82,729 | |
| | | | |
Offering costs paid by Sponsor in exchange for issuance of Founder shares | | $ | 18,394 | |
| | | | |
Offering costs included in accrued offering costs | | $ | 2,230 | |
| | | | |
Forfeiture of Founder Shares | | $ | (57 | ) |
| | | | |
Bakkt Holdings, Inc.
Consolidated Statements of Changes in Stockholders’ Equity (Successor)
(in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A
Common Stock | | Class V
Common Stock | | Class B
Ordinary Shares | | Additional
Paid-in
Capital | | Accumulated
Deficit | | Accumulated
Other
Comprehensive
Loss | | Total
Stockholders’
Equity | | Noncontrolling
Interest | | Total
Equity | | Class A
Ordinary Shares | | Total
Mezzanine
Equity |
| Shares | | $ | | Shares | | $ | | Shares | | $ | | | | | | | | | | | | | | Shares | | $ | | |
| Balance as of October 15, 2021 | — | | | $ | — | | | — | | | $ | — | | | 5,184,300 | | | $ | 1 | | | $ | — | | | $ | (54,347) | | | $ | — | | | $ | (54,346) | | | $ | — | | | $ | (54,346) | | | 20,737,202 | | | $ | 207,372 | | | $ | 207,372 | |
| Redemption of Class A ordinary shares | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (8,452,042) | | | (84,530) | | | (84,530) | |
| Conversion of Class A ordinary shares and Class B ordinary shares into Class A common stock | 17,469,460 | | | 2 | | | — | | | — | | | (5,184,300) | | | (1) | | | 122,840 | | | — | | | — | | | 122,841 | | | — | | | 122,841 | | | (12,285,160) | | | (122,842) | | | (122,842) | |
| Issuance of common stock to PIPE investors, net of issuance costs | 32,500,000 | | | 3 | | | — | | | — | | | — | | | — | | | 311,997 | | | — | | | — | | | 312,000 | | | — | | | 312,000 | | | — | | | — | | | — | |
| Conversion of Opco Class A, Class B, and Class C voting units into Class V common stock | — | | | — | | | 189,933,286 | | | 19 | | | — | | | — | | | — | | | — | | | — | | | 19 | | | 1,796,750 | | | 1,796,769 | | | — | | | — | | | — | |
| Issuance of Class V common stock for Opco incentive units | — | | | — | | | 17,473,362 | | | 2 | | | — | | | — | | | — | | | — | | | — | | | 2 | | | 107,877 | | | 107,879 | | | — | | | — | | | — | |
| Share-based compensation | — | | | — | | | — | | | — | | | — | | | — | | | 1,022 | | | — | | | — | | | 1,022 | | | — | | | 1,022 | | | — | | | — | | | — | |
| Unit-based compensation | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 46,786 | | | 46,786 | | | — | | | — | | | — | |
| Forfeiture and cancellation of common units | — | | | — | | | (1,134,856) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (4,602) | | | (4,602) | | | — | | | — | | | — | |
| Exercise of warrants | 7,194,928 | | | 1 | | | — | | | — | | | — | | | — | | | 130,907 | | | — | | | — | | | 130,908 | | | — | | | 130,908 | | | — | | | — | | | — | |
| Currency translation adjustment, net of tax | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (55) | | | (55) | | | (204) | | | (259) | | | — | | | — | | | — | |
| Net loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (43,995) | | | — | | | (43,995) | | | (120,832) | | | (164,827) | | | — | | | — | | | — | |
| Balance as of December 31, 2021 | 57,164,388 | | | $ | 6 | | | 206,271,792 | | | $ | 21 | | | — | | | $ | — | | | $ | 566,766 | | | $ | (98,342) | | | $ | (55) | | | $ | 468,396 | | | $ | 1,825,775 | | | $ | 2,294,171 | | | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Share-based compensation | — | | | — | | | — | | | — | | | — | | | — | | | 31,557 | | | — | | | — | | | 31,557 | | | — | | | 31,557 | | | — | | | — | | | — | |
| Unit-based compensation | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 3,847 | | | 3,847 | | | — | | | — | | | — | |
| Forfeiture and cancellation of common units | — | | | — | | | (313,144) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (185) | | | (185) | | | — | | | — | | | — | |
| Exercise of warrants | 221 | | | — | | | — | | | — | | | — | | | — | | | 2 | | | — | | | — | | | 2 | | | — | | | 2 | | | — | | | — | | | — | |
| Shares issued upon vesting of share-based awards, net of tax withholding | 1,286,363 | | | — | | | — | | | — | | | — | | | — | | | (2,586) | | | — | | | — | | | (2,586) | | | — | | | (2,586) | | | — | | | — | | | — | |
| Exchange of Class V shares for Class A shares | 22,475,871 | | | 2 | | | (22,475,871) | | | (2) | | | — | | | — | | | 177,241 | | | — | | | — | | | 177,241 | | | (177,241) | | | — | | | — | | | — | | | — | |
| Increase in deferred tax liability from step-up tax basis related to exchanges of Opco common units | — | | | — | | | — | | | — | | | — | | | — | | | (7) | | | — | | | — | | | (7) | | | — | | | (7) | | | — | | | — | | | — | |
| Currency translation adjustment, net of tax | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (254) | | | (254) | | | (596) | | | (850) | | | — | | | — | | | — | |
| Unrealized gains on available-for-sale securities | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 19 | | | 19 | | | 40 | | | 59 | | | — | | | — | | | — | |
| Net loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (578,105) | | | — | | | (578,105) | | | (1,411,829) | | | (1,989,934) | | | — | | | — | | | — | |
| Balance as of December 31, 2022 | 80,926,843 | | | $ | 8 | | | 183,482,777 | | | 19 | | | — | | | $ | — | | | $ | 772,973 | | | $ | (676,447) | | | $ | (290) | | | $ | 96,263 | | | $ | 239,811 | | | $ | 336,074 | | | — | | | $ | — | | | $ | — | |
The accompanying notes are an integral part of these consolidated financial statements.
VPC IMPACT ACQUISITION HOLDINGS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2020
Bakkt Holdings, Inc.
Consolidated Statements of Changes in Members’ Equity and Mezzanine Equity (Predecessor)
(in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A Voting Units | | Class B Voting Units | | Class B Warrant | | Class C Voting Units | | Class C Warrant | | Accumulated
Deficit | | Accumulated Other Comprehensive Income | | Total
Member’s
Equity | | Incentive
units | | Total Mezzanine Equity |
| Units | | $ | | Units | | $ | | Warrants | | $ | | Units | | $ | | Warrants | | $ | | | | | | | | Units | | $ | | |
| Balance as of December 31, 2020 | 400,000,000 | | | 2,613 | | | 182,500,000 | | | 182,500 | | | — | | | 5,426 | | | 270,270,270 | | | 310,104 | | | — | | | — | | | (112,504) | | | 191 | | | 388,330 | | | — | | | 21,452 | | | 21,452 | |
| Issuance of Class A voting units | — | | | 185 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 185 | | | — | | | — | | | — | |
| Unit-based incentive compensation | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 26,538 | | | 26,538 | |
| Exercise of Class B warrant | — | | | — | | | 9,953,454 | | | 5,426 | | | — | | | (5,426) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Vesting of Class C warrant | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 969 | | | — | | | — | | | 969 | | | — | | | — | | | — | |
| Currency translation adjustment, net of tax | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 248 | | | 248 | | | — | | | — | | | — | |
| Net loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (139,219) | | | — | | | (139,219) | | | — | | | — | | | — | |
| Balance as of October 14, 2021 | 400,000,000 | | | $ | 2,798 | | | 192,453,454 | | | $ | 187,926 | | | — | | | $ | — | | | 270,270,270 | | | $ | 310,104 | | | — | | | $ | 969 | | | $ | (251,723) | | | $ | 439 | | | $ | 250,513 | | | — | | | $ | 47,990 | | | $ | 47,990 | |
The accompanying notes are an integral part of these consolidated financial statements.
Bakkt Holdings, Inc.
Consolidated Statements of Cash Flows
(in thousands)
| | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Year Ended December 31, 2022 | | October 15, 2021 through December 31, 2021 | | | January 1, 2021 through October 14, 2021 |
| Cash flows from operating activities: | | | | | | |
| Net loss | $ | (1,989,934) | | | $ | (164,827) | | | | $ | (139,219) | |
| Adjustments to reconcile net loss to net cash used in operating activities | | | | | | |
| Depreciation and amortization | 25,350 | | | 5,422 | | | | 9,512 | |
| Non-cash lease expense | 2,679 | | | 249 | | | | 946 | |
| Share-based compensation expense | 31,557 | | | 1,022 | | | | — | |
| Unit-based compensation expense | 557 | | | 44,892 | | | | 33,877 | |
| Forfeiture and cancellation of common units | (185) | | | (192) | | | | — | |
| Recognition of affiliate capital contribution | — | | | — | | | | 185 | |
| Amortization of customer consideration asset | — | | | — | | | | 1,743 | |
| Deferred income taxes | (11,594) | | | 11,733 | | | | — | |
| Impairment of long-lived assets | 11,494 | | | 1,196 | | | | 3,598 | |
| Goodwill and intangible assets impairments | 1,822,089 | | | — | | | | — | |
| Loss on disposal of assets | 3,834 | | | — | | | | — | |
| Loss on sale of shares of affiliate stock | — | | | — | | | | 63 | |
| (Gain) loss from change in fair value of warrant liability | (16,638) | | | 79,373 | | | | — | |
| (Gain) on extinguishment of software license liability | — | | | (1,301) | | | | — | |
| Modification and vesting of Class C warrant | — | | | — | | | | 969 | |
| Other | 285 | | | (129) | | | | 655 | |
| Changes in operating assets and liabilities: | | | | | | |
| Accounts receivable | (7,164) | | | (1,133) | | | | (6,601) | |
| Prepaid insurance | 9,384 | | | (31,121) | | | | (351) | |
| Deposits with clearinghouse | 1 | | | — | | | | 20,199 | |
| Accounts payable and accrued liabilities | 744 | | | (19,728) | | | | 23,292 | |
Due to related party (affiliate in Predecessor period)(1) | 551 | | | (1,696) | | | | 457 | |
| Deferred revenue | (2,364) | | | 24 | | | | 1,038 | |
| Operating lease liabilities | 4,150 | | | (12) | | | | (822) | |
| Customer funds payable | 40 | | | 124 | | | | 345 | |
| Other assets and liabilities | (2,433) | | | (7,283) | | | | (801) | |
| Net cash used in operating activities | (117,597) | | | (83,387) | | | | (50,915) | |
| Cash flows from investing activities: | | | | | | |
| Capitalized internal-use software development costs and other capital expenditures | (30,543) | | | (3,578) | | | | (12,109) | |
| Purchase of available-for-sale securities | (306,593) | | | — | | | | — | |
| Proceeds from the maturity of available-for-sale securities | 165,175 | | | — | | | | — | |
| Proceeds from disposal of assets | — | | | — | | | | 8 | |
| Proceeds from sale of shares of affiliate stock | — | | | — | | | | 1,759 | |
| Cash acquired through business combination | — | | | 30,837 | | | | — | |
| Net cash provided by (used in) investing activities: | (171,961) | | | 27,259 | | | | (10,342) | |
| Cash flows from financing activities: | | | | | | |
| Payment of finance lease liability | — | | | (404) | | | | (97) | |
| Repurchase of redeemed Class A common stock | — | | | (84,530) | | | | — | |
| Repurchase and retirement of Class A common stock | (2,586) | | | — | | | | — | |
Bakkt Holdings, Inc.
Consolidated Statements of Cash Flows
(in thousands)
| | | | | | | | | | | | | | | | | | | | |
| Payment of deferred underwriting fee | — | | | (7,258) | | | | — | |
| Proceeds from the exercise of warrants | 2 | | | 37,117 | | | | — | |
| Proceeds from PIPE, net of issuance costs | — | | | 312,000 | | | | — | |
| Net cash provided by (used in) financing activities: | (2,584) | | | 256,925 | | | | (97) | |
| Effect of exchange rate changes. | (850) | | | (307) | | | | 248 | |
| Net increase (decrease) in cash, cash equivalents, restricted cash and customer funds | (292,992) | | | 200,490 | | | | (61,106) | |
| Cash, cash equivalents, restricted cash and customer funds at the beginning of the period | 408,415 | | | 207,925 | | | | 91,943 | |
| Cash, cash equivalents, restricted cash and customer funds at the end of the period | $ | 115,423 | | | $ | 408,415 | | | | $ | 30,837 | |
| Supplemental disclosure of cash flow information: | | | | | | |
| Cash paid for income taxes | $ | — | | | $ | — | | | | $ | — | |
| Non-cash operating lease right-of-use asset acquired | 11,006 | | | 10,347 | | | | — | |
| Supplemental disclosure of non-cash investing and financing activity: | | | | | | |
| Issuance of Class A voting units in exchange of capital contribution | $ | — | | | $ | — | | | | $ | 26 | |
| Capitalized internal-use software development costs and other capital expenditures included in accounts payable and accrued liabilities | 3,900 | | | 1,929 | | | | 1,809 | |
| Cashless exercise of private placement warrants | — | | | 64,978 | | | | — | |
| Reconciliation of cash, cash equivalents, restricted cash and customer funds to consolidated balance sheets: | | | | | | |
| Cash and cash equivalents | $ | 98,332 | | | $ | 391,364 | | | | $ | 13,911 | |
| Restricted cash | 16,500 | | | 16,500 | | | | 16,500 | |
| Customer funds | 591 | | | 551 | | | | 426 | |
| Total cash, cash equivalents, restricted cash and customer funds | $ | 115,423 | | | $ | 408,415 | | | | $ | 30,837 | |
(1)As a result of the VIH Business Combination, ICE and its affiliates are no longer our affiliates. Refer to Note 8 for our related party disclosures.
The accompanying notes are an integral part of these consolidated financial statements.
Notes to the Consolidated Financial Statements
1.Organization and Description of Business
Organization
VPC Impact Acquisition Holdings
(the “Company”(“VIH”)
iswas a blank check company incorporated as a Cayman Islands exempted company on July 31, 2020.
The CompanyVIH 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 (a “Business Combination”entities. VIH’s sponsor was VPC Impact Acquisition Holdings Sponsor, LLC (the “Sponsor”).
The Company is not limited to a particular industry or sector for purposes of consummating a Business Combination. The Company is an early stage and emerging growth company and, as such, the Company is subject to all of the risks associated with early stage and emerging growth companies.
As of December 31, 2020, the Company had not commenced any operations. All activity for the period from July 31, 2020 (inception) through December 31, 2020 relates to the Company’s formation, its initial public offering (“Initial Public Offering”), which is described below, and subsequent to the Initial Public Offering, identifying a target company for a Business Combination. The Company will not generate any operating revenues until after the completion of a Business Combination, at the earliest. The Company generates non-operating income in the form of interest income from the proceeds derived from the Initial Public Offering.
The registration statement for
the Company’sVIH’s Initial Public Offering was declared effective on September 22, 2020. On September 25, 2020,
the CompanyVIH consummated the Initial Public Offering of 20,000,000 units (the “Units”
and, with respect to the Class A ordinary shares included in the Units sold, the “Public Shares”), generating gross proceeds of
$200,000,000 which is described in Note 3.$200.0 million. Simultaneously with the closing of the Initial Public Offering, the CompanyVIH consummated the sale of 6,000,000 warrants (the “Private Placement Warrants”“private placement warrants”) at a price of $1.00 per Private Placement Warrantprivate placement warrant in a private placement to VPC Impact Acquisition Holdingsthe Sponsor, LLC (the “Sponsor”), generating gross proceeds of $6,000,000, which is described in Note 4.
$6.0 million. On September 29, 2020, the underwriters notified the CompanyVIH of their intention to partially exercise their over-allotment option on October 1, 2020. As such, on October 1, 2020, the CompanyVIH 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,private placement warrants, at $1.00 per Private Warrant,private placement warrant, generating total gross proceeds of $7,519,460.
Transaction costs charged to equity amounted to $11,906,606, consisting of $4,147,440 of underwriting fees, $7,258,021 of deferred underwriting fees and $501,145 of other offering costs. In addition, at September 25, 2020 cash of $1,205,178 was held outside of the Trust Account (as defined below) and is available for working capital purposes.
$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 $207,372,020$207.4 million ($10.00 per Unit) from the net proceeds of the sale of the Units in the Initial Public Offering and the sale of the Private Placement Warrantsprivate placement warrants, net of transaction costs, was placed in a trust account (the “Trust Account”).
On October 15, 2021 (the “Closing Date”), VIH and investedBakkt 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 (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 U.S. government securities, withinan 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 meaning set forthmanaging member interest in Section 2(a)(16)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 Investmentaccompanying consolidated financial statements (the “financial statements”). Refer to Note 4 for further discussion on the VIH Business Combination.
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, simplified solutions focused in the following areas:
Crypto
•Custody. Our institutional-grade qualified custody solution caters to more experienced market participants. Crypto that we custody is held by our subsidiary, Bakkt Trust Company Act of 1940, as amended (the “Investment Company Act”LLC (“Bakkt Trust”), with a maturity of 185 days or less, or in any open-ended investmentlimited 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 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 is a limited-purpose trust company that operates, in conjunction with ICE, regulated infrastructure for trading, clearing, and custody services for physically-delivered bitcoin futures. Bakkt Marketplace holds itself outa New York State virtual currency license, money transmitter licenses from all states throughout the U.S. where such licenses are required, and is registered as a money market fund investing solely in U.S. Treasuries and meeting certain conditions under Rule 2a-7services business with the Financial Crimes Enforcement Network of the Investment Company Act, as determined by the Company, until the earliest of: (i) the completion of a Business Combination and (ii) the distributionUnited States Department of the funds in the Trust AccountTreasury. Bakkt Trust’s custody solution provides support to the Company’s shareholders, as described below.
VPC IMPACT ACQUISITION HOLDINGS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2020
The Company’s management has broad discretionBakkt Marketplace with respect to Bitcoin and Ether functionalilty.
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
Basis of Presentation and Consolidation
As a result of the specificVIH Business Combination, we evaluated if VIH or Opco was the predecessor for accounting purposes. In connection therewith, we considered the application of Rule 405 of Regulation C, the net proceedsinterpretive guidance of the Initial Public Offering and the salestaff of the Private Placement Warrants, although substantially allSEC, including factors for registrants to consider in determining the predecessor, and analyzed the following: (1) the order in which the entities were acquired, (2) the size of the net proceeds are intended to be applied generally toward consummating a Business Combination. The stock exchange listing rules require thatentities, (3) the Business Combination must be with one or more operating businesses or assets with a fair market value equal to at least 80% of the assets heldentities, (4)
the historical and ongoing management structure, and (5) how management discusses our business in
this Form 10-K. In considering the
Trust Account (excludingforegoing principles of predecessor determination in light of our specific facts and circumstances, we determined that Opco is the
deferred underwriting commissions and taxes payable onpredecessor for accounting purposes. The financial statement presentation includes the
interest earned on the Trust Account). The Company will only complete a Business Combination if the post-Business Combination company owns or acquires 50% or morefinancial statements of
the issued and outstanding voting securities of the target or otherwise acquires a controlling interest in the target business sufficientOpco as “Predecessor” for
it not to be required to register as an investment company under the Investment Company Act. There is no assurance that the Company will be able to successfully effect a Business Combination.The Company will provide the holders of the public shares (the “Public Shareholders”) with the opportunity to redeem all or a portion of their public shares upon the completion of the Business Combination, either (i) in connection with a general meeting called to approve the Business Combination or (ii) by means of a tender offer. The decision as to whether the Company will seek shareholder approval of a Business Combination or conduct a tender offer will be made by the Company, solely in its discretion. The Public Shareholders will be entitled to redeem their Public Shares, equal to the aggregate amount then on deposit in the Trust Account, calculated as of two business daysperiods prior to the consummationClosing Date and the financial statements of the Business Combination (initially $10.00 per Public Share),Company as “Successor” for the period after the Closing Date, including interest (which interest shall be netthe consolidation of taxes payable), divided byOpco. Refer to Note 4 for further discussion on the number of then issued and outstanding public shares, subject to certain limitations as described in the prospectus. The per-share amount to be distributed to the Public Shareholders who properly redeem their shares will not be reduced by the deferred underwriting commissions the Company will pay to the underwriters (as discussed in Note 6). There will be no redemption rights upon the completion of a Business Combination with respect to the Company’s warrants.
The Company will proceed with a Business Combination only if the Company has net tangible assets of at least $5,000,001 and, if the Company seeks shareholder approval, it receives an ordinary resolution under Cayman Islands law approving a Business Combination, which requires the affirmative vote of a majority of the shareholders who attend and vote at a general meeting of the Company. If a shareholder vote is not required and the Company does not decide to hold a shareholder vote for business or other legal reasons, the Company will, pursuant to its Amended and Restated Memorandum and Articles of Association, conduct the redemptions pursuant to the tender offer rules of the U.S. Securities and Exchange Commission (“SEC”), and file tender offer documents containing substantially the same information as would be included in a proxy statement with the SEC prior to completing aVIH Business Combination. If the Company seeks shareholder approval in connection with a Business Combination, the Sponsor has agreed to vote its Founder Shares (as defined in Note 5) and any Public Shares purchased during or after the Initial Public Offering in favor of approving a Business Combination. Additionally, each Public Shareholder may elect to redeem their Public Shares, without voting, and if they do vote, irrespective of whether they vote for or against a proposed Business Combination.
Notwithstanding the foregoing, if the Company seeks shareholder approval of the Business Combination and the Company does not conduct redemptions pursuant to the tender offer rules, a Public Shareholder, together with any affiliate of such shareholder or any other person with whom such shareholder is acting in concert or as a “group” (as defined under Section 13 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), will be restricted from redeeming its shares with respect to more than an aggregate of 15% of the Public Shares without the Company’s prior written consent.
The Sponsor has agreed (a) to waive its redemption rights with respect to any Founder Shares and Public Shares held by it in connection with the completion of a Business Combination and (b) not to propose an
VPC IMPACT ACQUISITION HOLDINGS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2020
amendment to the Amended and Restated Memorandum and Articles of Association (i) to modify the substance or timing of the Company’s obligation to allow redemption in connection with the Company’s initial Business Combination or to redeem 100% of the Public Shares if the Company does not complete a Business Combination within the Combination Period (as defined below) or (ii) with respect to any other provision relating to shareholders’ rights or pre-initial business combination activity, unless the Company provides the Public Shareholders with the opportunity to redeem their Public Shares upon approval of any such amendment at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the Trust Account, including interest earned on the Trust Account and not previously released to pay taxes, divided by the number of then issued and outstanding Public Shares.
The Company will have until September 25, 2022 to consummate a Business Combination (the “Combination Period”). However, if the Company has not completed a Business Combination within the Combination Period, the Company will (i) cease all operations except for the purpose of winding up, (ii) as promptly as reasonably possible but not more than ten business days thereafter, redeem 100% of the Public Shares, at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the Trust Account, including interest earned and not previously released to the Company to pay its taxes, if any (less up to $100,000 of interest to pay dissolution expenses), divided by the number of then issued and outstanding Public Shares, which redemption will completely extinguish the rights of the Public Shareholders as shareholders (including the right to receive further liquidating distributions, if any), and (iii) as promptly as reasonably possible following such redemption, subject to the approval of the Company’s remaining Public Shareholders and its Board of Directors, liquidate and dissolve, subject in each case to the Company’s obligations under Cayman Islands law to provide for claims of creditors and the requirements of other applicable law. There will be no redemption rights or liquidating distributions with respect to the Company’s warrants, which will expire worthless if the Company fails to complete a Business Combination within the Combination Period.
The Sponsor has agreed to waive its rights to liquidating distributions from the Trust Account with respect to the Founder Shares it will receive if the Company fails to complete a Business Combination within the Combination Period. However, if the Sponsor or any of its respective affiliates acquire Public Shares, such Public Shares will be entitled to liquidating distributions from the Trust Account if the Company fails to complete a Business Combination within the Combination Period. The underwriters have agreed to waive their rights to their deferred underwriting commission (see Note 6) held in the Trust Account in the event the Company does not complete a Business Combination within the Combination Period, and in such event, such amounts will be included with the other funds held in the Trust Account that will be available to fund the redemption of the Public Shares. In the event of such distribution, it is possible that the per share value of the assets remaining available for distribution will be less than the Initial Public Offering price per Unit ($10.00).
In order to protect the amounts held in the Trust Account, the Sponsor has agreed that it will be liable to the Company if and to the extent any claims by a third party (other than the Company’s independent registered public accounting firm) for services rendered or products sold to the Company, or a prospective target business with which the Company has discussed entering into a transaction agreement, reduce the amount of funds in the Trust Account to below the lesser of (1) $10.00 per Public Share and (2) the actual amount per Public Share held in the Trust Account as of the date of the liquidation of the Trust Account, if less than $10.00 per Public Share, due to reductions in the value of trust assets, in each case net of the interest that may be withdrawn to pay taxes. This liability will not apply to any claims by a third party who executed a waiver of any and all rights to seek access to the Trust Account and as to any claims under the Company’s indemnity of the underwriters of the Initial Public Offering against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the “Securities Act”). In the event that an executed waiver is deemed to be unenforceable against a third party, the Sponsor will not be responsible to the extent of any liability for such third-party claims. The
VPC IMPACT ACQUISITION HOLDINGS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2020
Company will seek to reduce the possibility that the Sponsor will have to indemnify the Trust Account due to claims of creditors by endeavoring to have all vendors, service providers (other than the Company’s independent registered public accounting firm), prospective target businesses or other entities with which the Company does business, execute agreements with the Company waiving any right, title, interest or claim of any kind in or to monies held in the Trust Account.
Francis
Liquidity and Capital Resources
As of December 31, 2020, the Company had approximately $1.2 million in its operating bank accounts and working capital of approximately $0.5 million.
Prior to the completion of the Initial Public Offering, the Company’s liquidity needs had been satisfied through a contribution of $25,000 from Sponsor to cover for certain formation and offering costs in exchange for the issuance of the Founder Shares, the loan of up to $300,000 from the Sponsor pursuant to the Note (see Note 5), and the proceeds from the consummation of the Private Placement not held in the Trust Account. The Note was repaid on September 25, 2020. In addition, in order to finance transaction costs in connection with a Business Combination, the Sponsor or an affiliate of the Sponsor, or certain of the Company’s officers and directors may, but are not obligated to, provide the Company Working Capital Loans (see Note 5). As of December 31, 2020, there were no amounts outstanding under any Working Capital Loan.
Based on the foregoing, management believes that the Company will have sufficient working capital and borrowing capacity to meet its needs through the earlier of the consummation of a Business Combination or one year from this filing. Over this time period, the Company will be using these funds for paying existing accounts payable, identifying and evaluating prospective initial Business Combination candidates, performing due diligence on prospective target businesses, paying for travel expenditures, selecting the target business to merge with or acquire, and structuring, negotiating and consummating the Business Combination.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying audited consolidated financial statements have beenare prepared in accordance with accounting principlesUnited States generally accepted in the United States of Americaaccounting principles (“U.S. GAAP”) and pursuantinclude 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 rules and regulations of the SEC.
Emerging Growth Company
The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.
Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not
VPC IMPACT ACQUISITION HOLDINGS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2020
had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Company’saccompanying consolidated financial statements with another public company whichin 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 historical financial information is
neither an emerging growth company nor an emerging growth company which has opted outnot necessarily indicative of
using the extended transition period difficult or impossible becauseour future results of
the potential differences in accounting standards used.operations, financial position, and cash flows.
The preparation of financial statements in conformity with U.S. GAAP requires the Company’s management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. The significant estimates and assumptions that affect the financial statements may include, but are not limited to, those that are related to income tax valuation allowances, useful lives of intangible assets and property, equipment and software, fair value of financial assets and liabilities, determining provision for doubtful accounts, valuation of acquired tangible and intangible assets and the impairment of intangible assets and goodwill, as well as fair market value of Opco common units, incentive units and participation units in the Predecessor period. Actual results may materially differ from management’s estimates.
Segment Information
We have one operating and reportable segment. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker, who is our chief executive officer (“CEO”), in deciding how to allocate resources and assessing performance. All material operations are within the United States. Our chief operating decision maker allocates resources and assesses performance based upon financial information at the consolidated level.
Cash and Cash Equivalents and Restricted Cash
We consider all short-term, highly liquid investments with maturities from the purchase date of three months or less to be cash equivalents. Cash equivalents consists of amounts invested in money market funds of $0.2 million and $343.1 million as of December 31, 2022 and 2021, respectively.
We classify all cash and cash equivalents that are not available for immediate or general business use as restricted. Restricted cash includes amounts set aside due to regulatory requirements. Refer to Note 13 for additional information.
Customer Funds and Customer Funds Payable
Customer funds represents fiat currency deposited in digital wallets. In accordance with state money transmitter laws, we may invest customer cash deposits in certain permissible investments. As of December 31, 2022, we had not made any such investments. We classify the assets as current since they are readily available for customer use with a corresponding customer funds payable liability.
Translation of Foreign Currencies and Foreign Currency Transactions
Our foreign subsidiaries’ functional currencies are their respective local currencies. The assets and liabilities of foreign subsidiaries are translated into U.S. dollars at the exchange rate at the balance sheet date. Revenue and expenses are translated using average monthly rates. Translation adjustments are included in “Accumulated other comprehensive loss” on the consolidated balance sheets and reflected as “Currency translation adjustment, net of tax” in the consolidated statements of comprehensive loss.
Transactions denominated in currencies other than the functional currency are remeasured based on the exchange rates at the time of the transaction. Monetary assets and liabilities are translated at the rate in effect at the balance sheet date, with subsequent changes in exchange rates resulting in transaction gains or losses, which are included in “Other income (expense), net” in the consolidated statements of operations. Non-monetary assets and liabilities are translated at historical rates and revenue and expenses are translated at average rates in effect during each reporting period.
Accounts Receivable and Allowance for Doubtful Accounts
We classify rights to consideration in exchange for services or goods as accounts receivables. Accounts receivable are rights to consideration that are unconditional (i.e., only the passage of time is required before payment is due). “Accounts receivable, net” includes billed and contract assets (i.e., unbilled receivables), net of an estimated allowance for doubtful accounts. We calculate the allowance using the current expected credit loss model. The allowance is based upon historical loss patterns, the number of days that billings are past due and, an evaluation of the potential risk of loss associated with delinquent accounts and incorporates the use of forward-looking information over the contractual term of our accounts receivable. Receivables are written-off and charged against our recorded allowance when we have exhausted collection efforts without success. The allowance for doubtful accounts was $0.2 million and $0.2 million as of December 31, 2022 and 2021, respectively. There were no write-offs of receivables during the year ended December 31, 2022, and the periods from October 15, 2021 through December 31, 2021 and January 1, 2021 through October 14, 2021.
Property, Equipment and Software, Net
Property, equipment and software are stated at cost, less accumulated depreciation and amortization.
Costs related to software we develop or obtain for internal use are included in “Property, equipment and software, net”. Costs incurred during the preliminary or maintenance development stage are expensed, and costs incurred during the application development stage are capitalized and are amortized over the useful life of the software.
Depreciation and amortization are computed using the straight-line method over the following estimated useful lives of assets:
| | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Year ended December 31, 2022 | | October 15, 2021 through December 31, 2021 | | | January 1, 2021 through October 14, 2021 |
| Internal use software | 3-7 years | | 3-7 years | | | 3-7 years |
| Purchased software | 3 years | | 3 years | | | 3 years |
| Assets under finance lease | 2-5 years | | 2-5 years | | | 2-5 years |
| Office, furniture and equipment | 7-10 years | | 7-10 years | | | 7-10 years |
| Leasehold improvements | 7 years | | 7 years | | | 7 years |
| Other computer and network equipment | 3 years | | 3 years | | | 3 years |
Leases
We determine if an arrangement is a lease and whether it is classified as finance or operating at the inception of the contract. We recognize the lease at its commencement date on the balance sheet as a liability for our obligation related to the lease and a corresponding asset representing our right to use the underlying asset over the period of use. Leases with an initial term of 12 months or less are not recorded on the balance sheet and the lease expense for these leases is recognized on a straight-line basis over the lease term.
The lease liability for each lease is recognized as the present value of the lease payments not yet paid at the commencement date. The right-of-use (“ROU”) asset for each lease is recorded at the amount equal to the initial measurement of lease liability, adjusted for balances of prepaid rent, lease incentives received and initial direct costs incurred.
When determining lease term, we consider renewal options that are reasonably certain to exercise and termination options that are reasonably certain to not be exercised, in addition to the non-cancellable lease term.
For operating leases, expense is generally recognized on a straight-line basis over the lease term and is recorded within “Selling, general and administrative”. For finance leases, interest on lease liability is recognized using the effective interest method, while the ROU asset is amortized on a straight-line basis over the shorter of the useful life of the ROU asset or the lease term. Interest on lease liability is recorded within “Interest income (expense), net”, and amortization of right-of-use assets is recorded within “Depreciation and amortization”.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. The period of depreciation and amortization of long-lived assets is evaluated to determine whether events or circumstances warrant revised estimates of useful lives. When indicators of impairment are present, the recoverability of our long-lived assets is determined by comparing the carrying value of the long-lived assets to the total amount of undiscounted net cash flows expected to result from the use of the assets and their eventual disposition. If the estimated future undiscounted cash flows demonstrate the long-lived assets are not recoverable, an impairment loss would be calculated based on the excess of the carrying amounts of the long-lived assets over their fair value. We recorded impairment charges of $11.5 million, $1.2 million and $3.6 million related to long-lived assets during the year ended December 31, 2022, and the periods from October 15, 2021 through December 31, 2021 and January 1, 2021 through October 14, 2021, respectively. Refer to Note 6 for additional information.
Business Combinations
We account for our business combinations using the acquisition accounting method, which requires us to determine the fair value of identifiable assets acquired and liabilities assumed, including any contingent consideration, to properly allocate the purchase price to the individual assets acquired and liabilities assumed and record any residual purchase price as goodwill in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations. We identify and attribute fair values and estimated lives to the intangible assets acquired and allocate the total cost of an acquisition to the underlying net assets based on their respective estimated fair values. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and involves the use of significant estimates, including projections of future cash inflows and outflows, discount rates and asset lives. These determinations will affect the amount of amortization expense recognized in future periods. We base our fair value estimates on assumptions we believe are reasonable but recognizes that the assumptions are inherently uncertain.
For business combinations effected through a common control transaction, we measure the recognized net assets of the acquiree at the carrying amounts of the net assets previously recognized by our related party. We reflect the
operations of entities acquired through a common control transaction in our financial statements as of the first date in the reporting period or as of the date that the entity was acquired by our related party, as applicable.
If the initial accounting for the business combination has not been completed by the end of the reporting period in which the business combination occurs, provisional amounts are reported to present information about facts and circumstances that existed as of the acquisition date. Once the measurement period ends, which in no case extends beyond one year from the acquisition date, revisions to the accounting for the business combination are recorded in earnings.
All acquisition-related costs, other than the costs to issue debt or equity securities, are accounted for as expenses in the period in which they are incurred.
Goodwill and Intangible Assets
Goodwill and intangible assets that have indefinite useful lives are accounted for in accordance with ASC 350, Intangibles — Goodwill and Other. We allocate the cost of an acquired entity to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the acquisition consideration transferred over the fair value of the net assets acquired, including other intangible assets, is recorded as goodwill. Goodwill is tested for impairment at the reporting unit level, and we are organized and operate as a single reporting unit. Goodwill and indefinite-lived intangible assets are tested at least annually or more frequently when events or circumstances occur that indicate that it is more likely than not that an impairment has occurred. In assessing goodwill and intangible assets for impairment, we first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. In the qualitative assessment, we may consider factors such as economic conditions, industry and market conditions and developments, overall financial performance and other relevant entity-specific events in determining whether it is more likely than not that the fair value of the reporting unit is less than the carrying amount. Should we conclude that it is more likely than not that the recorded goodwill and intangible assets amounts have been impaired, we would perform the impairment test. An impairment loss is recognized in earnings if the estimated fair value of a reporting unit or indefinite lived intangible asset is less than the carrying amount of the reporting unit or intangible asset. Significant judgment is applied when goodwill and intangible assets are assessed for impairment.
Identifiable intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives and are also reviewed at least annually for impairment or more frequently if conditions exist that indicate that an asset may be impaired.
We recorded $1,822.1 million of impairment charges related to goodwill and other intangible assets during the year ended December 31, 2022. We did not record any impairment charges related to goodwill and other intangible assets during the periods from October 15, 2021 through December 31, 2021 and January 1, 2021 through October 14, 2021. Refer to Note 5 for additional information.
Revenue Recognition
We recognize revenue when we transfer promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services.
Crypto Services
Crypto Services revenues are derived from our custody services, our crypto marketplace and the Triparty agreement,.
Custody: For customers with custody accounts related to physically-delivered bitcoin futures contracts and options contracts (collectively, “PDF Contracts”), we do not charge a fee specifically for the custody service. For customers using custody services on a standalone basis, we charge a fee, which is generally based on a fixed fee and represents fixed consideration. We invoice customers on a quarterly basis. Our performance obligation related to the
storage and custody of a customer’s cryptoasset represents an obligation to provide custody services for crypto. The contract for custodial services may be terminated by the applicable institution or high net worth individual at any time upon final withdrawal of all crypto, without incurring a penalty. As a result, we believe our contracts represent day-to-day contracts with each day representing a renewal. These renewals are priced consistently with the original contract and with other similar customers and as such, we do not believe that they represent a material right.
The daily contract consists of a single performance obligation to provide custodial services, with the transaction price equal to a pro rata portion (i.e., daily) of the annual custody fee. Our performance obligation to provide custodial services meets the criterion to be satisfied over time. Revenue from our custodial services is included in “Net revenues” in the statements of operations.
Revenue from our custody services is included in “Subscription and services revenue” in the disaggregation of revenue by service type table within Note 3.
Crypto: Crypto services platform revenues are transaction fees earned by Bakkt Marketplace.As part of our operation of the crypto services platform, we transact in bitcoin and ether with consumers. Consumer crypto transactions were not material for year ended December 31, 2022 and for the periods from October 15, 2021 through December 31, 2021 and January 1, 2021 through October 14, 2021.
Additionally, as part of our operation of the crypto platform, we transact in crypto with our trading clients in order to adjust our cryptoasset inventory based on actual consumer activity to maintain an inventory consistent with our inventory policy. Transactions in crypto with our trading clients in the normal course of business were not material for the year ended December 31, 2022 and for the periods from October 15, 2021 through December 31, 2021 and January 1, 2021 through October 14, 2021.
We maintain an inventory reserve of crypto to facilitate consumer transactions if needed. We may adjust our inventory reserve levels under our inventory policy. Sales of crypto resulting from inventory reserve adjustments are not part of our normal course of business. Accordingly, proceeds from the sale of crypto outside of the normal course of business are included in “Other income (expense), net,” net of the cost of cryptoasset sold, in the statements of operations. We did not recognize any income from the sale of crypto during the year ended December 31, 2022 or the period from October 15, 2021 through December 31, 2021. We recognized income from the sale of crypto, net of the cost of crypto sold, of $1.0 million for period from January 1, 2021 through October 14, 2021.
Triparty Agreement: The Digital Currency Trading, Clearing, and Warehouse Services Agreement with ICE Futures U.S., Inc. (“IFUS”) and ICE Clear US, Inc. (“ICUS”) (the “Triparty Agreement”) governs the trading, clearing and custody services for PDF Contracts. We have concluded that we have a single performance obligation to provide a stand-ready custody function that supports the trading and clearing services provided by IFUS and ICUS, respectively. We have concluded that the related activities that collectively comprise this single performance obligation are not separately identifiable within the context of the Triparty Agreement, as all are necessary in order for IFUS and ICUS to offer PDF Contracts.
We consider the transaction price to be the net transaction fee received from IFUS and ICUS or paid to IFUS and ICUS. Rebates offered by IFUS to support market liquidity and trading volume represent consideration payable to a customer and reduce the transaction price; as such, these rebates are included in “Net revenues”. Because these rebates are measured and resolved within the same reporting period, it is not necessary for us to estimate these at a given reporting period date.
We determine the obligation period associated with Triparty Agreement revenue using the portfolio method based on our historical transaction experience. Therefore, we recognize revenue for the stand-ready custody services that we provide to IFUS and ICUS on a straight-line basis over the average performance obligation period, which is less than one month.
We also recognize a capital contribution for the cost of the trading and clearing services provided by IFUS and ICUS pursuant to the Contribution Agreement, which reduces the revenue recognized as part of the net transaction fee. See Note 10 for more information.
Revenue from the Triparty Agreement is included in “Transaction revenue, net” in the disaggregation of revenue by service type table within Note 3. Revenue from the Triparty Agreement was not material during the year ended December 31, 2022 or the periods from October 15, 2021 through December 31, 2021 and January 1, 2021 through October 14, 2021.
Loyalty redemption platform
We host, operate and maintain a loyalty redemption platform connecting loyalty programs to e-commerce merchants allowing loyalty point holders to redeem a spectrum of loyalty currencies for crypto, merchandise and services. Our customer in these arrangements is generally the loyalty program sponsor. Our contracts related to our loyalty redemption platform consist of two performance obligations: (1) access to our software as a service (“SaaS”)-based redemption platform and customer support services and (2) facilitation of order fulfillment services. We are the principal related to providing access to our redemption platform. We are acting as the agent to facilitate order fulfillment services on behalf of the loyalty program sponsor. Revenues generated from our loyalty redemption platform are included in “Net revenues” in the consolidated statements of operations and include the following:
•Platform subscription fees: Monthly fixed fee charged to customers to access the redemption platform and receive customer support services. We recognize revenue for these fees on a straight-line basis over the related contract term as the customer receives benefits evenly throughout the term of the contract. These fees are allocated to our performance obligation to provide access to our redemption platform, and thus are recognized on a gross basis. Revenue from our platform subscription fees is included in “Subscription and services revenue” in the disaggregation of revenue table by service type in Note 3.
•Transaction fees: Transaction fees are earned for most transactions processed through our platform. These fees are allocated to our performance obligation to provide order placement services on behalf of the loyalty program sponsor, and therefore are recognized net of the related redemption cost. We allocate transaction fees to the period in which the related transaction occurs. Revenue from our transaction fees is included in “Transaction revenue, net” in the disaggregation of revenue table by service type in Note 3.
•Revenue share fees: We are entitled to revenue share fees in the form of rebates from third-party commerce merchants and other clients which provide services facilitating redemption order fulfillment. We allocate revenue share fees to the period in which the related transaction occurs. Revenue from our revenue share fees is included in “Transaction revenue, net” in the disaggregation of revenue table by service type in Note 3.
•Service fees: We earn fees for certain software development activities associated with the implementation of new customers on our loyalty redemption platform and other development activities if a customer requests that we customize certain features and functionalities for their loyalty program. We also earn fees for providing call center services for customers. We recognize revenue from software development activities on a straight-line basis, beginning when the internally developed software resulting from such implementation or other development activities are operational in our platform over the longer of the remaining anticipated customer life and 3 years, which represents the estimated useful life of our internally developed software. Implementation and development service fees are generally billed when the implementation and development activities are performed. We recognize deferred revenue when all such fees are billed. We recognize revenue from call center services in the period in which we provide such services. Revenue from our services fees is included in “Subscription and services revenue” in the disaggregation of revenue table by service type in Note 3.
Practical expedients
We have elected the following practical expedients under ASC 606:
•Assessing the performance obligation period for Triparty Agreement transactions on a portfolio basis;
•Excluding sales taxes from the measurement of the transaction price;
•Not adjusting the transaction price for the existence of a significant financing component if the timing difference between a customer’s payment and our performance is one year or less; and
•Not providing disclosures about the transaction price allocated to unsatisfied performance obligations for contracts with a duration of one year or less or when the consideration is variable and allocated entirely to a wholly unsatisfied performance obligation or a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation.
Additionally, we have elected the practical expedient under ASC 340-40 to not capitalize incremental costs to obtain a contract with a customer if the amortization period would have been one year or less.
Refer to Note 3 for additional disclosures related to our recognition of revenue.
Safeguarding obligation for crypto: On March 31, 2022, the Securities and Exchange Commission 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. We adopted the guidance in SAB 121 during the quarter ended June 30, 2022.
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.
Deferred Revenue
Deferred revenue includes amounts invoiced and collected prior to our meeting the criteria for revenue recognition. We invoice customers for service fees at the time the service is performed, and such fees are recognized as revenue over time as we satisfy our performance obligation. The portion of deferred revenue to be recognized in the succeeding twelve-month period is recorded as current deferred revenue, and the remaining portion is recorded as non-current deferred revenue. We have determined that these arrangements do not contain a significant financing component, and therefore the transaction price is not adjusted.
Compensation and Benefits
Compensation and benefits expense primarily consists of salaries and wages, bonuses, contract labor fees, share-based compensation, unit-based compensation, payroll taxes and benefits associated with the compensation of our employees, excluding the accelerated unit-based compensation discussed in “Acquisition-related expenses,” and any contract labor not capitalized.
Restructuring Costs
The Company groups restructuring obligations into four categories: involuntary employee termination benefits, contractual employee termination benefits, costs to terminate contracts, and other associated costs. Involuntary employee termination benefits include cash and non-cash compensation and is recognized as incurred upon communication of the plan to the identified employees. Contractual employee termination benefits include cash and non-cash compensation owed
to an employee pursuant to their individual employment agreements. Cash termination benefits are recorded at the employee notice date, while non-cash compensation is recorded over any remaining service term. Costs to terminate contracts are recognized upon termination agreement with the provider. Other associated restructuring costs are expensed as incurred.
Professional Services
Professional services expenses consist of costs associated with audit, tax, legal and other professional services and are recognized as incurred.
Technology and Communication
Technology and communication expenses include costs incurred in operating and maintaining our platform, including software licenses, software maintenance and support, hosting and infrastructure costs.
Selling, General and Administrative
Selling, general and administrative expenses consist primarily of costs associated with advertising, marketing, insurance and rent. Advertising costs are expensed as incurred. Total advertising costs for the year ended December 31, 2022 and for the periods from October 15, 2021 through December 31, 2021 and January 1, 2021 through October 14, 2021, were $8.8 million, $2.6 million and $16.2 million, respectively.
Acquisition-Related Expenses
We incur incremental costs relating to acquisitions and other strategic opportunities. This includes fees for investment banking advisors, lawyers, accountants, tax advisors and public relations firms, as well as costs associated with other external costs directly related to the proposed or closed transactions. See Note 4 for additional information related to acquisition-related expenses.
Share-Based Compensation
Share-based compensation expense relates to the restricted stock units (“RSUs”) and performance stock units (“PSUs”) granted during the Successor period. Our RSUs and PSUs are measured at fair value on the date of grant and recognized as expense in “Compensation and benefits” over the requisite service period. Expense is recognized on a straight-line basis for awards that vest based solely on a service condition. In addition to a service condition, PSUs provide an opportunity to receive shares based on our performance as measured against objective performance goals. We record compensation expense for PSUs on an accelerated attribution basis based on our assessment of the probable outcome of the performance conditions at each reporting period. The fair value of our RSUs and PSUs is determined as the closing price of our Class A common stock on the date of grant. We account for forfeitures as they occur. See Note 11 for additional information about share-based compensation.
Unit-Based Compensation
The Successor period unit-based compensation expense relates to the replacement common incentive units and phantom units (“participation” units) granted during the Predecessor period that were issued to employees as purchase consideration. The replacement incentive units and participation units were measured at fair value on the Closing Date, and we recognize expense in “Compensation and benefits” in the consolidated statements of operations over the requisite service period. A portion of the prior year Successor period expense relates to the acceleration of compensation expense given the satisfaction of non-substantive service obligations upon the Closing Date for certain participation units. Additionally, we recognize variable compensation expense for liability-classified participation units based on changes to the fair value of the awards at each reporting date. We account for forfeitures as they occur. Any cancellations of common incentive units due to clawbacks or similar provisions are recognized in “Other income (expense), net” at the lesser of the
recognized compensation cost associated with the unit-based payment arrangement or the fair value of the consideration received.
The Predecessor period unit-based compensation expense related to incentive units and participation units granted to employees and was measured at fair value on the date of grant and recognized as expense in “Compensation and benefits” over the requisite service period, subject to acceleration if certain performance or market conditions were met. Additionally, we recognized variable compensation expense for liability-classified participation units based on changes to the fair value of the awards at each reporting date. We accounted for forfeitures in the Predecessor period as they occurred. See Note 11 for additional information about unit-based compensation.
Warrant Accounting
We account for our Class A common stock warrants in accordance with applicable accounting guidance provided in ASC Topic 815, Derivatives and Hedging—Contracts in Entity’s Own Equity, as either derivative liabilities or as equity instruments depending on the specific terms of the warrant agreement. We classify as equity any equity-linked contracts that (1) require physical settlement or net-share settlement or (2) give us a choice of net-cash settlement or settlement in our own shares (physical settlement or net-share settlement). We classify as assets or liabilities any equity-linked contracts that (1) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event is outside our control) or (2) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). All public and private placement warrants issued by us were deemed to qualify for liability classification. See Note 9 for additional information.
Noncontrolling Interest
Bakkt Holdings, Inc. is the sole managing member of Opco and, as a result, consolidates the financial results of Opco. We report a noncontrolling interest representing the portion of Opco that we control and consolidate but do not own. We recognize each noncontrolling holder’s respective share of the estimated fair value of the net assets at the date of formation or acquisition. Noncontrolling interest is subsequently adjusted by the noncontrolling holders’ share of additional contributions, distributions and their share of the net earnings or losses of each respective consolidated entity. We allocate net income or loss to noncontrolling interest based on the weighted average ownership interest during the period. The net income or loss that is not attributable to the Company is reflected in “Net loss attributable to noncontrolling interest”. Each Opco Common Unit, when coupled with one share of our Class V common stock is referred to as a “Paired Interest.” When Paired Interests are exchanged, 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 are accounted for as equity transactions. As such, future redemptions or direct exchanges or 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.
Income Taxes
We account for deferred federal and state income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and
disclosuretheir respective tax bases. Deferred tax assets are also recognized for the future tax benefits attributable to the expected utilization of
contingentexisting tax net operating loss carryforwards and other types of carryforwards. If the future utilization of some portion of deferred taxes is determined to be unlikely, a valuation allowance is provided to reduce the recorded tax benefits from such assets. Deferred tax assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.Making estimates requires managementare measured using enacted tax rates expected to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate, could changeapply to taxable income in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly fromyears in which those estimates.
Cashtemporary differences and Cash Equivalents
The Company considers all short-term investments with an original maturity of three months or less when purchased to be cash equivalents. The Company had no cash equivalents as of December 31, 2020.
Investments held in Trust Account
The Company’s portfolio of investments held in trust is comprised solely of U.S. Treasury money market funds, within the meaning set forth in Section 2(a)(16) of the Investment Company Act, with a maturity of 185 days or less, or investments in money market funds that invest in U.S. government securities, or a combination thereof. The Company’s investments held in the Trust Accountcarryforwards are classified as trading securities. Trading securities are presented on the balance sheet at fair value at the end of each reporting period. Gains and losses resulting from the change in fair value of these investments are included in interest earned on marketable securities held in Trust Account in the accompanying statement of operations. The estimated fair values of investments held in the Trust Account are determined using available market information.
Class A Ordinary Shares Subject to Possible Redemption
The Company accounts for its Class A ordinary shares subject to possible redemption in accordance with the guidance in Accounting Standards Codification (“ASC”) Topic 480 “Distinguishing Liabilities from Equity.” Ordinary shares subject to mandatory redemption are classified as a liability instrument and are measured at fair value. Conditionally redeemable ordinary shares (including ordinary shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) are classified as temporary equity. At all other times, ordinary shares are
VPC IMPACT ACQUISITION HOLDINGS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2020
classified as shareholders’ equity. The Company’s ordinary shares feature certain redemption rights that are considered to be outside of the Company’s control and subject to occurrence of uncertain future events. Accordingly, at December 31, 2020, 19,563,518 Class A ordinary shares subject to possible redemption are presented as temporary equity, outside of the shareholders’ equity section of the Company’s balance sheet.
Offering Costs
Offering costs consist of legal, accounting, underwriting fees and other costs incurred through the Initial Public Offering that are directly related to the Initial Public Offering. Offering costs amounting to $11,906,606 were charged to shareholders’ equity upon the completion of the Initial Public Offering.
Income Taxes
The Company accounts for income taxes under ASC Topic 740, “Income Taxes,” which prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be takenrecovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In the event interest or penalties are incurred with respect to income tax matters, our policy will be to include such items in income tax expense. We record deferred tax
assets and liabilities on a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The Company’s management determined thatnet basis on the Cayman Islands is the Company’s major tax jurisdiction. The Company recognizes accruedconsolidated balance sheets. We recognize interest and penalties related to unrecognizeduncertain tax benefits aspositions in income tax expense. As of December 31, 2020, there were no unrecognized tax benefits
Fair Value Measurements
We account for our financial assets and no amounts accruedliabilities that are recognized and/or disclosed at fair value on a recurring basis in accordance with ASC 820, Fair Value Measurements and Disclosures. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for interestassets and penalties. The Company is currently not aware of any issues under review that could result in significant payments, accrualsliabilities required or material deviation from its position.The Company is consideredpermitted to be an exempted Cayman Islands company with no connection to any other taxable jurisdiction and is presently not subject to income taxes or income tax filing requirements in the Cayman Islands or the United States. As such, the Company’s tax provision was zero for the period presented. The Company does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.
Net Loss Per Ordinary Share
The Company complies with accounting and disclosure requirements of FASB ASC Topic 260, “Earnings Per Share”. Net income (loss) per share is computed by dividing net income (loss) by the weighted average number of ordinary shares outstanding for the period. The calculation of diluted income (loss) per share does notrecorded at fair value, we consider the effectprincipal or most advantageous market in which we would transact, and we consider assumptions that market participants would use when pricing the asset or liability. ASC 820 establishes a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable and proscribes the following fair value hierarchy in determining fair values:
Level 1 — Quoted prices for identical assets or liabilities in active markets.
Level 2 — Inputs other than quoted prices within Level 1 that are observable either directly or indirectly, including quoted prices in active markets for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data such as interest rates or yield curves.
Level 3 — Unobservable inputs reflecting our view about the assumptions that market participants would use in measuring the fair value of the
warrants issued in connection with the (i) Initial Public Offering, and (ii) Private Placement Warrants since the exercise of the warrants are contingent upon the occurrence of future events and the inclusion of such warrants would be anti-dilutive. The warrants are exercisable to purchase 16,516,041 shares of Class A ordinary shares in the aggregate.The Company’s statement of operations includes a presentation of income (loss) per share for ordinary shares subject to possible redemption in a manner similar to the two-class method of income (loss) per share. Net income per share, basic and diluted, for Class A redeemable ordinary shares is calculated by dividing the interest income earned on the Trust Account of $4,193 for the period from July 31, 2020 (inception) through December 31, 2020 by the weighted average number of Class A redeemable ordinary shares outstanding for the period. Net loss per share, basic and diluted, for Class B non-redeemable ordinary shares is calculated by dividing the net loss, adjusted for income attributable to Class A redeemable ordinary shares of $4,193 by the weighted average number of Class B non-redeemable ordinary shares outstanding for the period. Class B non-redeemable ordinary shares includes the Founder Shares as these shares do not have any redemption features and do not participate in the income earned on the Trust Account.
assets or liabilities. VPC IMPACT ACQUISITION HOLDINGS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2020
The following table reflects the calculation of basic and diluted net income (loss) per ordinary share (in dollars, except per share amounts):
| | | | |
| | | For the Period
from
July 31, 2020
(inception)
Through
December 31,
2020 | |
Redeemable Class A Ordinary Shares | | | | |
Numerator: Earnings allocable to Redeemable Class A Ordinary Shares | | | | |
Interest Income | | $ | 4,193 | |
| | | | |
Redeemable Net Earnings | | $ | 4,193 | |
Denominator: Weighted Average Redeemable Class A Ordinary Shares | | | | |
Redeemable Class A Ordinary Shares, Basic and Diluted | | | 20,737,202 | |
Earnings/Basic and Diluted Redeemable Class A Ordinary Shares | | $ | — | |
| |
Non-Redeemable Class B Ordinary Shares | | | | |
Numerator: Net Income (Loss) minus Redeemable Net Earnings | | | | |
Net Income (Loss) | | $ | (1,002,669 | ) |
Redeemable Net Earnings | | $ | (4,193 | ) |
| | | | |
Non-Redeemable Net Loss | | $ | (1,006,862 | ) |
Denominator: Weighted Average Non-Redeemable Class B Ordinary Shares | | | | |
Non-Redeemable Class B Ordinary Shares, Basic and Diluted | | | 5,184,300 | |
Loss/Basic and Diluted Non-Redeemable Class B Ordinary Shares | | $ | (0.19 | ) |
As of December 31, 2020, basic and diluted shares are the same as there are no non-redeemable securities that are dilutive to the Company’s ordinary shareholders.
Concentration of Credit Risk
Financial instruments that potentially subject the Companyus to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, and accounts receivable, including unbilled accounts receivable. The associated risk of concentration for cash and cash equivalents and restricted cash is mitigated by banking with creditworthy institutions. At certain times, amounts on deposit exceed federal deposit insurance limits. We have not experienced any losses on our deposits of cash and cash equivalents.
As of December 31, 2022, and 2021, three customer balances represented approximately 65% and 53%, respectively, of total accounts receivable.
For the year ended December 31, 2022 and for the periods from October 15, 2021 through December 31, 2021 and January 1, 2021 through October 14, 2021, our top three customers represented approximately 52%, 46% and 55%, respectively, of total revenue. Three customers, that each represented over 10% of our net revenue, combined to account for net revenue of $28.6 million during the year ended December 31, 2022. Five customers, that each represented over 10% of our net revenue, combined to account for net revenue of $7.8 million during the period from October 15, 2021 through December 31, 2021. Three customers, that each represented over 10% of our net revenue, combined to account for net revenue of $15.3 million during the period from January 1, 2021 through October 14, 2021.
Investments
We were required to hold shares of Intercontinental Exchange, Inc. (“ICE”) stock for ICUS membership privileges prior to the withdrawal of our ICUS membership on May 20, 2020. These shares were carried at cost basis and evaluated periodically for impairment. Upon withdrawal of its ICUS membership, these shares were remeasured at fair value, with realized and unrealized gains and losses being reflected as “Other income (expense), net”. In June 2021, we sold all of our shares of ICE stock, resulting in a realized loss on the sale of shares of affiliate stock of $0.1 million for the period from January 1, 2021 through October 14, 2021.
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 cash account in amajor financial institution, which, at times, may exceed the Federal Depository Insurance Corporation coverage limits of $250,000. The Company has not experienced lossesinstitution.
Investments are classified as current or non-current depending on
this accounttheir maturity dates and
management believes the Company is not exposedwhen they are expected to
significant risks on such account.Fair Value of Financial Instruments
The fair value of the Company’s assets and liabilities, which qualify as financial instruments under ASC Topic 820, “Fair Value Measurement,” approximates the carrying amounts represented in the Company’s balance sheet, primarily due to their short-term nature.
Recentbe converted into cash.
Recently Adopted Accounting
StandardsManagement doesPronouncements
| | | | | | | | |
| Standard/Description | Effective Date and Adoption
Considerations | Effect on Financial Statements |
| ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40). | We early adopted on January 1, 2021. | This standard is effective for annual periods beginning after December 15, 2023, including interim periods therein, with early adoption permitted. The adoption of the new standard did not have a material impact on our consolidated financial statement amounts. |
| ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This standard requires that an acquirer recognize, and measure contract assets and liabilities acquired in a business combination in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606), or ASU 2021-08. | We early adopted on October 15, 2021 on a prospective basis. | This standard is effective for annual periods beginning after December 15, 2022, including interim periods therein, with early adoption permitted. We applied the guidance to the VIH Business Combination as it relates to the measurement of deferred revenue at the acquisition date. |
Recently Issued Accounting Pronouncements Not Yet Adopted
We do not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the Company’s financial statements.
VPC IMPACT ACQUISITION HOLDINGS
NOTES TO FINANCIAL STATEMENTS
DECEMBER
3.Revenue from Contracts with Customers
Disaggregation of Revenue
We disaggregate revenue by service type and by platform as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Service Type | Year ended December 31, 2022 | | October 15, 2021 through December 31, 2021 | | | January 1, 2021 through October 14, 2021 |
Transaction revenue, net(a) | $ | 27,884 | | | $ | 5,724 | | | | $ | 10,637 | |
| Subscription and service revenue | 26,683 | | | 5,757 | | | | 17,319 | |
| Total revenue | $ | 54,567 | | | $ | 11,481 | | | | $ | 27,956 | |
(a)Amounts are net of incentives, rebates and liquidity payments, reductions related to the Contribution Agreement and consideration payable to certain customers of $0.6 million for the year ended December 31, 2020NOTE 3—INITIAL PUBLIC OFFERING
Pursuant2022, and less than $0.1 million and $2.1 million for the periods from October 15, 2021 through December 31, 2021 and from January 1, 2021 through October 14, 2021, respectively. Included in these amounts are amounts earned from related parties of less than $0.1 million for the year ended December 31, 2022, and less than $0.1 million and $0.3 million for the periods from October 15, 2021 through December 31, 2021 and from January 1, 2021 through October 14, 2021, respectively.
| | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Platform | Year ended December 31, 2022 | | October 15, 2021 through December 31, 2021 | | | January 1, 2021 through October 14, 2021 |
| Loyalty redemption platform | 54,479 | | | 11,315 | |
| | 29,179 | |
Crypto services(b) | 88 | | | 166 | |
| | (1,223) | |
| Total revenue | $ | 54,567 | | | $ | 11,481 | |
| | $ | 27,956 | |
(b)Amounts are net of incentives, rebates and liquidity payments, reductions related to the Contribution Agreement and consideration payable to certain customers of $0.6 million for the year ended December 31, 2022, and less than $0.1 million and $2.1 million for the periods from October 15, 2021 through December 31, 2021 and from January 1, 2021 through October 14, 2021, respectively. Included in these amounts are amounts earned from related parties of less than $0.1 million for the year ended December 31, 2022, and less than $0.1 million and $0.3 million for the periods from October 15, 2021 through December 31, 2021 and from January 1, 2021 through October 14, 2021, respectively.
We recognized revenue from foreign jurisdictions of $3.8 million for the year ended December 31, 2022, and $0.8 million and $2.6 million for the periods from October 15, 2021 through December 31, 2021 and from January 1, 2021 through October 14, 2021, respectively.
We have one reportable segment. See Note 2 for additional information.
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 year ended December 31, 2022 and for the periods from October 15, 2021 through December 31, 2021 and January 1, 2021 through October 14, 2021 was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Year ended December 31, 2022 | | October 15, 2021 through December 31, 2021 | | | January 1, 2021 through October 14, 2021 |
| Beginning of the period contract liability | $ | 9,448 | | | $ | 9,423 | |
| | $ | 8,385 | |
| Revenue recognized from contract liabilities included in the beginning balance | (4,739) | | | (1,350) | |
| | (3,524) | |
| Increases due to cash received, net of amounts recognized in revenue during the period | 2,375 | | | 1,375 | |
| | 4,562 | |
| End of the period contract liability | $ | 7,084 | | | $ | 9,448 | |
| | $ | 9,423 | |
Remaining Performance Obligations
As of December 31, 2022, the aggregate amount of the transaction price allocated to the remaining performance obligations related to partially completed contracts was $27.5 million, comprised of $20.4 million of subscription fees and $7.1 million of service fees that are deferred. We will recognize our subscription fees as revenue over a weighted-average period of 35 months (ranges from 2 months – 45 months) and our service fees as revenue over approximately 17 months.
As of December 31, 2021, the aggregate amount of the transaction price allocated to the remaining performance obligations related to partially completed contracts is $26.0 million, comprised of $16.6 million of subscription fees and $9.4 million of service fees that are deferred. We will recognize our subscription fees as revenue over a weighted-average period of 50 months (ranges from 10 months – 57 months) and our service fees as revenue over approximately 36 months.
Contract Costs
For the year ended December 31, 2022, we did not incur any incremental costs to obtain and/or fulfill contracts with customers. For the periods from October 15, 2021 through December 31, 2021 and January 1, 2021 through October 14, 2021, we incurred $0.1 million and $0.7 million in incremental costs to obtain and/or costs to fulfill contracts with customers, respectively.
4.Business Combinations and Asset Acquisition
VIH Business Combination
The VIH Business Combination was completed on October 15, 2021. The VIH Business Combination was accounted for as a business combination under ASC 805. Opco constitutes a business, with inputs, processes, and outputs. Accordingly, the acquisition of Opco constitutes the acquisition of a business for purposes of ASC 805, and due to the change in control, has been accounted for using the acquisition method with the Company as the accounting acquirer and Opco as the accounting acquiree. We are the accounting acquirer based on an evaluation of the following factors:
•We are the sole managing member of Opco, the managing member has full and complete charge of all affairs of Opco and the existing non-managing member equity holders of Opco do not have substantive participating or kick out rights;
•The Sponsor and Opco jointly designated six of the initial eight members of the Board; and
•Equity Holders do not hold a controlling interest in the Company or Opco due to (1) the limitation imposed by the Voting Agreement entered into between the Company and ICE at Closing on ICE and its affiliates’ voting power to 30% of the total voting power of all shares of our Class A common stock, par value $0.0001 per share (“Class A common stock”), and our Class V common stock, par value $0.0001 per share (“Class V common stock” and, together with the Class A common stock, the “Common Stock”) that are issued and outstanding and entitled to vote as of the relevant record date so long as it owns shares of Common Stock representing more than 50% of the total voting power of the Company, and (2) ICE and its affiliates do not unilaterally control the Board, as only one out of the eight members of the Board is affiliated with ICE, and the majority of the Board are independent directors not affiliated with ICE.
These factors support the conclusion that the Company acquired a controlling interest in Opco and is the accounting acquirer. We are the primary beneficiary of Opco, which is a variable interest entity, since we have the power to direct the activities of Opco that most significantly impact Opco’s economic performance through our role as the managing member, and our ownership of Opco, which results in the right (and obligation) to receive benefits (and absorb losses) of Opco that could potentially be significant to us. Therefore, the VIH Business Combination constituted a change in control and was accounted for using the acquisition method. Under the acquisition method, as the accounting acquirer, VIH’s net assets and stockholders equity retain their carrying values. The estimated fair value of the purchase price is allocated to the assets acquired and the liabilities assumed from Opco based on their estimated acquisition-date fair values. Opening
successor cash and equity represent the carrying value of the accounting acquirer’s cash and equity and are not comparable to the predecessor cash and equity of Opco.
Included in the opening cash balance as of October 15, 2021 was $207.4 million from the proceeds of the sale of the units in VIH’s Initial Public Offering
and the
Company sold 20,000,000 Units, at a purchase price of $10.00 per Unit. In connection with the underwriters’ partial exercisesale of the
over-allotment option on October 1, 2020, the Company sold an additional 737,202 Units, at a purchase priceprivate placement warrants, net of
$10.00 per Unit. Each Unit consists of one Class A ordinary share and one-half of one redeemable warrant (“Public Warrant”). Each whole Public Warrant entitles the holder to purchase one Class A ordinary share at an exercise price of $11.50 per whole share (see Note 7).NOTE 4—PRIVATE PLACEMENT
Simultaneously with the closing of the Initial Public Offering, the Sponsor purchased an aggregate of 6,000,000 Private Placement Warrants at a price of $1.00 per Private Placement Warrant, for an aggregate purchase price of $6,000,000. In connection with the underwriters’ partial exercise of the over-allotment option on October 1, 2020, the Company sold an additional 147,440 Private Placement Warrants, at a purchase price of $1.00 per Private Placement Warrants, for an aggregate purchase price of $147,440. Each Private Placement Warrant is exercisable to purchase one Class A ordinary share at a price of $11.50 per share, subject to adjustment (see Note 7). A portion of the proceeds from the Private Placement Warrants were added to the proceeds from the Initial Public Offeringtransaction costs, that was previously held in the Trust Account. If the Company does not complete a Business Combination within the Combination Period, theThe cash proceeds from the sale of the Private Placement Warrants will beTrust Account were used to fund thefor transaction expenses, deferred underwriting commission, redemption of the Public Shares (subject to the requirements of applicable law)shares as described below, and the Private Placement Warrants will expire worthless.
NOTE 5—RELATED PARTY TRANSACTIONS
Founder Shares
On August 3, 2020, the Sponsor paid $25,000 to cover certain offering and formation costsoperating activities of the Company in considerationfollowing the VIH Business Combination.
We paid $84.5 million of cash for
5,750,000 Class B ordinarythe repurchase of 8,452,042 shares
(the “Founder Shares”). In September 2020, the Sponsor transferred an aggregate of 60,000 Founder Shares to members of the Company’s board of directors, resulting in the Sponsor holding 5,690,000 Founder Shares. The Founder Shares included an aggregate of up to 750,000 shares that were subject to forfeiture depending on the extent to which the underwriters’ over-allotment option was exercised, so that the number of Founder Shares would equal, on an as-converted basis, approximately 20% of the Company’s issued and outstanding ordinary shares after the Initial Public Offering. In connection with the underwriters’ partial exercise of the over-allotment option and the forfeiture of the remaining over-allotment option, 565,700 Founder Shares were forfeited and 184,300 Founder Shares are no longer subject to forfeiture resulting in an aggregate of 5,184,300 Founder Shares outstanding at October 1, 2020.The Sponsor has agreed, subject to limited exceptions, not to transfer, assign or sell any of the Founder Shares until the earliest of: (A) one year after the completion of a Business Combination and (B) subsequent to a Business Combination, (x) if the closing price of the Class A ordinary shares equals or exceeds $12.00 per share (as adjusted for share sub-divisions, share capitalizations, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after a Business Combination, or (y) the date on which the Company completes a liquidation, merger, share exchange or other similar transaction that results in all of the Public Shareholders having the right to exchange their Class A ordinary shares, for shareholders who elected to execute their redemption right, as presented within the financing activities of our statement of cash securities or other property.
Promissory Note—Related Party
On August 3, 2020, the Company issued an unsecured promissory note (the “Promissory Note”) to the Sponsor, pursuant to which the Company may borrow up to an aggregate principal amount of $300,000.flows. The
VPC IMPACT ACQUISITION HOLDINGS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2020
Promissory Note was non-interest bearing and payable on the earlier of (i) December 31, 2020 and (ii) the completion of the Initial Public Offering. The remaining 12,285,160 outstanding balance under the Promissory Note of $82,729 was repaid at the closing of the Initial Public Offering on September 25, 2020.
Administrative Services Agreement
Commencing on September 25, 2020, the Company entered into an agreement to pay the Sponsor up to $10,000 per month for office space, utilities, secretarial and administrative support services. Upon completion of a Business Combination or its liquidation, the Company will cease paying these monthly fees. As of December 31, 2020, $30,000 were earned and remained unpaid in the accrued expenses line item on the balance sheet.
Related Party Loans
In order to finance transaction costs in connection with a Business Combination, the Sponsor or an affiliate of the Sponsor, or certain of the Company’s officers and directors will loan, and have the means to provide the Company funds as may be required (“Working Capital Loans”). Such Working Capital Loans would be evidenced by promissory notes. The notes may be repaid upon completion of a Business Combination, without interest, or, at the lender’s discretion, up to $1,500,000 of notes may be converted upon completion of a Business Combination into warrants at a price of $1.00 per warrant. Such warrants would be identical to the Private Placement Warrants. In the event that a Business Combination does not close, the Company may use a portion of proceeds held outside the Trust Account to repay the Working Capital Loans but no proceeds held in the Trust Account would be used to repay the Working Capital Loans. As of December 31, 2020, the Company had no outstanding borrowings under the Working Capital Loans.
NOTE 6—COMMITMENTS AND CONTINGENCIES
Risks and Uncertainties
Management continues to evaluate the impact of the COVID-19 global pandemic on the industry and has concluded that while it is reasonably possible that the virus could have a negative effect on the Company’s financial position, results of its operations and/or search for a target company, the specific impact is not readily determinable as of the date of these financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Registration and Shareholders Rights
Pursuant to a registration rights agreement entered into on September 22, 2020, the holders of the Founder Shares, Private Placement Warrants and any warrants that may be issued upon conversion of Working Capital Loans (and any Class A ordinary shares issuableof the Company, par value $0.0001 per share (the “Class A Ordinary Shares”), and 5,184,300 Class B ordinary shares of the Company, par value $0.0001 per share (the “Class B Ordinary Shares”), were exchanged for an equivalent number of shares of Class A common stock.
We incurred $1.6 million of expenses directly related to the VIH Business Combination from October 15, 2021 through December 31, 2021, which are reflected as “Acquisition-related expenses” in the consolidated statements of operations. Opco incurred $24.8 million of expenses directly related to the VIH Business Combination from January 1, 2021 through October 14, 2021, which are reflected as “Acquisition-related expenses” in the consolidated statements of operations, including a $12.1 million success fee for an investment bank advising Opco. At Closing, we paid $7.3 million of deferred underwriting costs related to VIH’s initial public offering and $13.0 million of fees related to the $325.0 million in proceeds from the investors purchasing an aggregate of 32,500,000 shares of Class A common stock in connection with the VIH Business Combination (the “PIPE Investment”). The cash inflow from the PIPE Investment is presented net of issuance costs within the financing section of the statement of cash flows. The fees associated with the PIPE were treated as a reduction of equity. Additionally, at Closing, we paid $0.9 million as a prepayment on Directors and Officers (“D&O”) insurance which is included in “Other current assets” in the balance sheets.
Additionally, all outstanding membership interests and rights to acquire membership interests in Opco were exchanged for an aggregate of 208,200,000 Opco common units and an equal number of newly issued shares of our Class V common stock, par value $0.0001 per share (“Class V common stock”), which are non-economic, voting shares of the Company, of which 207,406,648 were outstanding and 793,352 reserved for issuance upon the exercise of a warrant agreement. Opco Equity Holders (as defined below) 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. Opco Class C warrants were exchanged for the Private Placement Warrants793,352 shares of Class V common stock referenced above. Opco incentive units were exchanged for 17,473,362 shares of Class V common stock.
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 warrantsRestated Limited Liability Company Agreement of Opco and the Exchange Agreement, dated as of October 15, 2021, as amended on May 15, 2022, between the Company and certain holders of Opco common units (the “Exchange Agreement”). Following the Closing, the Company owned approximately 20.3% of the Opco common units, with the remaining Opco common units being owned by the equity owners of Opco prior to the VIH Business Combination (the “Opco Equity Holders”).
The following table summarizes the estimated fair value of the purchase consideration paid to Opco Equity Holders (in thousands, except per unit data):
| | | | | |
| Consideration |
Equity consideration paid to Opco Equity Holders(1) | $ | 1,904,648 | |
Cash paid for redeemed Opco Incentive Units(2) | 1,488 | |
Cash paid for seller transaction costs(3) | 13,454 | |
| Total purchase consideration | $ | 1,919,590 | |
(1)The equity consideration paid to Opco Equity Holders is equal to the estimated fair value of noncontrolling interest on the acquisition date. Equity consideration paid to Opco Equity Holders consisted of the following:
| | | | | |
| Fair Value |
| Opco common units | 189,933 | |
| Fair value per unit | $ | 9.46 | |
| Fair value of Opco common units | $ | 1,796,769 | |
| Fair value of Opco common incentive units based on services rendered | 107,879 | |
| Equity consideration paid to Opco Equity Holders | $ | 1,904,648 | |
(2)Represents the cash paid to certain Opco Equity Holders in exchange for the redemption of 40% of the first one-third of their Opco common incentive units and preferred incentive units which vested at the effective time of the VIH Business Combination (see Note 11).
(3)Represents Opco’s liability to pay transaction costs as of the VIH Business Combination date, which was settled with cash received from the VIH Business Combination.
We recorded the allocation of the purchase price to Opco’s assets acquired and liabilities assumed based on their fair values as of October 15, 2021. The purchase price allocation is as follows (in thousands):
| | | | | |
| Fair Value |
| Cash and cash equivalents, restricted cash and customer funds | $ | 30,837 | |
| Accounts receivable, net | 17,009 | |
| Other current assets | 5,090 | |
| Property, equipment and software | 4,115 | |
| Deposits with clearinghouse, noncurrent (affiliate in Predecessor period) | 15,151 | |
| Intangible assets | 393,070 | |
| Goodwill | 1,527,071 | |
| Deferred tax asset | 140 | |
| Other assets | 3,002 | |
| Total assets acquired | 1,995,485 | |
| Accounts payable and accrued liabilities | (52,997) | |
| Due to related party (affiliate in Predecessor period) | (2,313) | |
| Other current liabilities | (3,140) | |
| Deferred revenue, current | (4,665) | |
| Participation unit liability | (6,756) | |
| Deferred revenue, noncurrent | (4,758) | |
| Other liabilities | (1,266) | |
| Total liabilities assumed | (75,895) | |
| Total purchase consideration | $ | 1,919,590 | |
The goodwill of $1,527.1 million represents the excess purchase price over the fair value of the net tangible and identifiable intangible assets acquired and liabilities assumed. Qualitative factors that contribute to the recognition of goodwill include certain intangible assets that are not recognized as separate identifiable intangible assets apart from goodwill. Intangible assets not recognized apart from goodwill consist primarily of expertise and industry know-how of the workforce, back-office infrastructure, strong market position and the assembled workforce of Opco. None of the goodwill recognized is expected to be deductible for income tax purposes.
The weighted average amortization period for the acquired intangible assets is 5.7 years. The fair value of the intangible assets is as follows (in thousands):
| | | | | | | | | | | |
| Weighted Average Useful Lives (in years) | | Fair Value |
Trademarks / trade names (1) | Indefinite | | $ | 39,470 | |
Licenses (2) | Indefinite | | 241,320 | |
Customer relationships (3) | 8.0 | | 44,970 | |
Technology (4) | 4.2 | | 67,310 | |
| Total intangible assets acquired | | | $ | 393,070 | |
(1)The trademarks / trade names represent those that Opco originated which were valued using the relief-from-royalty method.
(2)The licenses represent those that Opco acquired that were valued using the with-and-without method.
(3)The customer relationships represent the existing customer relationships of Opco that were valued by applying the multi-period excess earnings methodology.
(4)The technology represents technologies acquired and developed by Opco for the purpose of operating its platform, which were valued using the relief-from-royalty method.
Apex Crypto
On November 2, 2022, we entered into a definitive agreement with Apex Fintech Solutions, Inc. (“AFS”) pursuant to which we agreed to acquire all of the membership interests of Apex Crypto, LLC (“Apex”), a financial technology company with an integrated crypto trading platform, for consideration consisting of an initial purchase price of $55.0 million in cash, up to $45.0 million in shares of our Class A common stock that may be issued upon conversionearned if Apex achieves certain profitability growth targets for the fourth quarter of 2022, and up to an additional $100.0 million in shares of our Class A common stock depending on Apex’s achievement of certain financial targets through 2025. Subsequent to December 31, 2022, we determined the actual achievement of the Working Capital Loans) are entitledQ4 2022 profitability growth target would result in approximately $9.0 million Class A common stock being issued when the transaction closes. The transaction, which is subject to registration rights requiringregulatory approvals, is expected to close in the Companyfirst half of 2023. Under the terms of the transaction, Bakkt and AFS will, among other things, enter into a commercial agreement that memorializes the continued relationship and provision of Bakkt crypto solutions to registerAFS’s customers.
Bumped Acquisition
On February 8, 2023, we acquired 100% of the units of Bumped Financial, LLC (“Bumped”), a salebroker-dealer registered with the SEC and the Financial Industry Regulatory Authority, Inc. (“FINRA”), for cash consideration of $575,000. This acquisition required Bumped to file a Continuing Membership Application (“CMA”) with FINRA, and FINRA is currently reviewing the CMA to ensure that Bumped will continue to meet its regulatory obligations if the filing is approved.
5.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 | (2) | |
| Impairment | (1,511,264) | |
| Balance as of December 31, 2022 | $ | 15,852 | |
We commenced our annual strategic planning process in the third quarter of 2022, which included updating expected cryptoasset product activations in light of the cryptoasset market volatility and elongation of decision timeframes for activations of cryptoasset strategy by our clients. We assessed the changes in circumstances that occurred during the period ended September 30, 2022 to determine if it was more likely than not that the fair values of any indefinite-lived intangible assets, long-lived assets or goodwill were below their carrying amounts. Several determinative factors, including the elongated timing for expected cryptoasset product activations and the sustained decline in our market capitalization, led us to conclude that it was more likely than not that the fair value of our equity was lower than book basis as of September 30, 2022, and our indefinite-lived intangible assets, long-lived assets and goodwill should be evaluated for impairment as of September 30, 2022. We then performed quantitative impairment tests of the indefinite-lived intangible assets, long-lived assets, and goodwill.
After assessing the totality of circumstances and giving effect to the indefinite-lived intangible asset impairment described below, we concluded that the carrying value of our reporting unit exceeded its securities heldfair value and recorded a goodwill impairment of $1,389.9 million.
During the fourth quarter of 2022 a number of high-profile bankruptcies among cryptoasset companies exacerbated the volatility in the market for our services we observed in earlier in the year. This created a further depression of our stock price and created additional uncertainty about our ability to achieve the growth we expected when the impairment test as of September 30, 2022 was performed. Accordingly, we concluded our indefnite-lived intangible assets, long-lived assets and goodwill should be quantitatively tested for impairment as of December 31, 2022.
We concluded the carrying value of the reporting unit exceeded its fair value and recorded an incremental goodwill impairment of $121.4 million.
Our goodwill impairment analyses involved the use of a market approach and an income approach, with equal weighting given to both approaches. The market approach valuation was derived from metrics of publicly traded companies, which are Level 2 inputs. A significant judgment in using the market approach includes the selection of comparable businesses with consideration of risk profiles, size, geography, and business operations. Significant assumptions used in the income approach include growth (revenue, earnings before interest, taxes, depreciation, and amortization (EBITDA) and earnings before interest and taxes (EBIT) margin, and terminal value) and discount rates. We used historical performance and management estimates of future performance to estimate margins and revenue growth rates. Our growth rates and margins are impacted significantly by them.our ability to grow loyalty redemption transactions, cryptoasset trading volumes and subscription services. The holdersincome approach utilizes our projected cash flow estimates to determine fair value, which are unobservable, Level 3 inputs. Unobservable inputs are used to measure fair value to the extent that relevant observable inputs are not available. We developed our estimates using the best information available at the time and in consultation with third party valuation specialists. We used discount rates that are commensurate with the risks and uncertainty inherent in our business. Assumptions used, such as forecasted growth rates, capital expenditures, and our cost of capital, are consistent with our internal projections and operating plans. Changes in our estimates or any of our other assumptions used in our analysis could result in a different conclusion. Further declines in our market capitalization or the failure to execute on business objectives could result in future goodwill or intangible asset impairments.
For the impairment analysis conducted as of September 30, 2022 we also concluded that the fair value of our licenses and trademark/trade name indefinite-lived intangible assets fell below their carrying values and recorded impairments of $131.3 million and $26.5 million, respectively.
For the impairment analysis conducted as of December 31, 2022 we also concluded that the fair value of our licenses, trademark/trade name indefinite lived intangible assets and the technology finite lived intangible asset associated with our mobile app fell below their carrying values and recorded impairments of $110.0 million, $5.0 million, and $38.0 million, respectively.
Our impairment analysis for the licenses intangible asset involved the use of an income approach which estimated the value of the in place licenses as compared to cash flows if the licenses had to be obtained at a delay. Significant judgments used in this analysis are consistent with the inputs used in the income approach for the goodwill impairment analysis and the assumed time to obtain the licenses.
Our impairment analysis for the trademark/trade name involved the use of a relief from royalty approach, which estimates the value of the stream of payments a market participant would pay to make use of the in place trade name. Significant judgments in this analysis include forecasted revenue growth rates and the royalty rate.
The discount rate used in the valuations described above was 15.5%, which was 400 basis points higher than the discount rate assumed in the valuation of these securities will be entitled to make up to three demands, excluding short form demands, thatintangibles for the Company register such securities. In addition, the holders have certain “piggy-back” registration rights with respect to registration statements filed subsequent to the completion of aVIH Business Combination. The higher discount rate reflects the higher risk-free rate and beta observed as of September 30, 2022 and December 31, 2022 as compared to the October 15, 2021 VIH Business Combination valuation date.
Our goodwill was impacted by foreign currency translation of less than $0.1 million during the year ended December 31, 2022 and the periods from October 15, 2021 through December 31, 2021 and January 1, 2021 through October 14, 2021, respectively.
Intangible assets consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor |
| 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor |
| December 31, 2021 |
| 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 | | | — | | | — | | | 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 year ended December 31, 2022 was $21.8 million and is included in “Depreciation and amortization” in the consolidated statements of operations. Amortization of intangible assets for the periods from October 15, 2021 through December 31, 2021 and January 1, 2021 through October 14, 2021 was $4.6 million and $5.1 million, respectively, and is included in “Depreciation and amortization” in the consolidated statements of operations.
Estimated future amortization for definite-lived intangible assets as of December 31, 2022 was as follows (in thousands):
| | | | | |
| Years ending December 31: | |
| 2023 | $ | 8,173 | |
| 2024 | 8,196 | |
| 2025 | 8,173 | |
| 2026 | 7,628 | |
| 2027 | 5,621 | |
| Thereafter | 10,042 | |
| Total | $ | 47,833 | |
6.Consolidated Balance Sheet Components
Accounts Receivable, Net
Accounts receivable, net consisted of the following (in thousands):
| | | | | | | | | | | |
| As of |
| December 31, 2022 | | December 31, 2021 |
| Trade accounts receivable | $ | 16,284 | | | $ | 11,404 | |
| Unbilled receivables | 6,445 | | | 5,448 | |
| Other receivables | 2,787 | | | 1,500 | |
| Total accounts receivable | 25,516 | | | 18,352 | |
| Less: Allowance for doubtful accounts | (210) | | | (210) | |
| Total | $ | 25,306 | | | $ | 18,142 | |
Property, Equipment and Software, Net
Property, equipment and software, net consisted of the following (in thousands):
| | | | | | | | | | | |
| As of |
| December 31, 2022 | | December 31, 2021 |
| Internal-use software | $ | 4,383 | | | $ | 3,550 | |
| Purchased software | 99 | | | 17 | |
| Office furniture and equipment | 2,303 | | | 19 | |
| Other computer and network equipment | 4,732 | | | 2,991 | |
| Leasehold improvements | 10,102 | | | 277 | |
| Property, equipment and software, gross | 21,619 | | | 6,854 | |
| Less: Accumulated amortization and depreciation. | (1,875) | | | (733) | |
| Total | $ | 19,744 | | | $ | 6,121 | |
For the year ended December 31, 2022, and for the periods from October 15, 2021 through December 31, 2021 and January 1, 2021 through October 14, 2021, depreciation and amortization expense related to property, equipment and software amounted to $3.5 million, $0.8 million and $4.4 million, respectively, of which $1.7 million, $0.4 million and $3.6 million, respectively, related to amortization expense of capitalized internal-use software placed in service.
The Company will bear the expenses incurred in connectionconducted a quantitative impairment test of long-lived assets as of December 31, 2022 and concluded internal use software associated with the filingmobile app was fully impaired. An impairment charge of any such registration statements.$8.7 million was recognized in “Impairment of long-lived assets” in the consolidated statements of operations. Significant judgments in this analysis include the division of long-lived assets into asset groups and cashflow assumptions that are consistent with the inputs used in the income approach for the goodwill impairment analysis.
VPC IMPACT ACQUISITION HOLDINGS
NOTES TO FINANCIAL STATEMENTS
DECEMBERWe entered into a software license agreement that required a minimum usage fee of $0.7 million annually for the contract term. The license was capitalized at the present value of minimum license payments over the contract term. We recognized a corresponding liability for the license payments. The software license was being amortized over the contract term. During the period from October 15, 2021 through December 31, 2020
Underwriting Agreement
The underwriters are entitled2021, we terminated the software license agreement. As a result of the termination, we recorded an impairment charge of $1.2 million for the impairment of the related asset to a deferred feefair value of $0.35 per Unit, or $7,258,021$0 and income of $1.3 million for the extinguishment of the related liability based on Level 3 inputs. The impairment charge and income are reflected as “Impairment of long-lived assets” and “Other income (expense), net”, respectively.
Deposits with Clearinghouse
Deposits with clearinghouse, noncurrent, consisted of the default resource contribution as described in Note 8. The default resource contribution amounted to $15.2 million and $15.2 million as of December 31, 2022 and 2021, respectively.
On January 19, 2021, ICUS self-certified a rule change with the aggregate. The deferred fee will become payableCFTC, reducing Bakkt Trust’s financial contribution to the underwritersICUS guaranty fund to $15.2 million from $35.4 million. Following the two-week self-certification period, in which no comments were received from the amountsCFTC, 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 inwith ICUS.
Other Assets
Other assets consisted of the Trust Account solely infollowing (in thousands):
| | | | | | | | | | | |
| As of |
| December 31, 2022 | | December 31, 2021 |
| Operating lease right-of-use assets | $ | 19,632 | | | $ | 11,239 | |
| Other | 2,826 | | | 2,640 | |
| Total | $ | 22,458 | | | $ | 13,879 | |
Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consisted of the event thatfollowing (in thousands):
| | | | | | | | | | | |
| As of |
| December 31, 2022 | | December 31, 2021 |
| Accounts payable | $ | 25,975 | | | $ | 10,646 | |
| Accrued expenses | 15,537 | | | 20,130 | |
| Purchasing card payable | 10,686 | | | 17,698 | |
| Salaries and benefits payable | 13,926 | | | 13,349 | |
| Other | 663 | | | 2,267 | |
| Total | $ | 66,787 | | | $ | 64,090 | |
Other Current Liabilities
Other current liabilities consisted of the Company completesfollowing (in thousands):
| | | | | | | | | | | |
| As of |
| December 31, 2022 | | December 31, 2021 |
| Participation units liability, current | $ | 275 | | | $ | 2,027 | |
| Current maturities of operating lease liability | 3,014 | | | 615 | |
| Other | 530 | | | 1,075 | |
| Total | $ | 3,819 | | | $ | 3,717 | |
Other Noncurrent Liabilities
Other noncurrent liabilities consisted of the following (in thousands):
| | | | | | | | | | | |
| As of |
| December 31, 2022 | | December 31, 2021 |
| Participation units liability, noncurrent | $ | — | | | $ | 2,027 | |
| Operating lease liability, noncurrent | 23,402 | | | 10,647 | |
| Total | $ | 23,402 | | | $ | 12,674 | |
7.Tax Receivable Agreement
On October 15, 2021, we entered into a
Business Combination,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
underwriting agreement.NOTE 7—SHAREHOLDERS’ EQUITY
Preference Shares—The Company is authorizedExchange Agreement, including our right to issue 1,000,000 preference shares with a par value of $0.0001 per share, with such designations, voting and other rights and preferences as may be determined from timeelect to time by the Company’s board of directors. At December 31, 2020, there were no preference shares issued or outstanding.
Class A Ordinary Shares—The Company is authorized to issue 200,000,000 Class A ordinary shares, with a par value of $0.0001 per share. Holdersdeliver cash in lieu of Class A ordinary shares are entitled to one votecommon 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 share. Attaxable 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 December 31,
2020, there2022, 22,475,871 Opco common units were
1,173,684exchanged for Class A
ordinary shares issued and outstanding, excluding 19,563,518 Class A ordinary shares subjectcommon stock. Refer to
possible redemption.Class B Ordinary Shares—The Company is authorized to issue 20,000,000 Class B ordinary shares, with a par value of $0.0001 per share. Holders ofNote 14 regarding the Class B ordinary shares are entitled to one vote for each share. At December 31, 2020, there were 5,184,300 Class B ordinary shares issued and outstanding.
Only holders of the Class B ordinary shares will have the right to vote on the appointment of directors priorcontingency related to the Business Combination. HoldersTRA.
8.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 period January 1, 2021 through October 14, 2021, $1.5 million of
Class A ordinary shares and Class B ordinary shares will vote together as a single class on all other matters submitted to a vote of shareholders, except as required by law and except that in a vote to continue the Company in a jurisdiction outside the Cayman Islands, holders of Class B ordinary shares will have ten votes per share and holders of Class A ordinary shares will have one vote per share.The Class B ordinary shares will automatically convert into Class A ordinary shares concurrently with or immediately following the consummation of a Business Combination on a one-for-one basis, subject to adjustment. In the case that additional Class A ordinary shares or equity-linked securities are issued or deemed issuedexpense was recorded in connection with athis agreement and is reflected as “Related party expenses (affiliate in Predecessor period)” in the consolidated statements of operations. Prior to the VIH Business Combination, ICE also made various payroll distributions and payments to vendors on behalf of Opco and made unitary state income tax payments on behalf of DACC Technologies, Inc. and Digital Asset Custody Company, Inc. (collectively with DACC Technologies, Inc., “DACC”). We recorded no expense during the numberyear ended December 31, 2022 under this agreement.
Upon consummation of Class A ordinary shares issuable upon conversionthe VIH Business Combination, we entered into a Transition Services Agreement (the “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 $1.2 million and $0.6 million of all Founder Shares will equal,expense related to the TSA for the year ended December 31, 2022 and the period from October 15, 2021 through December 31, 2021, respectively, which are reflected as “Related party expenses (affiliate in Predecessor period)” in the aggregate, 20%consolidated statements of operations and “Due to related party (affiliate in Predecessor period)” in the balance sheets.
Triparty Agreements
We recognized revenues related to the Triparty Agreement of less than $0.1 million, less than $0.1 million and $0.1 million for the year ended December 31, 2022 and the periods from October 15, 2021 through December 31, 2021 and January 1, 2021 through October 14, 2021, respectively, net of rebates and incentive payments (contra-revenue) of less than $0.1 million, less than $0.1 million and $0.2 million for the year ended December 31, 2022 and the periods from October 15, 2021 through December 31, 2021 and January 1, 2021 through October 14, 2021, respectively.
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 6, 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 year ended December 31, 2022 or the periods from October 15, 2021 through December 31, 2021 and January 1, 2021 through October 14, 2021.
Prior to the VIH Business Combination, we also recognized a capital contribution for the cost of the total numbertrading 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 for the period from January 1, 2021 through October 14, 2021 (Note 10). We did
not recognize a material reduction in revenue related to this capital contribution for the year ended December 31, 2022 or the period from October 15, 2021 through December 31, 2021.
Pursuant to a separate triparty agreement among ICE Futures Singapore (“IFS”), ICE Clear Singapore (“ICS”) and Opco, IFS and ICS provide trade execution and clearing services to customers that trade the cash-settled futures. To date, the cash settled contracts have not resulted in material net revenues payable to Opco. We expect the cash-settled futures contracts to be discontinued in the first quarter of 2023 and do not expect this to have a material impact on our business.
As of December 31, 2022 and 2021, we had $1.2 million and $0.6 million, respectively, reflected as “Due to related party (affiliate in Predecessor period)” in the consolidated balance sheets related to the intercompany services agreement and Triparty Agreement. As of December 31, 2022, we did not have any amounts recorded within “Accounts receivable, net” in the consolidated balance sheets related to the intercompany services agreement and Triparty Agreement. As of December 31, 2021, we had $0.1 million recorded within “Accounts receivable, net” in the consolidated balance sheets related to the intercompany services agreement and Triparty Agreement.
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 outstanding after such conversion (after giving effect to any redemptions of Class A ordinaryICE stock for ICUS membership privileges. These shares by Public Shareholders), including the total number of Class A ordinary shares issued, or deemed issued or issuable upon conversion or exercise of any equity-linked securities or rights issued or deemed issued, by the Company inwere carried at cost basis and evaluated periodically for impairment. In connection with orthe 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 relation to the consummationconsolidated statements of operations. In June 2021, Bakkt Clearing sold all of its shares of ICE stock. For the period from January 1, 2021 through October 14, 2021, we recorded a Business Combination, excluding any Class A ordinaryrealized loss on the sale of shares or equity-linked securities exercisable for or convertible into Class A ordinary shares issued, or to be issued, to any seller in a Business Combinationof affiliate stock of $0.1 million.
9.Warrants
As of December 31, 2022 and
any Private Placement Warrants issued to the Sponsor, officers or directors upon conversion of Working Capital Loans; provided that such conversion of Founder Shares will never occur on a less than one-for-one basis.Warrants—December 31, 2021, there were 7,140,808 and 7,141,035 public warrants outstanding, respectively. There were no private placement warrants outstanding at either year end. Public Warrantswarrants may only be exercised for a whole number of shares. No fractional shares will be issued upon exercise of the Public Warrants.a 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 will becomepublic warrants and private placement warrants became exercisable on the later of (a) 30 days after the completion of a Business Combination and (b) one year from the closing of the Initial Public Offering.November 15, 2021. The Public Warrantspublic warrants will expire five years from the completion of a Business Combinationon October 15, 2026, or earlier upon redemption or liquidation.
The Company will not be obligated to deliver any Class A ordinary shares pursuant to the exercise of a warrant and will have no obligation to settle such warrant exercise unless a registration statement under the
VPC IMPACT ACQUISITION HOLDINGS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2020
Securities Act with respect to the Class A ordinary shares underlying the warrants is then effective and a prospectus relating thereto is current, subject to the Company satisfying its obligations with respect to registration. No warrant will be exercisable and the Company will not be obligated to issue a Class A ordinary share upon exercise of a warrant unless the Class A ordinary share issuable upon such warrant exercise has been registered, qualified or deemed to be exempt under the securities laws of the state of residence of the registered holder of the warrants.
The Company has agreed that as soon as practicable, but in no event later than 15 business days, after the closing of a Business Combination, it will use its best efforts to file with the SEC a registration statement for the registration, under the Securities Act, of the Class A ordinary shares issuable upon exercise of the warrants. The Company will use its best efforts to cause the same to become effective and to maintain the effectiveness of such registration statement and a current prospectus relating thereto until the expiration of the warrants in accordance with the provisions of the warrant agreement. If a registration statement covering the Class A ordinary shares issuable upon exercise of the warrants is not effective by the sixtieth (60th) business day after the closing of a Business Combination, warrant holders may, until such time as there is an effective registration statement and during any period when the Company will have failed to maintain an effective registration statement, exercise warrants on a “cashless basis” in accordance with Section 3(a)(9) of the Securities Act or another exemption. Notwithstanding the above, if the Class A ordinary shares are at the time of any exercise of a warrant not listed on a national securities exchange such that they satisfy the definition of a “covered security” under Section 18(b)(1) of the Securities Act, the Company may, at its option, require holders of Public Warrants who exercise their warrants to do so on a “cashless basis” in accordance with Section 3(a)(9) of the Securities Act and, in the event the Company so elects, the Company will not be required to file or maintain in effect a registration statement, and in the event the Company does not so elect, it will use its best efforts to register or qualify the shares under applicable blue sky laws to the extent an exemption is not available.
Redemption of warrants when the price per Class A ordinary share equals or exceeds $18.00. Once the warrants become exercisable, the Company We may redeem the outstanding warrants (exceptwhen various conditions are met, such as described with respect to the Private Placement Warrants):
in whole and not in part;
at a price of $0.01 per warrant;
upon a minimum of 30 days’ prior written notice of redemption; and
if, and only if, the reported closing price of the Company’s Class A ordinary shares equals or exceeds $18.00 per share (as adjusted) for any 20 trading days within a 30-trading day period ending three trading days prior to the date on which the Company sends the notice of redemption to the warrant holders.
If and when the warrants become redeemable by the Company, the Company may exercise its redemption right even if it is unable to register or qualify the underlying securities for sale under all applicable state securities laws.
Redemption of warrants when the price per Class A ordinary share equals or exceeds $10.00. Once the warrants become exercisable, the Company may redeem the outstanding warrants (exceptspecific stock prices, as described with respect to the Private Placement Warrants):
in whole and not in part;
| • | | at $0.10 per warrant upon a minimum of 30 days’ prior written notice of redemption; provided that holders will be able to exercise their warrants on a cashless basis prior to redemption and receive that
|
VPC IMPACT ACQUISITION HOLDINGS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2020
| number of shares based on the redemption date and the “fair market value” of the Company’s Class A ordinary shares;
|
if, and only if, the last reported sale price (the “closing price”) of the Company’s Class A ordinary shares equals or exceeds $10.00 per Public Share (as adjusted) for any 20 trading days within the 30-trading day period ending three trading days before the Company sends the notice of redemption to the warrant holders; and
if the closing price of the Class A ordinary shares for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date on which we send the notice of redemption to the warrant holders is less than $18.00 per share (as adjusted), the Private Placement Warrants must also be concurrently called for redemption on the same terms as the outstanding Public Warrants, as described above.
If the Company calls the Public Warrants for redemption, as described above, its management will have the option to require any holder that wishes to exercise the Public Warrants to do so on a “cashless basis,” as describeddetailed in the specific warrant agreement.agreements. The exercise pricewarrants are recorded as a liability and number of ordinary shares issuable upon exercise of the Public Warrants may be adjusted in certain circumstances includingreflected as “Warrant liability” in the event of a share dividend, extraordinary dividend or recapitalization, reorganization, merger or consolidation. However, except as described below, the Public Warrants will not be adjusted for issuances of ordinary shares at a price below its exercise price. Additionally, in no event will the Company be required to net cash settle the Public Warrants. If the Company is unable to complete a Business Combination within the Combination Period and the Company liquidates the funds held in the Trust Account, holders of Public Warrants will not receive any of such funds with respect to their Public Warrants, nor will they receive any distribution from the Company’s assets held outside of the Trust Account with respect to such Public Warrants. Accordingly, the Public Warrants may expire worthless.
In addition, if (x) the Company issues additional Class A ordinary shares or equity-linked securities for capital raising purposes in connection with the closing of a Business Combination at an issue price or effective issue price of less than $9.20 per Class A ordinary share (with such issue price or effective issue price to be determined in good faith by the Company’s board of directors and, in the case of any such issuance to the Sponsor or its affiliates, without taking into account any Founder Shares held by the Sponsor or such affiliates, as applicable, prior to such issuance) (the “Newly Issued Price”), (y) the aggregate gross proceeds from such issuances represent more than 60% of the total equity proceeds, and interest thereon, available for the funding of a Business Combination on the date of the consummation of a Business Combination (net of redemptions), and (z) the volume weighted average trading price of the Class A ordinary shares during the 10 trading day period starting on the trading day prior to the day on which the Company consummates a Business Combination (such price, the “Market Value”) is below $9.20 per share, the exercise price of the warrants will be adjusted (to the nearest cent) to be equal to 115% of the higher of the Market Value and the Newly Issued Price, and the $18.00 per share redemption trigger price will be adjusted (to the nearest cent) to be equal to 180% of the higher of the Market Value and the Newly Issued Price, and the $10.00 per share redemption trigger price will be adjusted (to the nearest cent) to be equal to the higher of the Market Value and the Newly Issued Price.
The Private Placement Warrants are identical to the Public Warrants underlying the Units sold in the Initial Public Offering, except that the Private Placement Warrants and the Class A ordinary shares issuable upon the exercise of the Private Placement Warrants will not be transferable, assignable or salable until 30 days after the completion of a Business Combination, subject to certain limited exceptions. Additionally, the Private Placement Warrants will be exercisable on a cashless basis and be non-redeemable, except as described above, so long as they are held by the initial purchasers or their permitted transferees. If the Private Placement Warrants are held by someone other than the initial purchasers or their permitted transferees, the Private Placement Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants.
balance sheets.VPC IMPACT ACQUISITION HOLDINGS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2020
NOTE 8—FAIR VALUE MEASUREMENTS
The fair value of the Company’s financial assets and liabilities reflects management’s estimate of amounts that the Company would have received in connection with the sale of the assets or paid in connection with the transfer of the liabilities in an orderly transaction between market participants at the measurement date. In connection with measuring the fair value of its assets and liabilities, the Company seeks to maximize the use of observable inputs (market data obtained from independent sources) and to minimize the use of unobservable inputs (internal assumptions about how market participants would price assets and liabilities). The following fair value hierarchy is used to classify assets and liabilities based on the observable inputs and unobservable inputs used in order to value the assets and liabilities:
| | |
Level 1: | | Quoted prices in active markets for identical assets or liabilities. An active market for an asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. |
| |
Level 2: | | Observable inputs other than Level 1 inputs. Examples of Level 2 inputs include quoted prices in active markets for similar assets or liabilities and quoted prices for identical assets or liabilities in markets that are not active. |
| |
Level 3: | | Unobservable inputs based on our assessment of the assumptions that market participants would use in pricing the asset or liability. |
At December 31, 2020, assets held in the Trust Account were comprised of $207,376,213 in money market funds which are invested primarily in U.S. Treasury Securities. During the year ended December 31, 2020,2022, we issued 221 shares of Class A common stock in exchange for the exercise of 221 public warrants. 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 year ended December 31, 2022 of $16.6 million, which is reflected in “Gain (loss) from change in fair value of warrant liability” in the consolidated statements of operations.
During the period from October 15, 2021 through December 31, 2021, we issued 7,194,928 shares of Class A common stock in exchange for the exercise of 3,227,566 public warrants and the cashless exercise of 6,147,440 private placement warrants. We received $37.1 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 period from October 15, 2021 through December 31, 2021 of $79.4 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 December 31, 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 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 December 31, 2022 and December 31, 2021, there were 80,926,843 and 57,164,388 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 December 31, 2022, 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. 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 became 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. Since the expiration of the six-month lock-up period on April 16, 2022, holders of Paired Interests exchanged an aggregate of 22.5 million Paired Interests for shares of our Class A common stock, and the Company did not withdrawelect to settle any interest income fromsuch exchanges in cash. As of December 31, 2022 and December 31, 2021, there were 183,482,777 and 206,271,792 shares of Class V common stock issued and outstanding, respectively.
Dividends
Dividends shall not be declared or paid on the
Trust Account.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 presentssummarizes the ownership interests in Bakkt Opco Holdings, LLC as of December 31, 2022 and December 31, 2021.
| | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Opco
Common Units | Ownership % | | Opco
Common Units | Ownership % |
| Opco Common Units held by Bakkt Holdings, Inc. | 80,926,843 | | 31 | % | | 57,164,388 | | 22 | % |
| Opco Common Units held by noncontrolling interest holders | 183,482,777 | | 69 | % | | 206,271,792 | | 78 | % |
| Total Opco Common Units outstanding | 264,409,620 | | 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 year ended December 31, 2022 and the period from October 15, 2021 through December 31, 2021 was 72.6% and 78.9%, respectively.
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”). See Note 11 for further information.
In December 2018, pursuant to the contribution agreement between Opco and ICE in connection with ICE’s formation of Opco (the “Contribution Agreement”), ICE committed to contribute developed assets and licenses in exchange for 400,000,000 Class A voting units. The primary value contributed by ICE was the access to the trading and clearing services to be provided for the duration of the Triparty Agreement. Prior to 2020, ICE had contributed developed technology assets of $1.7 million, which is included in “Property, equipment and software, net” (see Note 6). The contribution from ICE and associated increase in “Members’ equity” for the Class A voting units issued was recognized over time as the services were provided. During the period from January 1, 2021 through October 14, 2021, ICE contributed $0.2 million of exchange and clearing license value based on costs incurred by IFUS and ICUS for executing and clearing bitcoin futures under the Triparty Agreement. This is shown as a reduction to “Net revenues” in the consolidated statements of operations and an increase to “Members’ equity” in the balance sheets. The reduction to revenue for the year ended December 31, 2022 and the period from October 15, 2021 through December 31, 2021 was immaterial.
Each Class B voting unit was convertible at the option of the voting unit holder any time into Class A voting units using a defined conversion price formula. All Class B voting units were to convert automatically to Class A voting units in the event of an initial public offering.
In connection with the VIH Business Combination (Note 4), 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 expired 3 years from issuance.
The fair value of the Class B Warrant at the issuance date was measured using the Black-Scholes model. The key inputs used in the valuation were as follows:
| | | | | |
| As of February 19,
2020 |
| Dividend yield | — | % |
| Risk-free interest rate | 1.39 | % |
| Expected volatility | 40.00 | % |
| Expected term (years) | 3.00 |
Estimates were determined as follows (i) expected term based on the warrant’s contractual period, (ii) based on the blended volatilities of comparable public companies, (iii) risk-free interest rates based on the U.S. Treasury yield for the expected term, and (iv) an expected dividend yield of zero percent was used since we did not yet and do not yet presently expect to pay dividends.
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.
Since the strategic partner was also a customer of the Company, the issuance of the warrant was determined to be consideration payable to a customer and was recognized as a unit-based sales incentive at fair value on the warrant’s issuance date of $5.4 million, with a corresponding asset recognized and amortized over the term of the customer contract as a reduction to revenue. In October 2021, we updated our assessment of future revenue from its relationship with the strategic partner and determined that the carrying value of the customer consideration asset exceeded the revenue less cost to provide service expected to be recognized from this relationship. As a result, we recorded an impairment charge of $3.6 million to measure the fair value of the customer consideration asset at $0 based on Level 3 inputs. The impairment charge is reflected as “Impairment of long-lived assets”. Accordingly, Successor period transaction fees no longer reflect a reduction for the recognition of the customer consideration asset.
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. The warrant vests upon the fulfillment of certain service conditions, with an expiration date of September 23, 2024. The fair value of the warrant on the grant date was estimated to be $1.6 million.
In August 2021, Opco amended the Class C Warrant to change the service conditions for 781,515 warrant units. The service conditions for the remaining 2,822,085 units were unchanged.
Opco accounted for the amendment as a modification and remeasured the fair value of the modified warrant units on the modification date using the Black-Scholes model. The fair value of the modified warrant units on modification date was estimated to be $1.0 million. The key inputs used in the valuation were as follows:
| | | | | |
| Dividend yield | — | % |
| Risk-free interest rate | 0.41 | % |
| Expected volatility | 45.00 | % |
| Expected term (years) | 3.06 |
Estimates of expected term were based on the contractual period of the warrants. Estimates of the volatility for the Black-Scholes model were based on the blended volatilities of comparable public companies. The risk-free interest rates were based on the U.S. Treasury yield for a term consistent with the expected term. Opco had neither declared or paid any cash dividends and did not plan to pay cash dividends in the foreseeable future as of the issuance date. As a result, an expected dividend yield of zero percent was used.
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 $1.11 per Paired Interest. As of December 31, 2022 and December 31, 2021, 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. We recorded $1.0 million of expense during the period from January 1, 2021 through October 14, 2021 upon the vesting of the modified warrant units which is reflected in “Selling, general and administrative” in the consolidated statements of operations. No expenses were recorded in the year ended December 31, 2022 or the period from October 15, 2021 through December 31, 2021 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 year ended December 31, 2022, we granted 10,251,747 RSUs and 5,116,984 PSUs, which represents 100% of the target award, to employees and directors. We recorded $31.6 million and $1.0 million of share-based compensation expense for the year ended December 31, 2022 and for the period from October 15, 2021 through December 31, 2021, respectively, which is included in “Compensation and benefits” in the consolidated statements of operations. We recorded $23.9 million and $1.0 million of share-based compensation expense related to RSUs for the year ended December 31, 2022 and for the period from October 15, 2021 through December 31, 2021, respectively. We recorded $7.7 million of share-based compensation expense related to PSUs for the year ended December 31, 2022. We did not record any share-based compensation expense related to PSUs for the period from October 15, 2021 through December 31, 2021.
Unrecognized compensation expense as of December 31, 2022 was $29.9 million for the RSUs and PSUs. The unrecognized compensation expense will be recognized over a weighted-average period of 2.05 years.
RSU and PSU Activity
The following table summarizes RSU and PSU activity under the 2021 Incentive Plan for the year ended December 31, 2022 and the period October 15, 2021 through December 31, 2021 (in thousands, except per unit data):
| | | | | | | | | | | | | | | | | | | | | | | |
| Successor |
| RSUs and PSUs | Number
of Shares | | Weighted Average Remaining Contractual Term (years) | | Weighted Average Grant Date Fair Value | | Aggregate
Intrinsic
Value |
| Outstanding as of October 15, 2021 | — | | | | | | |
| Granted | 2,142 | | | | $ | 9.18 | | | $ | 19,669 | |
| Forfeited | — | | | | | | |
| Vested | — | | | | | | |
| Outstanding as of December 31, 2021 | 2,142 | | | 1.51 | | $ | 9.18 | | | |
| Granted | 15,369 | | | | | $ | 3.94 | | | $ | 60,583 | |
| Forfeited | (1,885) | | | | | | | |
| Vested | (1,844) | | | | | | | |
| Outstanding as of December 31, 2022 | 13,782 | | | 2.05 | | $ | 4.05 | | | |
During the year ended December 31, 2022, we recorded $2.0 million of share-based compensation expense related to the accelerated vesting for certain employees that were terminated. We also recorded reversal of share-based compensation expense of $1.9 million during the year ended December 31, 2022 for pre-vesting forfeitures of RSUs, a portion of which is described below.
During the fourth quarter of 2022, the Company announced a restructuring plan to further focus the business. This restructuring plan included a reduction in workforce, impacting 22 employees that had outstanding RSUs. We modified the terms of the awards with these employees waiving the continued service requirement for the first tranche of outstanding RSUs if those awards would vest during the 60 days following their separation date. Any awards vesting after the 60 days would be forfeit, consistent with the terms of the 2021 Incentive Plan. We accounted for the modification of these awards as a new grant, including determining the grant date fair value on the date of the modification. The modified grant date fair value, combined with the forfeitures of the awards, resulted in a reversal of $1.0 million of previously recognized share-based compensation expense.
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 based upon the achievement of the final annual target. 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
In December 2018, Opco established the Opco Plan. The purpose of the Opco Plan was to provide incentives to selected employees, directors, and service providers to promote long-term growth and profitability. Three types of awards may be granted under the Opco Plan: (1) preferred incentive units, (2) common incentive units, and (3) participation units. The total number of units that Opco was authorized to issue under the Opco Plan was 156,000,000, which were granted at the discretion of the Compensation Committee of the Board of Directors of the Company.
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.
The units are unvested on the grant date and are subject to the vesting terms in the award agreement. They do not receive distributions until such units are vested. The units vest subject to continuous employment through the vesting date (subject to limited exceptions), and the achievement of certain performance and market conditions. A portion of the units may be subject to vesting upon a liquidity event, initial public offering, or partial exit event, or to the extent any incentive units and participation units remain outstanding and unvested on the date that is the eight-year anniversary of the launch of one of Opco’s services in a production environment, which occurred on September 23, 2019, these remaining units will vest based on the calculated fair market value of Opco as of such date. The VIH Business Combination was an initial public offering vesting event contemplated in the Opco Plan.
On December 19, 2018, Opco and Bakkt Management, LLC (the “Management Vehicle”), a wholly-owned subsidiary of Opco, entered into the Back-to-Back Agreement. The Management Vehicle has no substantive operations, and its sole purpose is to own incentive units in Opco. Under the Back-to-Back Agreement, Opco granted incentive units to the Management Vehicle, which is a member of Opco, and the Management Vehicle issued economically identical membership interests in the Management Vehicle (“Management incentive units”) to employees. Any employees who receive Management incentive units have an ownership interest in the Management Vehicle, which corresponds to an indirect ownership interest in Opco. Beginning on the 4th anniversary of the date that an incentive unit vests and assuming that Opco had not consummated an IPO or Liquidity Event, the Management Vehicle had the right, but not the obligation, to require Opco to purchase all of the incentive units then held by the Management Vehicle, for a period of four years. As such, Opco classified the incentive units as “Mezzanine equity” on the balance sheet due to this put option which represented a redemption feature. Since the incentive units reached a vesting event due to the VIH Business Combination, the Management Vehicle no longer has the right to require Opco to purchase all of the incentive units held by the Management Vehicle. Accordingly, since the Closing Date, the Company classifies the incentive units as “Noncontrolling interest” in the consolidated balance sheets.
In May 2020, Opco amended the Opco Plan. Under the modified Opco Plan, participants have the opportunity to continue to hold unvested units upon voluntary resignation of employment. The number of unvested units that a participant can continue to hold depends on the number of years that the participant was employed. Non-forfeited units vest upon the occurrence of a vesting event, as defined in the Opco Plan, subject to time restrictions. The modification to the Opco Plan did not result in additional compensation expense being recognized because the fair value of the units immediately before and after the modification was the same.
In anticipation of the VIH Business Combination, certain incentive unit awards granted under the Opco Plan in late 2020 were modified. The modification was approved in April 2021. The modification required Opco to redeem 40% of the first one-third of certain employee awards which were scheduled to vest upon consummation of the VIH Business Combination. Upon consummation of the VIH Business Combination, we paid $1.5 million to award holders for the redemption. This amount is included in the purchase consideration paid to Opco Equity Holders (Note 4). As this obligation was contingent upon consummation of the VIH Business Combination, Opco did not recognize any additional unit-based compensation expense as a result of the modification for the period from January 1, 2021 through October 14, 2021.
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 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. These payments are included in “Other assets and liabilities” in the statements of cash flows. 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 year ended December 31, 2022 and the period from October 15, 2021 through December 31, 2021, was as follows (in thousands):
| | | | | | | | | | | |
| Successor |
| Type of unit | Year Ended December 31, 2022 | | October 15, 2021 through December 31, 2021 |
| Common incentive unit | $ | 3,663 | | | $ | 42,376 | |
| Participation unit | (3,291) | | | 2,516 | |
| Total | $ | 372 | | | $ | 44,892 | |
Unit-based compensation expense for the period from January 1, 2021 through October 14, 2021, was as follows (in thousands):
| | | | | |
| Predecessor |
| Type of unit | January 1,
2021 through
October 14, 2021 |
| Preferred incentive unit | $ | 14,091 | |
| Common incentive unit | 12,447 | |
| Participation unit | 7,339 | |
| Total | $ | 33,877 | |
Included in the unit-based compensation expense for the period from October 15, 2021 through December 31, 2021 is $47.2 million of accelerated expense related to the incremental fair value of Successor common incentive and participation units based on remeasurement of the fair value of common incentive units and participation units in the Opco Plan on the Closing Date, as well as acceleration of expense for non-substantive service. This increase in expense was partially offset by the reversal of expense previously recorded for forfeitures of preferred and common incentive units made by certain former employees.
Included in the unit-based compensation expense for the period January 1, 2021 through October 14, 2021 is $30.6 million of accelerated expense related to the one-third of the incentive units and participation units in the Opco Plan which vested upon consummation of the VIH Business Combination.
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.
Unrecognized compensation expense as of December 31, 2021 was $5.7 million and $1.9 million for common incentive units and participation units, respectively. The unrecognized compensation expense will be recognized over a weighted-average period of 1.79 years.
Unit Activity
The following tables summarize common incentive unit activity under the Opco Plan for the year ended December 31, 2022 and the period October 15, 2021 through December 31, 2021 (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 October 15, 2021 | 17,473 | | 2.00 | $ | 6.30 | | $ | 109,998 | |
| Granted | — | | | | |
| Forfeited | (1,134) | | | | |
| Exchanged | — | | | | |
| Outstanding as of December 31, 2021 | 16,339 | | 1.79 | $ | 6.30 | | $ | 133,240 | |
| Granted | — | | | | |
| Forfeited | (313) | | | | |
| Exchanged | (7,732) | | | | |
| Outstanding as of December 31, 2022 | 8,294 | | 0.79 | $ | 6.30 | | $ | 67,635 | |
The following tables summarize preferred incentive unit and common incentive unit activity under the Opco Plan for the period from January 1, 2021 through October 14, 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 | — | | | | |
| Vested | — | | | | |
| Outstanding as of October 14, 2021 | 76,475 | | 6.04 | $ | 0.42 | | $ | 141,058 | |
| | | | | | | | | | | | | | |
| 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 | (3,613) | | | $ | 0.39 | | |
| Vested | — | | | | |
| Outstanding as of October 14, 2021 | 23,220 | | 6.04 | $ | 0.53 | | $ | 25,605 | |
There were no participation units granted during the year ended December 31, 2022 or the period from October 15, 2021 through December 31, 2021. There were less than 0.1 million participation units granted during the period from January 1, 2021 through October 14, 2021. The total number of participation units outstanding as of December 31, 2022 and December 31, 2021 were 0.2 million and 0.7 million, respectively. During the year ended December 31, 2022 we made cash payments of $0.5 million to settle vested participation units. During the period from October 15, 2021 through December 31, 2021 we made cash payments of $5.2 million to settle vested participation units. We did not make any cash payments to settle vested participation units during the period from January 1, 2021 through October 14, 2021. During the period from October 15, 2021 through December 31, 2021, we granted certain employees awards, which are payable over a two-year period in cash or shares of Class A common stock in an amount that will fluctuate based on the trading price of Class A common stock. We included these awards in the amounts above as they are subject to the same accounting as the participation units. The fair value of the participation units as of December 31, 2022 and December 31, 2021, was $0.3 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 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 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.
The inputs used in the models to estimate the fair value of the common incentive units and participation units granted in 2021 are summarized as follows:
| | | | | |
| Successor |
| December 31, 2021 |
| Dividend yield | —% |
| Risk-free interest rate | 0.06% - 0.36% |
| Expected volatility | 51.00% - 53.00% |
| Expected term (years) | 0.50 - 2.00 |
| Discount for lack of marketability | 0.082 |
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 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):
| | | | | | | | | | | |
| Year ended December 31, 2022 | | October 15, 2021 through December 31, 2021 |
| Net loss per share: | | | |
| Numerator – basic and diluted: | | | |
| Net loss | $ | (1,989,934) | | | $ | (164,827) | |
| Less: Net loss attributable to noncontrolling interest | (1,411,829) | | | (120,832) | |
| Net loss attributable to Bakkt Holdings, Inc. – basic | $ | (578,105) | | | $ | (43,995) | |
| Net loss and tax effect attributable to noncontrolling interests | $ | — | | | $ | — | |
| Net loss attributable to Bakkt Holdings, Inc. – diluted | $ | (578,105) | | | $ | (43,995) | |
| | | |
| Denominator – basic and diluted: | | | |
| Weighted average shares outstanding – basic | 71,167,992 | | | 54,018,064 | |
| Weighted average shares outstanding – diluted | 71,167,992 | | | 54,018,064 | |
| | | |
| Net loss per share – basic | $ | (8.12) | | | $ | (0.81) | |
| Net loss per share – diluted | $ | (8.12) | | | $ | (0.81) | |
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):
| | | | | | | | | | | |
| Year ended December 31, 2022 | | October 15, 2021 through December 31, 2021 |
| RSUs | 9,173 | | | 2,142 | |
| PSUs | 4,609 | | | — | |
| Public warrants | 7,141 | | | 7,141 | |
| Opco warrants | 793 | | | 793 | |
| Opco unvested incentive units | 2,242 | | | 4,831 | |
| Opco common units | 181,241 | | | 201,440 | |
| Total | 205,199 | | | 216,348 | |
13.Capital Requirements
Bakkt Trust Company LLC 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 both December 31, 2022 and 2021, 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 in the CFTC and membership in the NFA, which was effective on June 20, 2022. Accordingly, as of December 31, 2022, Bakkt Clearing no longer was required to maintain capital under the rules described above.
Bakkt Marketplace, LLC is required to maintain tangible net worth of a minimum amount. This amount increased due to several states adopting 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 money transmitter licenses and has a virtual currency license (or “BitLicense”) from the NYDFS, which subjects it to NYDFS’ oversight with respect to 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 December 31, 2022 and December 31, 2021, wind-costs amounted to $7.1 million and $5.5 million, respectively.
As of December 31, 2022 and December 31, 2021, tangible net worth was $27.7 million and $11.0 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 for them to be able to 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 year ended December 31, 2022, and the periods from October 15, 2021 through December 31, 2021 and January 1, 2021 through October 14, 2021, we recorded $3.2 million, $0.5 million and $1.6 million, respectively, of expenses related to the 401(k) plan, which is included in “Compensation and benefits” in the consolidated statements of operations
Tax Receivable Agreement
The Company is party to a TRA with certain Opco Equity Holders. As of December 31, 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. 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, aboutany changes will be recorded on the Company's consolidated statement of operations and comprehensive loss at that time.
Litigation
As described above, in October 2021, we completed our VIH 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 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 alleged 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, and expect to complete a stipulation of settlement on or before April 10, 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.
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 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. As of December 31, 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 | | | $ | 15,500 | | | $ | — | | | $ | — | | | $ | 17,750 | |
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.
The domestic and foreign components of income (loss) before income taxes for the following periods were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Year Ended December 31, 2022 | | October 15, 2021 through December 31, 2021 | | | January 1, 2021
through
October 14, 2021 |
| Domestic | $ | (2,001,449) | | | $ | (153,831) | |
|
| $ | (142,376) | |
| Foreign | 195 | | | 755 | | | | 2,555 | |
| Total loss before provision for income taxes | $ | (2,001,254) | | | $ | (153,076) | |
|
| $ | (139,821) | |
Details of the income tax expense (benefit) are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Year Ended December 31, 2022 | | October 15, 2021 through December 31, 2021 | | | January 1, 2021 through October 14, 2021 |
| Current: | | | | | | |
| Foreign | $ | 68 | | | $ | 5 | | | | $ | (763) | |
| Federal | — | | | — | | | | 161 | |
| State | 184 | | | 18 | | | | — | |
| Total current income tax expense (benefit) | 252 | | | 23 | | | | (602) | |
| Deferred: | | | | | | |
| Foreign | — | | | — | | | | — | |
| Federal | (9,390) | | | 10,004 | | | | — | |
| State | (2,182) | | | 1,724 | | | | — | |
| Total deferred income tax expense (benefit) | (11,572) | | | 11,728 | | | | — | |
| Total income tax expense (benefit) | $ | (11,320) | | | $ | 11,751 | | | | $ | (602) | |
| | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Year Ended December 31, 2022 | | October 15, 2021 through December 31, 2021 | | | January 1, 2021 through October 14, 2021 |
| Tax provision at federal statutory rate | $ | (420,304) | | | $ | (32,146) | | | | $ | (29,363) | |
| Increase (decrease) in income tax resulting from: | | | | | | |
| Tax on income not subject to entity level federal income tax | — | | | — | | | | 29,859 | |
| State income taxes, net of federal tax effect | (34,316) | | | 1,741 | | | | — | |
| Noncontrolling interest | 296,122 | | | 25,375 | | | | — | |
| Fair value of warrant liability | (3,494) | | | 16,668 | | | | — | |
| Changes in valuation allowance | 145,701 | | | (50) | | | | (301) | |
| Stock compensation | 3,862 | | | — | | | | — | |
| Other | 1,109 | | | 163 | | | | (797) | |
| Provision for (benefit from) income taxes | $ | (11,320) | | | $ | 11,751 | | | | $ | (602) | |
| Effective tax rate | 0.66 | % | | (7.68) | % | | | 0.43 | % |
The effective tax rate differs from the federal statutory rate primarily due to the loss allocated to noncontrolling interest that is not taxed to the Company and changes to the Company’s valuation allowance. The effective tax rate was
higher for the year ended December 31, 2022 compared to the period from October 15, 2021 through December 31, 2021 due to an increase in the Company’s valuation allowance.
For the period from January 1, 2021 through October 14, 2021, Opco and its subsidiaries were classified as partnerships or other pass through entities for U.S. federal income tax purposes.
The following summarizes the significant components of our deferred tax assets and liabilities (in thousands):
| | | | | | | | | | | |
| Successor |
| December 31, 2022 | | December 31, 2021 |
| Deferred tax assets: | | | |
| Investment in partnership | 111,046 | | | — | |
| Net operating loss carryforwards | 14,656 | | | 5,011 | |
| Deferred and share-based compensation | 2,965 | | | 252 | |
| Other | 52 | | | 51 | |
| Total deferred tax assets | 128,719 | | | 5,314 | |
| Less: valuation allowance | (126,039) | | | (3,115) | |
| Net deferred tax assets | 2,680 | | | 2,199 | |
| Deferred tax liabilities: | | | |
| Investment in partnership | $ | — | | | $ | 11,507 | |
| Intercompany asset with Opco | 2,680 | | | 2,285 | |
| Total deferred tax liabilities | 2,680 | | | 13,792 | |
| Net deferred tax liabilities | $ | — | | | $ | (11,593) | |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
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 our deferred tax assets were not more likely than not to be realized. The Company had a valuation allowance of $126.0 million and $3.1 million as of December 31, 2022 and 2021, respectively. The increase in the valuation allowance during the year was primarily related to the impact of tax over book basis on the Company's investment in partnership related to the impairment of goodwill and created intangibles at Opco, for which there was no corresponding step-up for tax purposes.
As of December 31, 2022, the Company had gross federal net operating loss carryforwards (“NOLs”) of $51.8 million, of which $0.4 million will begin to expire in 2037 and $51.4 million can be carried forward indefinitely. The Company also had state NOLs of $56.9 million which will begin to expire in 2037. As of December 31, 2021, the Company had gross NOLs of $17.1 million, of which $0.4 million will begin to expire in 2037 and $16.7 million can be carried forward indefinitely. The Company also had state NOLs of $21.4 million which will begin to expire in 2037.
The Company files income tax returns in the U.S., as well as various state and foreign jurisdictions. While the Company is not currently under examination in any of the applicable taxing jurisdictions, the Company is open to examination for federal, state, and foreign jurisdictions with varying statutes, ranging generally from three to five years.
Our non-U.S. subsidiaries are subject to Global Intangible Low-Taxed Income (“GILTI”) provisions under the Tax Cuts and Jobs Act. The Company has elected to recognize the tax expense related to GILTI as a period cost in the period incurred.
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 both December 31, 2022 and 2021.
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):
| | | | | | | | | | | | | | |
| Successor |
| 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 | | $ | — | |
| | | | | | | | | | | | | | |
| 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 | | $ | — | | $ | — | |
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 December 31, 2022, 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 sheets 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 determined to be the principal market for the related crypto as of December 31, 2022, 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.
Certain of our assets and liabilities are measured at fair value on a non-recurring basis. During the year ended December 31, 2022, we remeasured our goodwill and certain of our indefinite-lived intangible and long-lived assets at fair value using Level 3 inputs, as described in Note 5. During the period from October 15, 2021 through December 31, 2021,
we adjusted a software license asset and liability to fair value when impairment charges were recognized, which was on a non-recurring basis and based on Level 3 inputs. During the period from January 1, 2021 through October 14, 2021, we adjusted our customer consideration asset to fair value when impairment charges were recognized, which was on a non-recurring basis and based on Level 3 inputs.
The private placement warrant liability was measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the Successor period until it was fully exercised on November 17, 2021. A reconciliation of the warrant liability associated with private placement warrants from October 15, 2021 through December 31, 2021 is summarized below (in thousands):
| | | | | |
| Successor |
| December 31, 2021 |
| Balance as of October 15, 2021 | $ | 14,631 | |
| Loss from fair value of warrant liability | 50,347 | |
| Exercise of warrants | (64,978) | |
| Balance as of December 31, 2021 | $ | — | |
17.Leases
The Company leases real estate for office space under operating leases and office equipment under finance leases. 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 the Company’s leases include escalation clauses for adjusting rentals. As of December 31, 2022, we do not have any active finance leases.
Our real estate leases have remaining lease terms as of December 31, 2022 ranging from 4 months to 117 months, with one of our leases containing an option to extend the term for a period of 5 years exercisable by us, which we were 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 not to 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 components of total lease expense are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Year Ended December 31, 2022 | | October 15, 2021 through December 31, 2021 | | | January 1, 2021 through
October 14, 2021 |
| Finance lease cost | | | | | | |
| Amortization of right-of-use assets | $ | — | | | $ | — | | | | $ | 108 | |
| Interest on lease liabilities | — | | | 38 | | | | 27 | |
| Operating lease cost | 3,780 | | | 370 | | | | 856 | |
| Short-term lease cost | 13 | | | 33 | | | | 202 | |
| Variable lease cost | 15 | | | 10 | | | | 56 | |
| Total lease cost | $ | 3,808 | | | $ | 451 | | | | $ | 1,249 | |
The short-term lease cost disclosed in the Successor period above reasonably reflects our ongoing short-term lease commitments.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Year Ended
December 31, 2022 | October 15, 2021 through December 31, 2021 | | | January 1, 2021 through October 14, 2021 |
| Operating Leases | Finance Leases | Operating Leases | Finance Leases | | | Operating Leases | Finance Leases |
| Cash paid for amounts included in the measurement of lease liabilities | | | | | | | | |
| Cash flow from financing activities | $ | — | | $ | — | | $ | — | | $ | 404 | | | | $ | — | | $ | 97 | |
Cash flow from operating activities(1) | $ | (3,068) | | $ | — | | $ | 106 | | $ | 38 | | | | $ | 871 | | $ | 27 | |
| Supplemental non-cash information on lease liabilities arising from obtaining right-of-use assets | $ | 11,006 | | $ | — | | $ | 10,347 | | $ | — | | | | $ | — | | $ | — | |
(1)Our real estate lease for office space in Alpharetta, Georgia required the landlord to reimburse certain expenditures incurred by us towards construction of improvements. The reimbursement was received during the year ended December 31, 2022 and exceeded the payments required to be made pursuant to the lease during the year.
The weighted average remaining lease term for our operating leases was 94 months, and the weighted average discount rate for our operating leases was 5.0%. We did not have any active finance leases as of December 31, 2022. We were not party to any short-term leases during the periods presented.
The following table shows balance sheet information about our leases:
| | | | | | | | | | | | | | | | | | | | |
| | | Successor |
| Balance sheet
classification | | December 31, 2022 | | | December 31, 2021 |
| Operating leases: | | | | | | |
| Right-of-use assets | Other assets, noncurrent | | $ | 19,632 | | | | $ | 11,239 | |
| Lease liabilities, current | Other current liabilities | | $ | 3,014 | | | | $ | 615 | |
| Lease liabilities, noncurrent | Other liabilities, noncurrent | | $ | 23,402 | | | | $ | 10,647 | |
| Finance leases: | | | | | | |
| Right-of-use assets | Other assets, noncurrent | | $ | — | | | | $ | — | |
| Lease liabilities, current | Other current liabilities | | $ | — | | | | $ | — | |
| Lease liabilities, noncurrent | Other liabilities, noncurrent | | $ | — | | | | $ | — | |
Future minimum lease payments under non-cancellable leases as of December 31, 2022 were as follows:
| | | | | |
| Operating Leases |
| For the year ended December 31, | |
| 2023 | $ | 4,271 | |
| 2024 | 4,599 | |
| 2025 | 4,702 | |
| 2026 | 3,450 | |
| 2027 | 2,947 | |
| Thereafter | 12,319 | |
| Total undiscounted lease payments | $ | 32,288 | |
| Less: imputed interest | $ | (5,872) | |
| Total lease liability | $ | 26,416 | |
| Current | $ | 3,014 | |
| Noncurrent | $ | 23,402 | |
18.Safeguarding Obligation For Crypto
As of December 31, 2022, we had safeguarding obligation for crypto of $15.8 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 were not aware of any actual or possible safeguarding loss events as of December 31, 2022. Therefore, the safeguarding obligation for crypto and the related safeguarding asset for crypto were recorded at the same amount.
We are responsible for holding the following crypto on behalf of our customers as of December 31, 2022 (in thousands): | | | | | |
| December 31, 2022 |
| Bitcoin | $ | 15,717 | |
| Ether | 75 | |
| Safeguarding obligations for crypto | $ | 15,792 | |
| |
| Safeguarding asset for crypto | $ | 15,792 | |
19.Investments 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):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| 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 | 141,003 | | | 59 | | | 141,062 | | | — | | | — | | | — | |
| Total available-for-sale securities | 141,003 | | | 59 | | | 141,062 | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| 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) | $ | 39,574 | | | $ | (381) | | | $ | — | | | $ | — | |
12 months or more(1) | — | | | — | | | — | | | — | |
| Total available-for-sale securities | $ | 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 December 31, 2022.
The cost basis and fair value of available-for-sale debt securities at December 31, 20202022, by contractual maturity, are shown below (in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to prepay and indicatescreditors may have the fair value hierarchyright to call obligations.
| | | | | | | | | | | |
| December 31, 2022 |
| Cost Basis | | Fair Value |
| Due in one year or less | 141,003 | | | 141,062 | |
| Due after one year through five years | — | | | — | |
| Total available-for-sale securities | 141,003 | | | 141,062 | |
20.Subsequent Events
We have evaluated subsequent events and transactions and determined that occurred afterno events or transactions met the balance sheet date up to the date that thedefinition of a subsequent event for purpose of recognition or disclosure in these financial statements, were issued. Based upon this review, other than as described below and within this note.
On March 9, 2023 the Company
did not identify any subsequent eventsannounced a reduction in force that
would have required adjustment or disclosureis expected to result in the
financial statements, with the exceptiontermination of approximately 16% of the
following matters:Merger Agreement
On January 11, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), with Pylon Merger Company LLC, a Delaware limited liability company and a direct wholly-
VPC IMPACT ACQUISITION HOLDINGS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2020
owned subsidiary of the Company (“Merger Sub”), and Bakkt Holdings, LLC, a Delaware limited liability company (“Bakkt”), a transformative digital asset marketplace launched in 2018 by Intercontinental Exchange, Inc. (“ICE”) and a group of investors and strategic partners.
The Merger Agreement provides that, among other things and upon the terms and subject to the conditions thereof, the following transactions will occur (together with the other agreements and transactions contemplated by the Merger Agreement, the “Proposed Transaction”): (i) at the closing of the transactions contemplated by the Merger Agreement, Merger Sub will merge (the “Merger”) with and into Bakkt, the separate corporate existence of Merger Sub will cease and Bakkt will be the surviving limited liability company, to be renamed Bakkt Opco Holdings, LLC (“Bakkt Opco”); (ii) immediately prior to the closing of the PIPE Investment and the effective time of the Merger, the Company will be renamed “Bakkt Holdings, Inc.” (referred to hereinafter as “Bakkt Pubco”); and (iii) as a result of the Merger, the aggregate consideration to be received in respect of the Merger byCompany’s non-call center, full-time workforce (49 employees). Substantially all of the Bakkt interest holdersemployees impacted by the reduction in force were notified of the reduction on March 9, 2023 and will exit the Company in the first quarter of 2023. The Company estimates that it will incur expenses of approximately $3.7 - $4.1 million related to the reduction in force, substantially all of which are related to employee severance and benefits costs and will be an aggregaterecognized in the first quarter of 208,200,000 common units2023.
Table of Bakkt Opco (“Bakkt Opco Units”) and 208,200,000 shares of class V common stock of Bakkt PubCo, which will be non-economic, voting shares of Bakkt Pubco.Subscription Agreements
ContentsOn January 11, 2021, concurrently with the execution of the Merger Agreement, the Company entered into subscription agreements (the “Subscription Agreements”) with certain investors (collectively, the “PIPE Investors” which include certain existing equityholders of the Company and Bakkt), pursuant to, and on the terms and subject to the conditions of which, the PIPE Investors have collectively subscribed for 32,500,000 Bakkt Pubco Class A Shares for an aggregate purchase price equal to $325,000,000 (the “PIPE Investment”). The PIPE Investment will be consummated immediately prior to the closing of the Merger Agreement. The Subscription Agreements provide for certain customary registration rights for the PIPE Investors. The Subscription Agreements will terminate with no further force and effect upon the earliest to occur of: (a) such date and time as the Merger Agreement is terminated in accordance with its terms; (b) the mutual written agreement of the parties to such Subscription Agreement; and (c) December 31, 2021.
Item 9. Changes
in andIn And Disagreements
withWith Accountants
onOn Accounting
andAnd Financial
Disclosure.Disclosure
Item 9A. Controls
and Procedures.And Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure
As required by Rule 13a-15(b) under the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls areand procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the fiscal year covered by this Annual Report on Form 10-K. Based on such evaluation, our principal executive officer and principal financial officer have concluded that as of such date, our disclosure controls and procedures were effective. Our disclosure controls and procedures are designed withto provide reasonable assurance that the objective of ensuring that information required to be disclosed by us in our reports filedthat we file under the Exchange Act suchis accumulated and communicated to management, including our principal executive officer and principal financial officer, as this Report,appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized, and reported within the time periodperiods specified in the SEC’s rules and forms. Disclosure controlsforms of the SEC.
Management’s Report on Internal Control Over Financial Reporting
We are also designed withresponsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and 15(d)-15(f) under the objective of ensuring that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our management evaluated, with the participation of our principal executive officer and principal financial and accounting officer (our “Certifying Officers”),Exchange Act. We assessed the effectiveness of our disclosure controls and proceduresthe Company’s internal control over financial reporting as of December 31, 2020, pursuant to Rule 13a-15(b) under2022. In making this assessment management used the Exchange Act.criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013). Based upon that evaluation, our Certifying Officerson this assessment, we concluded that as of December 31, 2020, our disclosure controls and procedures were effective.We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable,
VPC IMPACT ACQUISITION HOLDINGS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2020
not absolute, assurance that2022, the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Management’s Report on Internal Controls Over Financial Reporting
This Annual Report on Form 10-K does not include a report of management’s assessment regardingCompany’s internal control over financial reporting orwas effective.
This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm
dueregarding internal controls over financial reporting because the Jumpstart our Business Startups Act of 2012 provides an exemption from such requirement to
a transition period established by rules of the SEC for newly publicemerging growth companies.
Changes in Internal Control
overOver Financial Reporting
There were no changes
into our internal control over financial reporting
(as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act)that occurred during the
most recent fiscal quarter
ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions That Prevent Inspections.
None.
Item 10. Directors, Executive Officers
andAnd Corporate
Governance.Directors and Executive Officers
Our officers and directors are as follows:
| | | | | | |
NAME
| | AGE | | | POSITION
|
John Martin
| | | 61 | | | Chairman and Chief Executive Officer |
Gordon Watson
| | | 42 | | | President, Chief Operating Officer and Director |
Olibia Stamatoglou
| | | 41 | | | Chief Financial Officer |
Adrienne Harris
| | | 39 | | | Director |
Kai Schmitz
| | | 52 | | | Director |
Kurt Summers
| | | 41 | | | Director |
John Martin,Governance
The information called for by this item will be set forth in our
Chairman and Chief Executive Officer, maintains over thirty years of investment experienceProxy Statement and is
a Senior Partner at VPC. Martin served as managing partner and co-CEO of Antares Capital, LP, a private debt credit manager, until May 2019. He was a founding partner of the original Antares Capital in 1996, a startup business that provided acquisition financing capital to the portfolio companies of private equity firms across North America. Over the course of nine years, Antares grew to become one of the largest providers of acquisition capital to private equity sponsors in the middle market. Following the firm’s acquisitionincorporated herein by
GE Capital in 2005, Martin became President and CEO of the newly branded GE Antares Capital and helped to direct the strategic vision of the business. In addition, he presided over numerous acquisitions and divestitures, including the sale of the firm to The Canada Pension Plan Investment Board (“CPPIB”) for $12 billion in August 2015. Subsequently, Antares went on to raise more than $6.5 billion in the CLO market from a global investor base comprised of banks, pension funds, insurance companies and asset managers. Following the acquisition by CPPIB, Martin sat on the Antares Investment Committee throughout his tenure at the company and was a member of the board of directors. At the time of his retirement, the firm’s assets under management totaled more than $24 billion.Gordon Watson, our President and Chief Operating Officer, joined VPC in 2014 and is currently a Partner. Gordon is a member of VPC’s investment committee and helps lead our Fintech investing team. Gordon is the Investment Manager for VPC Specialty Lending Investments PLC (LSE: VSL), a VPC managed UK publicly listed investment trust focused on opportunities in the Fintech market. Previously, Gordon was a portfolio manager focused on distressed debt at GLG Partners, a London-based 31 billion multi-strategy hedge fund that concentrates on a diverse range of alternative investments. He joined GLG when it purchased Ore Hill Partners, a credit focused hedge fund where Gordon was a partner.
Olibia Stamatoglou, our Chief Financial Officer, is the Chief Financial Officer and Chief Compliance Officer of VPC. Previously, Olibia served as vice president of finance at Valor Equity Partners where she managed firm and fund finance activities. Prior to Valor, she served as chief operating officer and chief financial officer of First National Assets, a specialty finance private equity group specializing in tax lien purchases and real estate owned ventures. She joined First National Assets from Aurora Investment Management where she progressed through several accounting roles. Mrs. Stamatoglou was recognized as one of Crain’s Notable Women in Finance for 2019.
Adrienne Harris, a director, is currently a Professor of the Practice and a Gates Foundation Senior Research Fellow with the Center for Finance, Law and Policy at the University of Michigan. Ms. Harris advises fintech companies, incumbent financial institutions and large venture capital firms, and currently serves on the Board of Directors of Financial Health Network, Beneficial State Bank, and Homie, Inc. From 2017 to 2019, Ms. Harris served as Chief Business Officer and General Counsel at States Title, Inc., where she currently serves as Advisor. From 2015 to 2017, Ms. Harris served as Special Assistant to the President for Economic Policy at the National
reference. Economic Council, where she spearheaded the development of the administration’s fintech strategy, chairing both the Interagency Fintech Working Group and the Administration’s Distributed Ledger Technology Task Force. From 2013 to 2015, Ms. Harris served as Senior Advisor to the Deputy Secretary at the U.S. Department of the Treasury. From 2008 to 2013, Ms. Harris was an Associate at Sullivan & Cromwell LLP. Ms. Harris received an M.B.A. from NYU Stern School of Business, a J.D. from Columbia University Law School, where she was a member of the Columbia Law Review, and a B.A. from Georgetown University, where she was a John Carrol Scholar and graduated with honors.
Kai Schmitz, a director is currently a Partner at Amadeus Capital, where he focuses on growth stage investments in Emerging Markets, secondaries and Fintech investments. Mr. Schmitz currently serves on the Board of Directors of Koin (online point of sale financing), Minka (financial services cloud), Movii (digital bank), and RS2 (SaaS payment platform). From 2012 to 2019, Mr. Schmitz was Investment Lead Fintech and Regional Head Latin America at IFC, the World Bank’s private sector investment bank, where he was instrumental in building the Fintech portfolio to $600 million. From 2010 to 2012, Mr. Schmitz was a Senior Advisor at the World Bank’s Payment Systems Development Group, where he advised Central Banks and other government agencies on payment market infrastructure and regulation. Previously, Mr. Schmitz co-founded two companies, a remittance company in London and a financial services business with operations in the U.S. and Latin America. Mr. Schmitz has also worked at law firms in Hamburg and London. Mr. Schmitz received a J.D. equivalent from University of Hamburg and an MBA from Henley Management College in the UK.
Kurt Summers, a director, has twenty years of experience in both private and public sector finance. Mr. Summers is currently a Senior Advisor at both Blackstone and Ullico, where he provides insight and strategic direction around various investment opportunities and existing holdings. From 2014 to 2019, Mr. Summers served as Treasurer of the City of Chicago, where he managed the city’s more than $8 billion investment portfolio and served as a trustee or fiduciary of five local pension boards with nearly $25 billion under management. As Treasurer of Chicago, Mr. Summers and his team more than tripled the returns on the city’s portfolio, which now generates more than $100 million of incremental revenue to Chicago’s taxpayers, bondholders and other stakeholders each year. From 2012 to 2014, Mr. Summers served as Senior Vice President at Grosvenor Capital Management where he helped lead the firm’s strategy and business development efforts and served as a member of the Office of the Chairman. From 2010 to 2012, Mr. Summers served as Chief of Staff to the Cook County Board President where he was the architect of a turnaround of the second largest county in the country. From 2009 to 2010, Mr. Summers served as Managing Director at Ryan Specialty Group, an international specialty insurance organization. Mr. Summers began his career at McKinsey & Company, a preeminent global strategy-consulting firm, and also worked as an investment banker at Goldman Sachs. Mr. Summers received a BSBA in Finance and International Business with high honors from Washington University and an MBA from Harvard Business School.
Number and Terms of Office of Officers and Directors
Our board of directors consists of five members and is divided into three classes with only one class of directors being appointed in each year, and with each class (except for those directors appointed prior to our first annual general meeting) serving a three-year term. In accordance with Nasdaq corporate governance requirements, we are not required to hold an annual general meeting until one year after our first fiscal year end following our listing on Nasdaq. The term of office of the first class of directors, consisting of Kai Schmitz, will expire at our first annual general meeting. The term of office of the second class of directors, consisting of Adrienne Harris and Kurt Summers, will expire at the second annual general meeting. The term of office of the third class of directors, consisting of John Martin and Gordon Watson, will expire at the third annual general meeting.
Our officers are appointed by the board of directors and serve at the discretion of the board of directors, rather than for specific terms of office. Our board of directors is authorized to appoint officers as it deems appropriate pursuant to our amended and restated memorandum and articles of association.
Director Independence
The rules of Nasdaq require that a majority of our board of directors be independent. An “independent director” is defined generally as a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship, which in the opinion of the company’s board of directors, would interfere with the director’s exercise of independent judgment in carrying out the responsibilities of a director. We have three “independent directors” as defined in the Nasdaq rules and applicable SEC rules. Our board of directors has determined that Adrienne Harris, Kai Schmitz and Kurt Summers are “independent directors” as defined in the Nasdaq listing standards and applicable SEC rules. Our independent directors have regularly scheduled meetings at which only independent directors are present.
Committees of the Board of Directors
Our board of directors has three standing committees: an audit committee, a compensation committee and a nominating and corporate governance committee. Both our audit committee and our compensation committee are composed solely of independent directors. Subject to phase-in rules, the rules of Nasdaq and Rule 10A-3 of the Exchange Act require that the audit committee of a listed company be comprised solely of independent directors, and the rules of Nasdaq require that the compensation committee and the nominating and corporate governance committee of a listed company be comprised solely of independent directors. Each committee operates under a charter approved by our board and has the composition and responsibilities described below. The charter of each committee is available on our website following.
Audit Committee
We established an audit committee of the board of directors. Adrienne Harris, Kai Schmitz and Kurt Summers serve as the members of the audit committee, and Kai Schmitz will chair the audit committee. Under the Nasdaq listing standards and applicable SEC rules, we are required to have at least three members of the audit committee, all of whom must be independent. Each of Adrienne Harris, Kai Schmitz and Kurt Summers meet the independent director standard under Nasdaq listing standards and under Rule 10-A-3(b)(1) of the Exchange Act.
Each member of the audit committee is financially literate and our board of directors has determined that Kurt Summers qualifies as an “audit committee financial expert” as defined in applicable SEC rules and has accounting or related financial management expertise.
We adopted an audit committee charter, which details the principal functions of the audit committee, including:
assisting board oversight of (1) the integrity of our financial statements, (2) our compliance with legal and regulatory requirements, (3) our independent registered public accounting firm’s qualifications and independence, and (4) the performance of our internal audit function and independent registered public accounting firm; the appointment, compensation, retention, replacement, and oversight of the work of the independent registered public accounting firm and any other independent registered public accounting firm engaged by us;
pre-approving all audit and non-audit services to be provided by the independent registered public accounting firm or any other registered public accounting firm engaged by us, and establishing pre-approval policies and procedures; reviewing and discussing with the independent registered public accounting firm all relationships the firm has with us in order to evaluate their continued independence;
setting clear policies for audit partner rotation in compliance with applicable laws and regulations; obtaining and reviewing a report, at least annually, from the independent registered public accounting firm describing (1) the independent auditor’s internal quality-control procedures and (2) any material issues raised by the most recent internal quality-control review, or peer review, of the audit firm, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years respecting one or more independent audits carried out by the firm and any steps taken to deal with such issues;
meeting to review and discuss our annual audited financial statements and quarterly financial statements with management and the independent auditor, including reviewing our specific disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; reviewing and approving any related party transaction required to be disclosed pursuant to Item 404 of Regulation S-K promulgated by the SEC prior to us entering into such transaction; and
reviewing with management, the independent registered public accounting firm, and our legal advisors, as appropriate, any legal, regulatory or compliance matters, including any correspondence with regulators or government agencies and any employee complaints or published reports that raise material issues regarding our financial statements or accounting policies and any significant changes in accounting standards or rules promulgated by the Financial Accounting Standards Board, the SEC or other regulatory authorities.
Compensation Committee
We established a compensation committee of the board of directors. Adrienne Harris and Kurt Summers serve as the members of the compensation committee, and Kurt Summers will chair the compensation committee. Under the Nasdaq listing standards and applicable SEC rules, we are required to have at least two members of the compensation committee, all of whom must be independent. All members of our compensation committee are independent of and unaffiliated with our sponsor and our underwriters.
We adopted a compensation committee charter, which will detail the principal functionscode of the compensation committee, including:
reviewing and approving on an annual basis the corporate goals and objectives relevantconduct that applies to our chief executive officer’s compensation, evaluating our chief executive officer’s performance in light of such goals and objectives and determining and approving the remuneration (if any) of our chief executive officer’s based on such evaluation;
reviewing and making recommendations to our board of directors with respect to the compensation, and any incentive compensation and equity based plans that are subject to board approval of all of our other officers;
reviewingemployees, officers, and directors, including our executive compensation policies and plans;
implementing and administering our incentive compensation equity-based remuneration plans;
assisting management in complying with our proxy statement and annual report disclosure requirements;
approving all special perquisites, special cash paymentsChief Executive Officer, Chief Financial Officer and other special compensationexecutive and benefit arrangements for our officers and employees;
producing a report on executive compensation to be included in our annual proxy statement; and
reviewing, evaluating and recommending changes, if appropriate, to the remuneration for directors.
Notwithstanding the foregoing, as indicated above, other than the payment of customary fees we may elect to make to memberssenior financial officers. The full text of our boardcode of directors for director service and payment to an affiliateconduct is posted on the investor relations page of our sponsor of $10,000 per month, for upwebsite, which is located at https://investors.bakkt.com. We intend to 24 months, for office space, utilities and secretarial and administrative support and reimbursement of expenses, no compensation ofpost any kind, including finders, consulting or other similar fees, will be paid to any of our existing shareholders, officers, directors or any of their respective affiliates, prioramendment to, or for any services they render in order to effectuate the consummation of an initial business combination. Accordingly, it is likely that prior to the consummation of an initial business combination, the compensation committee will only be responsible for the review and recommendation of any compensation arrangements to be entered into in connection with such initial business combination.
The charter also provides that the compensation committee may, in its sole discretion, retain or obtain the advice of a compensation consultant, independent legal counsel or other adviser and will be directly responsible for the
appointment, compensation and oversight of the work of any such adviser. However, before engaging or receiving advice from a compensation consultant, external legal counsel or any other adviser, the compensation committee will consider the independence of each such adviser, including the factors required by Nasdaq and the SEC.
Nominating and Corporate Governance Committee
We established a nominating and corporate governance committee of the board of directors. The initial members of our nominating and corporate governance are Adrienne Harris, Kai Schmitz and Kurt Summers. Adrienne Harris serves as chair of the nominating and corporate governance committee. Under the Nasdaq listing standards and applicable SEC rules, each member of the nominating and corporate governance committee must be independent. All members of our nominating and corporate governance committee are independent of and unaffiliated with our sponsor and our underwriters.
We adopted a nominating and corporate governance committee charter, which details the purpose and responsibilities of the nominating and corporate governance committee, including:
identifying, screening and reviewing individuals qualified to serve as directors, consistent with criteria approved by the board, and recommending to the board of directors candidates for nomination for election at the annual general meeting or to fill vacancies on the board of directors;
developing and recommending to the board of directors and overseeing implementation of our corporate governance guidelines;
coordinating and overseeing the annual self-evaluation of the board of directors, its committees, individual directors and management in the governance of the company; and
reviewing on a regular basis our overall corporate governance and recommending improvements as and when necessary.
The charter also provides that the nominating and corporate governance committee may, in its sole discretion, retain or obtain the advice of, and terminate, any search firm to be used to identify director candidates, and will be directly responsible for approving the search firm’s fees and other retention terms.
We have not formally established any specific, minimum qualifications that must be met or skills that are necessary for directors to possess. In general, in identifying and evaluating nominees for director, the board of directors considers educational background, diversity of professional experience, knowledge of our business, integrity, professional reputation, independence, wisdom, and the ability to represent the best interests of our shareholders. Prior to our initial business combination, holders of our public shares will not have the right to recommend director candidates for nomination to our board of directors.
Compensation Committee Interlocks and Insider Participation
None of our officers currently serves, or in the past year has served, as a member of the compensation committee of any entity that has one or more officers serving on our board of directors.
Code of Business Conduct and Ethics
We adopted a Code of Business Conduct and Ethics applicable to our directors, officers and employees. We will file a copy of our Code of Business Conduct and Ethics as an exhibit to the registration statement of which this prospectus is a part. You will be able to review this document by accessing our public filings at the SEC’s web site at www.sec.gov. In addition, a copy of the Code of Business Conduct and Ethics and the charters of the committees of our board of directors will be provided without charge upon request from us. See the section of this report entitled “Where You Can Find Additional Information.” If we make any amendments to our Code of Business Conduct and Ethics other than technical, administrative or other non-substantive amendments, or grant
any waiver, including any implicit waiver from, a provision of the Codeour code of Business Conduct and Ethics applicable to our principal executive officer, principal financial officer principal accounting officer or controller or persons performing similar functions requiring disclosure under applicable SEC or Nasdaq rules, we will disclose the nature of such amendment or waiverconduct on our website. The information included on our website is not incorporated by reference into this report or in any other report or document we file with the SEC, and any references to our website are intended to be inactive textual references only.
Conflicts of Interest
Under Cayman Islands law, directors and officers owe the following fiduciary duties:
| (i) | duty to act in good faith in what the director or officer believes to be in the best interests of the company as a whole;
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| (ii) | duty to exercise powers for the purposes for which those powers were conferred and not for a collateral purpose;
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| (iii) | directors should not improperly fetter the exercise of future discretion;
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| (iv) | duty to exercise powers fairly as between different sections of shareholders;
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| (v) | duty not to put themselves in a position in which there is a conflict between their duty to the company and their personal interests; and
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| (vi) | duty to exercise independent judgment.
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In addition to the above, directors also owe a duty of care which is not fiduciary in nature. This duty has been defined as a requirement to act as a reasonably diligent person having both the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company and the general knowledge skill and experience of that director.
As set out above, directors have a duty not to put themselves in a position of conflict and this includes a duty not to engage in self-dealing, or to otherwise benefit as a result of their position. However, in some instances what would otherwise be a breach of this duty can be forgiven and/or authorized in advance by the shareholders provided that there is full disclosure by the directors. This can be done by way of permission granted in the memorandum and articles of association or alternatively by shareholder approval at general meetings.
Each of our officers and directors presently has, and any of them in the future may have additional, fiduciary or contractual obligations to at least one other entity pursuant to which such officer or director is or will be required to present a business combination opportunity to such entity. Accordingly, if any of our officers or directors becomes aware of a business combination opportunity which is suitable for an entity to which he or she has then- current fiduciary or contractual obligations, he or she will honor his or her fiduciary or contractual obligations to present such business combination opportunity to such entity, subject to their fiduciary duties under Cayman Islands law. Our amended and restated memorandum and articles of association provide that we renounce our interest in any corporate opportunity offered to any director or officer unless such opportunity is expressly offered to such person solely in his or her capacity as a director or officer of the company and it is an opportunity that we are able to complete on a reasonable basis. We do not believe, however, that the fiduciary duties or contractual obligations of our officers or directors will materially affect our ability to complete our initial business combination.
Our officers and directors are not required to, and will not, commit their full time to our affairs, which may result in a conflict of interest in allocating their time between our operations and our search for an initial business combination and their other businesses. We do not intend to have any full-time employees prior to the completion of our initial business combination. Each of our officers is engaged in other business endeavors for which he may be entitled to substantial compensation and our officers are not obligated to contribute any specific number of hours per week to our affairs. In particular, certain of our officers and directors are employed by Victory Park Capital which make investments in securities or other interests of or relating to companies in
industries we may target for our initial business combination. Our directors and officers may also serve as officers or board members for other entities. Specifically, certain of our officers and directors are actively engaged in VPC II and VPC III, both which are special purpose acquisition companies that each completed their initial public offering on March 9, 2021, and will continue to serve as officers and directors of VPC II and VPC III until their initial business combinations are completed. VPC II and VPC III, like us, may pursue initial business combination targets in any business or industry and is expected to have a similar window as us in which it may complete its initial business combination. Any such companies, businesses or investments, including VPC II and VPC III, may present additional conflicts of interest in pursuing an initial business combination. However, we do not believe that any such potential conflicts would materially affect our ability to complete our initial business combination. If our officers’ and directors’ other business affairs require them to devote substantial amounts of time to such affairs in excess of their current commitment levels, it could limit their ability to devote time to our affairs which may have a negative impact on our ability to complete our initial business combination.
Below is a table summarizing the entities to which our officers and directors currently have fiduciary duties or contractual obligations:
| | | | | | |
INDIVIDUAL
| | ENTITY
| | ENTITY’S BUSINESS
| | AFFILIATION
|
John Martin
| | Automotive Keys Investor LLC | | Consumer Products | | Director |
| | Victory Park Capital Advisors
VPC Impact Acquisition Holdings II
VPC Impact Acquisition Holdings III, Inc.
| | Investment Advisor
Special Purposes Acquisition Company
Special Purpose Acquisition Company
| | Advisor
Chairman and Director
Chairman and Director
|
Olibia Stamatoglou
| | Victory Park Capital Advisors | | Investment Advisor | | Officer |
Gordon Watson
| | Borro Ltd | | Specialty Finance | | Director |
| | Victory Park Capital Advisors | | Investment Advisor | | Partner |
| | Victory Park Specialty Lending Investments PLC
VPC Impact Acquisition Holdings II
VPC Impact Acquisition Holdings III, Inc.
| | Investment Advisor
Special Purpose Acquisition Company
Special Purpose Acquisition Company
| | Manager
Co-Chief Executive Officer
Co-Chief Executive Officer
|
Adrienne Harris
| | Beneficial State Bank | | Banking | | Director |
| | Financial Health Network | | Financial Consulting | | Director |
| | Homie, Inc. | | Real Estate Brokerage | | Director |
| | States Title, Inc.
VPC Impact Acquisition Holdings II
| | Real Estate Settlement Services
Special Purpose Acquisition Company
| | Advisor
Director
|
Kai Schmitz
| | Amadeus Capital Partners | | Investment Advisor | | Partner |
| | Koin Pagamentos S.A. | | Financing | | Director |
| | Minka Ltd | | Technology | | Director |
| | RS2 Software, Inc. | | Payments Platform | | Director |
| | Tranza Holding Ltd
VPC Impact Acquisition Holdings II
| | Digital Banking
Special Purpose Acquisition Company
| | Director
Director
|
Kurt Summers
| | Blackstone | | Investment Management | | Senior Advisor |
| | Ullico
VPC Impact Acquisition Holdings III, Inc.
| | Financial Services
Special Purpose Acquisition Company
| | Senior Advisor
Director
|
In addition, our sponsor and our officers and directors may sponsor or form other special purpose acquisition companies similar to ours or may pursue other business or investment ventures during the period in which we are seeking an initial business combination. Any such companies, businesses or investments may present additional conflicts of interest in pursuing an initial business combination. However, we do not believe that any such potential conflicts would materially affect our ability to complete our initial business combination.
Potential investors should also be aware of the following other potential conflicts of interest:
Our officers and directors are not required to, and will not, commit their full time to our affairs, which may result in a conflict of interest in allocating their time between our operations and our search for a business combination and their other businesses. We do not intend to have any full-time employees prior to the completion of our initial business combination. Each of our officers is engaged in several other business endeavors for which he may be entitled to substantial compensation, and our officers are not obligated to contribute any specific number of hours per week to our affairs.
Our initial shareholders purchased founder shares prior to the date of this prospectus and purchased private placement warrants in a transaction that closed simultaneously with the closing of our initial public offering. Our sponsor, officers and directors have entered into a letter agreement with us, pursuant to which they have agreed to waive their redemption rights with respect to their founder shares and public shares in connection with the completion of our initial business combination. Additionally, our sponsor, officers and directors have agreed to waive their rights to liquidating distributions from the trust account with respect to their founder shares if we fail to complete our initial business combination within the prescribed time frame. If we do not complete our initial business combination within the prescribed time frame, the private placement warrants will expire worthless. Furthermore, our sponsor, officers and directors have agreed not to transfer, assign or sell any of their founder shares and any Class A ordinary shares issuable upon conversion thereof until the earlier to occur of: (i) one year after the completion of our initial business combination or (ii) the date following the completion of our initial business combination on which we complete a liquidation, merger, share exchange or other similar transaction that results in all of our shareholders having the right to exchange their ordinary shares for cash, securities or other property. Notwithstanding the foregoing, if the closing price of our Class A ordinary shares equals or exceeds $12.00 per share (as adjusted for share sub-divisions, share capitalizations, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after our initial business combination, the founder shares will be released from the lockup. The private placement warrants (including the Class A ordinary shares issuable upon exercise of the private placement warrants) will not be transferable until 30 days following the completion of our initial business combination. Because each of our officers and directors own ordinary shares or warrants directly or indirectly, they may have a conflict of interest in determining whether a particular target business is an appropriate business with which to effectuate our initial business combination.
Our officers and directors may have a conflict of interest with respect to evaluating a particular business combination if the retention or resignation of any such officers and directors was included by a target business as a condition to any agreement with respect to our initial business combination.
We are not prohibited from pursuing an initial business combination with a business combination target that is affiliated with our sponsor, officers or directors or completing the business combination through a joint venture or other form of shared ownership with our sponsor, officers or directors. In the event we seek to complete our initial business combination with a business combination target that is affiliated with our sponsor, officers or directors, we, or a committee of independent directors, would obtain an opinion from an independent investment banking which is a member of FINRA or a valuation or appraisal firm, that the consideration to be paid in such initial business combination is fair to our company from a financial point of view. We are not required to obtain such an opinion in any other context. Furthermore, in no event will our sponsor or any of our existing officers or directors, or any of their respective affiliates, be paid by the company any finder’s fee, consulting fee or other
compensation prior to, or for any services they render in order to effectuate, the completion of our initial business combination. Further, commencing on the date our securities are first listed on Nasdaq, we will also pay our sponsor $10,000 per month for office space, utilities, secretarial and administrative services provided to members of our management team.
We cannot assure you that any of the above mentioned conflicts will be resolved in our favor.
In the event that we submit our initial business combination to our public shareholders for a vote, our sponsor, officers and directors have agreed to vote their founder shares, and they and the other members of our management team have agreed to vote their founder shares and any shares purchased during or after the offering in favor of our initial business combination.
Limitation on Liability and Indemnification of Officers and Directors
Cayman Islands law does not limit the extent to which a company’s memorandum and articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against willful default, fraud or the consequences of committing a crime. Our amended and restated memorandum and articles of association provide for indemnification of our officers and directors to the maximum extent permitted by law, including for any liability incurred in their capacities as such, except through their own actual fraud, willful default or willful neglect. We expect to purchase a policy of directors’ and officers’ liability insurance that insures our officers and directors against the cost of defense, settlement or payment of a judgment in some circumstances and insures us against our obligations to indemnify our officers and directors.
Our officers and directors have agreed to waive any right, title, interest or claim of any kind in or to any monies in the trust account, and have agreed to waive any right, title, interest or claim of any kind they may have in the future as a result of, or arising out of, any services provided to us and will not seek recourse against the trust account for any reason whatsoever. Accordingly, any indemnification provided will only be able to be satisfied by us if (i) we have sufficient funds outside of the trust account or (ii) we consummate an initial business combination.
Our indemnification obligations may discourage shareholders from bringing a lawsuit against our officers or directors for breach of their fiduciary duty. These provisions also may have the effect of reducing the likelihood of derivative litigation against our officers and directors, even though such an action, if successful, might otherwise benefit us and our shareholders. Furthermore, a shareholder’s investment may be adversely affected to the extent we pay the costs of settlement and damage awards against our officers and directors pursuant to these indemnification provisions.
We believe that these provisions, the insurance and the indemnity agreements are necessary to attract and retain talented and experienced officers and directors.
Item 11. Executive Compensation.
None of our officers or directors have received any cash compensationCompensation
The information called for services rendered to us. Commencing on the date that our securities are first listed on Nasdaq through the earlier of consummation of our initial business combination and our liquidation, we will pay our sponsor $10,000 per month for office space, utilities, secretarial and administrative support services provided to members of our management team. We may elect to make payment of customary fees to members of our board of directors for director service. In addition, our sponsor, officers and directors, or any of their respective affiliatesby this item will be reimbursed for any out-of-pocket expenses incurred in connection with activities on our behalf such as identifying potential target businesses and performing due diligence on suitable business combinations. Our audit committee will review on a quarterly basis all payments that were made to our sponsor, officers or directors, or our or their affiliates. Any such
payments prior to an initial business combination will be made from funds held outside the trust account. Other than quarterly audit committee review of such reimbursements, we do not expect to have any additional controls in place governing our reimbursement payments to our directors and officers for their out-of-pocket expenses incurred in connection with our activities on our behalf in connection with identifying and consummating an initial business combination. Other than these payments and reimbursements, no compensation of any kind, including finder’s and consulting fees, will be paid by the company to our sponsor, officers and directors, or any of their respective affiliates, prior to completion of our initial business combination.
After the completion of our initial business combination, directors or members of our management team who remain with us may be paid consulting or management fees from the combined company. All of these fees will be fully disclosed to shareholders, to the extent then known, in the proxy solicitation materials or tender offer materials furnished to our shareholders in connection with a proposed initial business combination. We have not established any limit on the amount of such fees that may be paid by the combined company to our directors or members of management. It is unlikely the amount of such compensation will be known at the time of the proposed initial business combination, because the directors of the post-combination business will be responsible for determining officer and director compensation.
Any compensation to be paid to our officers will be determined, or recommended to the board of directors for determination, either by a compensation committee constituted solely by independent directors or by a majority of the independent directors on our board of directors.
We do not intend to take any action to ensure that members of our management team maintain their positions with us after the consummation of our initial business combination, although it is possible that some or all of our officers and directors may negotiate employment or consulting arrangements to remain with us after our initial business combination. The existence or terms of any such employment or consulting arrangements to retain their positions with us may influence our management’s motivation in identifying or selecting a target business but we do not believe that the ability of our management to remain with us after the consummation of our initial business combination will be a determining factorset forth in our decision to proceed with any potential business combination. We are not party to any agreements with our officersProxy Statement and directors that provide for benefits upon termination of employment.
is incorporated herein by reference.
Item 12. Security Ownership ofOf Certain Beneficial Owners And Management And Related Stockholder Matters
The information required by this item will be set forth in our Proxy Statement and
Management and Related Shareholder Matters.The following table sets forth information regarding the beneficial ownership of our ordinary shares as of March 29, 2021 by:
each person knownis incorporated herein by us to be the beneficial owner of more than 5% of our outstanding ordinary shares;
reference.each of our executive officers and directors; and
all our executive officers and directors as a group.
Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect to all ordinary shares beneficially owned by them. The following table does not reflect record or beneficial ownership of the private placement warrants as these warrants are not exercisable within 60 days of the date of this Form 10-K.
The beneficial ownership of our ordinary shares is based on 25,916,502 ordinary shares issued and outstanding as of March 29, 2021, consisting of 20,732,202 Class A ordinary shares and 5,184,300 Class B ordinary shares.
| | | | | | | | |
NAME AND ADDRESS OF BENEFICIAL OWNER(1)
| | NUMBER OF
SHARES
BENEFICIALLY
OWNED | | | APPROXIMATE
PERCENTAGE
OF
OUTSTANDING
ORDINARY
SHARES | |
Directors, Executive Officers and Founders
| | | | | | | | |
John Martin
| | | — | | | | — | |
Gordon Watson
| | | — | | | | — | |
Olibia Stamatoglou
| | | — | | | | — | |
Adrienne Harris
| | | 20,000 | | | | * | |
Kai Schmitz
| | | 20,000 | | | | * | |
Kurt Summers
| | | 20,000 | | | | * | |
All executive officers and directors as a group (6 individuals)
| | | 60,000 | | | | * | % |
| | | | | | | | |
NAME AND ADDRESS OF BENEFICIAL OWNER | | NUMBER OF
SHARES
BENEFICIALLY
OWNED | | | APPROXIMATE
PERCENTAGE
OF
OUTSTANDING
ORDINARY
SHARES | |
Five Percent Holders | | | | | | | | |
VPC Impact Acquisition Holdings Sponsor, LLC(1)(2)(3) | | | 5,124,300 | | | | 19.8 | % |
Alpine Global Management, LLC(4) | | | 2,813,820 | | | | 10.9 | % |
Invesco Ltd.(5) | | | 2,391,105 | | | | 9.2 | % |
Millennium Management LLC(6) | | | 1,600,000 | | | | 6.2 | % |
Corbin Capital Partners Group, LLC(7) | | | 1,500,000 | | | | 5.8 | % |
Sculptor Capital LP(8) | | | 1,404,800 | | | | 5.4 | % |
Empyrean Capital Overseas Master Fund, Ltd.(9) | | | 1,208,580 | | | | 4.7 | % |
Point72 Asset Management, L.P.(10) | | | 1,159,546 | | | | 4.5 | % |
(1) | Unless otherwise noted, the business address of each of the following is 150 North Riverside Plaza, Suite 5200, Chicago, IL 60606.
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(2) | Interests shown consist solely of founder shares, classified as Class B ordinary shares. Such shares will automatically convert into Class A ordinary shares concurrently with or immediately following the consummation of our initial business combination on a one-for-one basis, subject to adjustment, as described herein.
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(3) | VPC Impact Acquisition Holdings Sponsor, LLC, our sponsor, is the record holder of such shares. Richard Levy, as Chief Executive Officer and Founder of Victory Park Capital Advisors, LLC, has voting and investment discretion over these shares and therefore may be deemed to beneficially own such shares. Richard Levy disclaims any beneficial ownership of the securities held by VPC Impact Acquisition Holdings Sponsor, LLC other than to the extent of any pecuniary interest he may have therein, directly or indirectly.
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(4) | According to a Schedule 13G/A filed on February 24, 2021, Alpine Global Management, LLC is the holder of 2,813,820 Class A ordinary shares. The address of Alpine Global Management, LLC is 140 Broadway, 38th Floor, New York, NY 10005.
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(5) | According to a Schedule 13G filed on March 10, 2021, Invesco Ltd. in its capacity as a parent holding company to its investment advisers, may be deemed to beneficially own 2,391,105 Class A ordinary shares which are held of record by clients of Invesco Ltd. The address of Invesco Ltd. is 1555 Peachtree Street NE, Suite 1800, Atlanta, GA 30309.
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(6) | According to a Schedule 13G/A filed on February 1, 2021, (i) Millenium Management LLC, a Delaware limited liability company (“Millenium Management”), Millennium Group Management LLC, a Delaware limited liability company (“Millenium Group Management”), Millenium International Management LP, a Delaware limited partnership (“Millennium International Management”) and Israel A. Englander, a United States citizen share voting control and investment discretion over part or all of an aggregate of 800,000 units, each consisting of 1 Class A ordinary share and one-half of one redeemable warrant and 800,000 Class A ordinary shares, of which (i) 800,000 Class A ordinary shares are held by Integrated Core Strategies (US) LLC, a Delaware limited liability company (“Integrated Core Strategies”) and (ii) 800,000 units are held by ICS Opportunities, Ltd., an exempted company organized under the laws of the Cayman Islands (“ICS Opportunities”). Millenium International Management is the investment manager to ICS Opportunities and may be deemed to have shared voting control and investment discretion over securities owned by ICS Opportunities. Millenium Management is the general partner of the managing member of Integrated Core Strategies and may be deemed to have shared voting control and investment discretion over securities owned by Integrated Core Strategies. Millennium Management is also the general partner of the 100% owner of ICS Opportunities and may also be deemed to have shared voting control and investment discretion over securities owned by ICS Opportunities. Millenium Group Management is the managing member of Millennium Management and may also be deemed to have shared voting control and investment discretion over securities owned by Integrated Core Strategies. Millennium Group Management is also the general partner of Millennium International Management and may also be deemed to have shared voting control and investment discretion over securities owned by ICS Opportunities. The managing member of Millennium Group Management is a trust of which Mr. Englander, currently serves as the sole voting trustee. Therefore, Mr. Englander may also be deemed to have shared voting control and investment discretion over securities owned by Integrated Core Strategies and ICS Opportunities. The address of each entity and Mr. Englander is c/o Millennium International Management LP, 666 Fifth Avenue, New York, New York 10103.
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(7) | According to a Schedule 13G filed on February 12, 2021, Corbin Capital Partners Group, LLC (“CCPG”) and Corbin Capital Partners, L.P. (“CCP”) may be deemed to be the beneficial owners of an aggregate of 1,500,00 Class A ordinary shares. The shares reported are held by Corbin ERISA Opportunity Fund, Ltd. (“CEOF”), a Cayman Islands exempted company, and Corbin Opportunity Fund, L.P. (“COF”), a Delaware limited partnership. CCPG is the general partner of CCP, which serves as investment advisor for both COF and CEOF. The address of the principal business office of each of CCPG and CCP is 590 Madison Avenue, 31st Floor, New York, NY 10022.
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(8) | According to a Schedule 13G/A filed on February 5, 2021, Sculptor Capital LP (“Sculptor”), a Delaware limited partnership, as the principal investment manager to a number of investment funds and discretionary accounts (collectively, the “Sculptor Accounts”) may be deemed to beneficially own 1,404,800 Class A ordinary shares which are held by the Sculptor Accounts. Sculptor Capital Holding Corporation (“SCHC”), a Delaware corporation, serves as the general partner of Sculptor As such, SCHC may be deemed to control Sculptor and, therefore, may be deemed to be the beneficial owner of the Class A ordinary shares owned by the Sculptor Accounts. Sculptor Capital Management, Inc. (“SCU”), a Delaware limited liability company, is a holding company that is the sole shareholder of SCHC. SCU is the sole shareholder of SCHC, and therefore may be deemed to be the beneficial owner of the Class A ordinary shares owned by the Sculptor Accounts. Sculptor Master Fund, Ltd. (“SCMF”), a Cayman Islands company and Sculptor Special Funding, LP (“NRMD”), a Cayman Islands exempted limited partnership, may also be deemed to share beneficial ownership over such Class A ordinary shares. The address of the principal business office of Sculptor, SCHC, and SCU is 9 West 57 Street, 39 Floor, New York, NY 10019. The address of the principal business office of SCMF and NRMD is c/o State Street (Cayman) Trust, Limited, P.O. Box 896, Suite 3307, Gardenia Court, 45 Market Street, Camana Bay, Grand Cayman, Cayman Islands KY1-1103.
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(9) | According to a Schedule 13G filed on December 18, 2020, Empyrean Capital Overseas Master Fund, Ltd. (“Empyrean Fund”) is the direct holder of 1,208,590 Class A ordinary shares. Empyrean Capital Partners, LP (“Empyrean Capital”), as the investment manager of Empyrean Fund, may be deemed to share voting and investment discretion over such securities. Mr. Meron, as the managing member of Empyrean Capital, LLC, the general partner of Empyrean Capital, may be deemed to share voting and investment discretion
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| over such securities. The address of each is c/o Empyrean Capital Partners, LP, 10250 Constellation Boulevard, Suite 2950, Los Angeles, CA 90067. |
(10) | According to a Schedule 13G filed on February 24, 2021, the reported shares are held by certain investment funds managed by Point72 Asset Management, L.P. (“Point72 Asset Management”). Point72 Capital Advisors, Inc. (“Point72 Capital Advisors Inc.”) may be deemed to share voting and dispositive power of the shares held by certain investment funds managed by Point72 Asset Management; and (iii) Steven A. Cohen (“Mr. Cohen”) may be deemed to share voting and dispositive power with respect to shares beneficially owned by Point72 Asset Management and Point72 Capital Advisors Inc. The address of the principal business office of Point72 Asset Management, Point72 Capital Advisors Inc., and Mr. Cohen is 72 Cummings Point Road, Stamford, CT 06902.
|
Item 13. Certain Relationships andAnd Related Transactions, andAnd Director Independence.
Founder Shares
on August 3, 2020, the Sponsor paid $25,000, or approximately $0.004 per share, to cover certain of the Company’s offering and formation costs in exchange for 5,750,000 Class B ordinary shares, par value $0.0001 per share (the “founder shares”). In September 2020, the Sponsor transferred an aggregate of 60,000 founder shares to members of the Company’s board of directors, resulting in the Sponsor holding 5,690,000 founder shares. Independence
The
number of founder shares outstanding was determined based on the expectation that the total size of the Company’s initial public offering would be a maximum of 23,000,000 units if the underwriters’ over-allotment option was exercised in full, and therefore that such founder shares would represent 20% of the outstanding shares after the Public Offering. Up to 750,000 of the founder shares were subject to forfeiture for no consideration depending on the extent to which the underwriters’ over-allotment was exercised. In connection with the underwriters’ partial exercise of the over-allotment option and the forfeiture of the remaining over-allotment option on October 1, 2020, 565,700 founder shares were forfeited and 184,300 founder shares are no longer subject to forfeiture resulting in an aggregate of 5,184,300 founder shares outstanding at December 31, 2020.Our Sponsor, officers and directors have agreed not to transfer, assign or sell any of their founder shares and any Class A ordinary shares issuable upon conversion thereof until the earlier to occur of: (i) one year after the completion of our initial business combination or (ii) the date following the completion of our initial business combination on which we complete a liquidation, merger, share exchange or other similar transaction that results in all of our shareholders having the right to exchange their ordinary shares for cash, securities or other property. Notwithstanding the foregoing, if the closing price of our Class A ordinary shares equals or exceeds $12.00 per share (as adjusted for share sub-divisions, share capitalizations, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after our initial business combination, the founder sharesinformation required by this item will be released from the lockup.
Private Placement Warrants
Simultaneously with the closing of the Initial Public Offering, we consummated the sale of 6,000,000 warrants (the “Private Placement Warrants”) to the Sponsor at a price of $1.00 per Private Placement Warrant generating gross proceeds of $6,000,000.
Each private placement warrantset forth in our Proxy Statement and is exercisable for one whole Class A ordinary share at a price of $11.50 per share. A portion of the proceeds from the sale of the private placement warrants to the Sponsor was added to the proceeds from the initial public offering held in the trust account. If we do not complete a business combinationincorporated herein by September 25, 2022, the private placement warrants will expire worthless. The private placement warrants will be non-redeemable for cash and exercisable on a cashless basis so long as they are held by the Sponsor or its permitted transferees.
The Sponsor and our officers and directors has agreed, subject to limited exceptions, not to transfer, assign or sell any of their private placement warrants until 30 days after the completion of the initial business combination.
reference.Related Party Loans
In order to finance transaction costs in connection with a Business Combination, the Sponsor or an affiliate of the Sponsor, or certain of the Company’s officers and directors may, but are not obligated to, loan the Company funds as may be required (“Working Capital Loans”). Such Working Capital Loans would be evidenced by promissory notes. The notes may be repaid upon completion of a Business Combination, without interest, or, at the lender’s discretion, up to $1,500,000 of notes may be converted upon completion of a Business Combination into warrants at a price of $1.00 per warrant. Such warrants would be identical to the Private Placement Warrants. In the event that a Business Combination does not close, the Company may use a portion of proceeds held outside the Trust Account to repay the Working Capital Loans but no proceeds held in the Trust Account would be used to repay the Working Capital Loans. As of December 31, the Company had no outstanding borrowings under the Working Capital Loans.
Administrative Services Agreement
Commencing on the date that our securities were first listed on the Nasdaq and continuing until the earlier of the consummation of a Business Combination or our liquidation, we agreed to pay the Sponsor a total of $10,000 per month for office space, utilities, secretarial and administrative support services, provided to the Company. We began incurring these fees on September 25, 2020 and will continue to incur these fees monthly until the earlier of the completion of a Business Combination and the Company’s liquidation.
The Sponsor, officers and directors, or any of their respective affiliates will be reimbursed for any out-of-pocket expenses incurred in connection with activities performed on our behalf such as identifying potential target businesses and performing due diligence on suitable Business Combinations.
We recognized an aggregate of $30,000 in expenses incurred in connection with the aforementioned arrangements with the related parties on our Statements of Operations for the period from July 31, 2020 (date of inception) through December 31, 2020, respectively.
Item 14. Principal AccountingAccountant Fees And Services
The information required by this item will be set forth in our Proxy Statement and
ServicesTheis incorporated herein by reference.
PART IV
Item 15. Exhibit And Financial Statement Schedules
(a)We have filed the following is a summarydocuments as part of fees paid to WithumSmith+Brown, PC, for services rendered.Audit Fees. Audit fees consistthis Annual Report on Form 10-K:
1.Financial Statements
See Index under Part II, Item 8 of
fees billed for professional services rendered for the audit of our year-end financial statements, reviews of our quarterly financial statements and services that are normally provided by our independent registered public accounting firm in connection with statutory and regulatory filings. The aggregate fees billed by WithumSmith+Brown, PC for audit fees, inclusive of required filings with the SEC for the period from July 31, 2020 (inception) through December 31, 2020, and of services rendered in connection with our initial public offering, totaled $81,000.Audit-Related Fees. Audit-related fees consist of fees billed for assurance and related services that are reasonably related to performance of the audit or review of our year-end financial statements and arethis Annual Report on Form 10-K.
2.Financial Statement Schedules
Schedules not
reported under “Audit Fees.” These services include attest services thatlisted above have been omitted because they are not required,
by statutebecause they are not applicable, or
regulation and consultation concerning financial accounting and reporting standards. We did not pay WithumSmith+Brown, PC any audit-related fees duringbecause the
period from July 31, 2020 (inception) through December 31, 2020.Tax Fees. Tax fees consist of fees billed for professional services relating to tax compliance, tax planning and tax advice. We did not pay WithumSmith+Brown, PC any tax fees during the period from July 31, 2020 (inception) through December 31, 2020.
All Other Fees. All other fees consist of fees billed for all other services. We did not pay WithumSmith+Brown, PC any other fees during the period from July 31, 2020 (inception) through December 31, 2020.
required information is otherwise included. Pre-Approval Policy
Our audit committee was formed upon the consummation of our initial public offering. As a result, the audit committee did not pre-approve all of the foregoing services, although any services rendered prior to the formation of our audit committee were approved by our board of directors. Since the formation of our audit committee, and on a going-forward basis, the audit committee has and will pre-approve all auditing services and permitted non-audit services to be performed for us by our auditors, including the fees and terms thereof (subject to the de minimis exceptions for non-audit services described in the Exchange Act which are approved by the audit committee prior to the completion of the audit).
3.ExhibitsPART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) The following documentsexhibits listed below are filed as part of this Annual Report on Form 10-K:
1. | Financial Statements: See “Index to Financial Statements” at “Item 8. Financial Statements and Supplementary Data” herein.
|
| (b) | Financial Statement Schedules. All schedules are omitted for the reason that the information is included in the financial statements or the notes thereto or that they are not required10-K or are not applicable.
|
| (c) | Exhibits: The exhibits listed in the Exhibit Index below are filed or incorporated herein by reference, in each case as indicated below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Incorporated by Reference | | Exhibit Number | | Description | | Form | | File No. | | Exhibit | | Filing Date | | Filed or Furnished Herewith | | 2.1 | | | | 8-K | | 001-39544 | | 2.1 | | January 11, 2021 | | | | 2.2 | | | | 8-K | | 001-39544 | | 2.1 | | March 31, 2021 | | | | 2.3 | | | | 8-K | | 001-39544 | | 2.1 | | September 30, 2021 | | | | 2.4 | | | | 8-K | | 001-39544 | | 2.1 | | November 3, 2022 | | | | 3.1 | | | | 8-K | | 001-39544 | | 3.1 | | October 21, 2021 | | | | 3.2 | | | | 8-K | | 001-39544 | | 3.2 | | October 21, 2021 | | | | 4.1 | | | | 8-K | | 001-39544 | | 4.1 | | October 21, 2021 | | | | 4.2 | | | | 8-K | | 001-39544 | | 4.2 | | October 21, 2021 | | | | 4.3 | | | | 8-K | | 001-39544 | | 4.1 | | September 28, 2020 | | | | 4.4 | | | | 10-K | | 001-39544 | | 4.4 | | March 31, 2022 | | | | 4.5 | | | | 8-K | | 001-39544 | | 4.3 | | October 21, 2021 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Incorporated by Reference | | Exhibit Number | | Description | | Form | | File No. | | Exhibit | | Filing Date | | Filed or Furnished Herewith | | 4.6 | | | | 8-K | | 001-39544 | | 4.1 | | November 3, 2022 | | | | 4.7 | | | | 10-K | | 001-39544 | | 4.6 | | March 31, 2022 | | | | 10.1 | | | | 8-K | | 001-39544 | | 10.1 | | September 28, 2020 | | | | 10.2 | | | | 8-K | | 001-39544 | | 10.3 | | January 11, 2021 | | | | 10.3 | | | | 8-K | | 001-39544 | | 10.10 | | October 21, 2021 | | | | 10.4 | | | | 8-K | | 001-39544 | | 10.6 | | October 21, 2021 | | | | 10.5 | | | | 8-K | | 001-39544 | | 10.1 | | October 21, 2021 | | | | 10.6 | | | | 8-K | | 001-39544 | | 10.2 | | October 21, 2021 | | | | 10.7 | | | | 8-K | | 001-39544 | | 10.3 | | October 21, 2021 | | | | 10.8 | | | | 8-K | | 001-39544 | | 10.1 | | May 4, 2022 | | | | 10.9 | | | | 8-K | | 001-39544 | | 10.5 | | October 21, 2021 | | | | 10.10+ | | | | 8-K | | 001-39544 | | 10.9 | | October 21, 2021 | | | | 10.11+ | | | | 10-K | | 001-39544 | | 10.11 | | March 31, 2022 | |
| | 10.12+ | | | | 10-K | | 001-39544 | | 10.12 | | March 31, 2022 | |
| | 10.13+ | | | | 10-K | | 001-39544 | | 10.13 | | March 31, 2022 | | | | 10.14* | | | | 8-K | | 001-39544 | | 10.7 | | October 21, 2021 | | | | 10.15+ | | | | 8-K | | 001-39544 | | 10.1 | | November 12, 2021 | | | | 10.16+ | | | | 8-K | | 001-39544 | | 10.12 | | October 21, 2021 | | | | 10.17+ | | | | 8-K | | 001-39544 | | 10.13 | | October 21, 2021 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Incorporated by Reference | | Exhibit Number | | Description | | Form | | File No. | | Exhibit | | Filing Date | | Filed or Furnished Herewith | | 10.18+ | | | | 10-K | | 001-39544 | | 10.18 | | March 31, 2022 | | | | 10.19 | | | | 8-K | | 001-39544 | | 10.1 | | July 25, 2022 | | | | 10.20 | | | | 8-K | | 001-39544 | | 10.1 | | September 12, 2022 | | | | 10.21 | | | | 8-K | | 001-39544 | | 10.2 | | September 12, 2022 | | | | 10.22 | | | | 10-Q | | 001-39544 | | 10.2 | | August 11, 2022 | | | | 10.23 | | | | 8-K | | 001-39544 | | 10.1 | | October 13, 2022 | | | | 21.1 | | | | | | | | | | | | X | | 23.1 | | | | | | | | | | | | X | | 24.1 | | | | | | | | | | | | X | | 31.1 | | | | | | | | | | | | X | | 31.2 | | | | | | | | | | | | X | | 32.1† | | | | | | | | | | | | X | | 32.2† | | | | | | | | | | | | X | | 101.INS | | XBRL Instance Document. | | | | | | | | | | | | 101.SCH | | XBRL Taxonomy Extension Schema Document. | | | | | | | | | | | | 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. | | | | | | | | | | | | 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. | | | | | | | | | | | | 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. | | | | | | | | | | | | 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. | | | | | | | | | | | | 104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). | | | | | | | | | | |
*Schedules and exhibits to this agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished to the SEC upon request.
+ Indicates a management contract or compensatory plan or arrangement. †The certifications attached as part of this Annual Report on Form 10-K. |
Exhibit Index
| | |
Exhibit
Number
| | Description
|
| |
2.1† | | Business Combination Agreement, dated as of January 11, 2021, by and among the Company, Pylon Merger Company LLC and Bakkt Holdings, LLC (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K (File No. 001-39544), filed with the Securities and Exchange Commission on January 11, 2021). |
| |
3.1 | | Amended and Restated Memorandum and Articles of Association (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-39544), filed with the Securities and Exchange Commission on September 28, 2020). |
| |
4.1 | | Specimen Unit Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Amendment No. 1 to the Form S-1 (File No. 333-248619), filed with the Securities and Exchange Commission on September 16, 2020). |
| |
4.2 | | Specimen Class A Ordinary Share Certificate (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Amendment No. 1 to the Form S-1 (File No. 333-248619), filed with the Securities and Exchange Commission on September 16, 2020). |
| |
4.3 | | Specimen Warrant Certificate (incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Amendment No. 1 to the Form S-1 (File No. 333-248619), filed with the Securities and Exchange Commission on September 16, 2020). |
| |
4.4 | | Warrant Agreement by and between the Company and Continental Stock Transfer & Trust Company (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K (File No. 001-39544), filed with the Securities and Exchange Commission on September 28, 2020). |
| |
4.5* | | Description of Securities. |
| |
10.1 | | Letter Agreement among the Company, its officers, certain directors, dated as of September 22, 2020 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-39544), filed with the Securities and Exchange Commission on September 28, 2020). |
| |
10.2 | | Promissory Note issued to VPC Impact Acquisition Holdings Sponsor, LLC (incorporated by reference to Exhibit 10.6 to the Company’s Registration Statement on Amendment No. 1 to the Form S-1 (File No. 333-248619), filed with the Securities and Exchange Commission on September 16, 2020). |
32.1 and 32.2 that accompany this Annual Report on Form 10-K are furnished, not filed, with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of the Registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K, irrespective of any general incorporation language contained in such filing. | | |
10.3 | | Registration Rights Agreement, dated September 22, 2020, by and among the Company, VPC Impact Acquisition Holdings Sponsor, LLC and the holders party thereto (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K (File No. 001-39544), filed with the Securities and Exchange Commission on September 28, 2020). |
| |
10.4 | | Administrative Service Agreement, dated as of September 22, 2020, by and between the Company and VPC Impact Acquisition Holdings Sponsor, LLC (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K (File No. 001-39544), filed with the Securities and Exchange Commission on September 28, 2020). |
| |
10.5 | | Securities Subscription Agreement, dated as of August 3, 2020, by and between the Company and VPC Impact Acquisition Holding Sponsor, LLC (incorporated by reference to Exhibit 10.7 to the Company’s Registration Statement on Amendment No. 1 to the Form S-1 (File No. 333-248619), filed with the Securities and Exchange Commission on September 16, 2020). |
| |
10.6 | | Form of Indemnity Agreement (incorporated by reference to Exhibit 10.5 to the Company’s Registration Statement on Amendment No. 1 to the Form S-1 (File No. 333-248619), filed with the Securities and Exchange Commission on September 16, 2020). |
| |
10.7 | | Amendment to the Letter Agreement, dated as of January 11, 2021, by and among the Registrant, its executive officers, its directors, VPC Impact Acquisition Holdings Sponsor, LLC, and Bakkt Holdings, Inc. (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K (File No. 001-39544), filed with the Securities and Exchange Commission on January 11, 2021). |
| |
10.8 | | Support Agreement, dated as of January 11, 2021, by and among the Company and the subscribers party thereto (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 001-39544), filed with the Securities and Exchange Commission on January 11, 2021). |
| |
10.9 | | Support Agreement, dated as of January 11, 2021, by and among the Registrant, Intercontinental Exchange Holdings, Inc. and Bakkt Holdings, LLC. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 001-39544), filed with the Securities and Exchange Commission on January 11, 2021). |
| |
10.10 | | Form of Subscription Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-39544), filed with the Securities and Exchange Commission on January 11, 2021). |
| |
14* | | Code of Business Conduct and Ethics. |
| |
24* | | Power of Attorney (included on signature page of this report). |
| |
31.1* | | Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a). |
| |
31.2* | | Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a). |
| |
32.1** | | Certification of the Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350. |
| |
32.2** | | Certification of the Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350. |
| |
101.INS*** | | XBRL Instance Document |
| |
101.SCH*** | | XBRL Taxonomy Extension Schema Document |
| |
101.CAL*** | | XBRL Taxonomy Extension Calculation Linkbase Document |
| |
101.DEF*** | | XBRL Taxonomy Extension Definition Linkbase Document |
| |
101.LAB*** | | XBRL Taxonomy Extension Label Linkbase Document |
| |
101.PRE*** | | XBRL Taxonomy Extension Presentation Linkbase Document |
† | Certain of the exhibits and schedules to this Exhibit have been omitted in accordance with Regulation S-K Item 601(a)(5). The Registrant agrees to furnish a copy of all omitted exhibits and schedules to the SEC upon its request.
|
*** | XBRL (eXtensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
|
Item 16. Form 10-K Summary
Pursuant to the requirements
of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | | | | | | | |
| Date: | March 30, 202124, 2023 | | VPC Impact Acquisition HoldingsBAKKT HOLDINGS, INC. |
| | | |
| | | By: | | /s/ John Martin Gavin Michael |
| | | | Name: John Martin | Gavin Michael |
| | | | Title: | Chief Executive Officer and ChairmanPresident |
| | | | | (Principal Executive Officer) |
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints John Martin, Gordon WatsonGavin Michael, Marc D’Annunzio and Olibia Stamatoglou,Karen Alexander, and each or any one of them, his or heras their true and lawful attorney-in-factattorneys-in-fact and agent,agents, with full power of substitution and resubstitution, for him or herthem and in his or hertheir name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the United States Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or shethey might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or histheir substitute or her substitutes, or substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | | | | | | | | | | |
| Signature | | Title | | Date |
| | | | |
| /s/ Gavin Michael | | Chief Executive Officer, President and Director (Principal Executive Officer) | | 3/24/2023 |
| Gavin Michael | | |
| | | | |
| /s/ Karen Alexander | | Chief Financial Officer (Principal Financial Officer) | | 3/24/2023 |
| Karen Alexander | | |
| | | | |
| /s/ Chip Goodroe | | Chief Accounting Officer (Principal Accounting Officer) | | 3/24/2023 |
| Chip Goodroe | | |
| | | | |
/s/ John Martin John Martin
David C. Clifton | | Chief Executive Officer and Chairman
(principal executive officer)
Director | | March 30, 20213/24/2023 |
| David C. Clifton | | |
| | | | |
| /s/ Sean Collins | | Director | | 3/24/2023 |
| Sean Collins | | |
| |
| |
|
| /s/ Michelle J. Goldberg | | Director | | 3/24/2023 |
| Michelle J. Goldberg | | |
| |
| |
|
| /s/ Richard Lumb | | Director | | 3/24/2023 |
| Richard Lumb | | |
| | |
/s/ Gordon Watson
Gordon Watson
| | Chief Operating Officer and President | | March 30, 2021 |
| /s/ Andrew A. Main | | Director | | 3/24/2023 |
| Andrew A. Main | | |
/s/ Olibia Stamatoglou
Olibia Stamatoglou
| | Chief Financial Officer
(principal financial and accounting officer)
| | March 30, 2021
|
| /s/ Gordon Watson | | Director | | 3/24/2023 |
| Gordon Watson | | |
| |
| |
|
/s/ Adrienne HarrisAdrienne Harris
De’Ana Dow | | Director | | March 30, 20213/24/2023 |
| De’Ana Dow | | |
| |
| |
|
/s/ Kai SchmitzKai Schmitz
Jill Simeone | | Director | | March 30, 20213/24/2023 |
| Jill Simeone | | |
/s/ Kurt Summers
Kurt Summers
| | Director | | March 30, 2021 |
98