Bakkt (BKKT) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements and detailed notes for Bakkt Holdings, Inc Consolidated Balance Sheets Total assets and liabilities increased significantly, driven by a substantial rise in crypto safeguarding assets and obligations Consolidated Balance Sheet Highlights | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | |:---|:---|:---| | Total Assets | $1,023,742 | $455,502 | | Safeguarding asset for crypto | $659,656 | $15,792 | | Total Liabilities | $763,866 | $119,428 | | Safeguarding obligation for crypto | $659,656 | $15,792 | | Total Stockholders' Equity | $83,796 | $96,263 | Consolidated Statements of Operations Total revenues increased substantially due to the Bakkt Crypto acquisition, though higher operating expenses led to increased net losses Consolidated Statements of Operations Highlights | Metric (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | |:---|:---|:---|:---|:---| | Total revenues | $347,629 | $14,035 | $360,848 | $27,103 | | Operating loss | $(51,088) | $(43,551) | $(96,534) | $(92,036) | | Net loss attributable to Bakkt Holdings, Inc | $(16,848) | $(3,897) | $(30,820) | $(11,026) | | Net loss per share – Basic | $(0.19) | $(0.05) | $(0.36) | $(0.17) | | Net loss per share – Diluted | $(0.19) | $(0.05) | $(0.36) | $(0.18) | Consolidated Statements of Comprehensive Loss Comprehensive loss increased significantly compared to the prior year, reflecting the net loss adjusted for other comprehensive income items Consolidated Statements of Comprehensive Loss Highlights | Metric (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | |:---|:---|:---|:---|:---| | Net loss | $(50,511) | $(27,641) | $(95,366) | $(70,962) | | Currency translation adjustment, net of tax | $339 | $(382) | $360 | $(194) | | Unrealized gains (losses) on available-for-sale securities, net of tax | $233 | $(13) | $2 | $(13) | | Comprehensive loss attributable to Bakkt Holdings, Inc | $(16,658) | $(4,006) | $(30,696) | $(11,093) | Consolidated Statements of Changes in Stockholders' Equity Total equity decreased from year-end 2022, primarily due to the net loss incurred, partially offset by share-based compensation Consolidated Statements of Changes in Stockholders' Equity Highlights | Metric (in thousands) | Balance as of December 31, 2022 | Balance as of June 30, 2023 | |:---|:---|:---| | Total Stockholders' Equity | $96,263 | $83,796 | | Noncontrolling Interest | $239,811 | $176,080 | | Total Equity | $336,074 | $259,876 | | Net loss | $(676,447) (Accumulated Deficit) | $(707,271) (Accumulated Deficit) | | Shares issued in connection with Apex acquisition | — | $9,063 | Consolidated Statements of Cash Flows The company continued to use cash in operating activities, while investing activities provided net cash from the sale of securities Consolidated Statements of Cash Flows Highlights | Metric (in thousands) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | |:---|:---|:---| | Net cash used in operating activities | $(78,486) | $(60,430) | | Net cash provided by (used in) investing activities | $75,116 | $(203,937) | | Net cash (used in) provided by financing activities | $(2,502) | $2 | | Cash, cash equivalents, restricted cash, cash held in escrow and customer funds at the end of the period | $109,912 | $143,857 | Notes to Unaudited Consolidated Financial Statements Provides detailed explanations of accounting policies, acquisitions, and components of the consolidated financial statements 1. Organization and Description of Business Bakkt operates under an 'up-C' structure and focuses on crypto and loyalty solutions, recently acquiring Apex Crypto - Bakkt Holdings, Inc operates under an 'up-C' structure, with Opco holding substantially all assets and business[394] - Acquired 100% of Apex Crypto LLC on April 1, 2023, subsequently renamed Bakkt Crypto Solutions, LLC[396] - Business segments include Crypto (Custody, Trading, Rewards, Payouts) and Loyalty solutions, aiming to connect the digital economy[397][406] 2. Summary of Significant Accounting Policies Financial statements are prepared per U.S. GAAP, with a key policy update for Bakkt Crypto's revenue recognition as a principal - Interim consolidated financial statements are prepared in accordance with U.S. GAAP, with all intercompany balances and transactions eliminated[408] - Bakkt Crypto acts as a principal in customer transactions, reporting gross proceeds from crypto sales as revenue, including a spread on the market price[411][416] - Revenue from crypto transactions is primarily allocated to the execution performance obligation, satisfied upon recording the transaction to the customer's account[411] 3. Revenue from Contracts with Customers Transaction revenue, particularly from crypto services, increased massively following the Apex Crypto acquisition Revenue by Service Type and Platform | Service Type (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | |:---|:---|:---|:---|:---| | Transaction revenue | $342,542 | $7,495 | $350,248 | $14,549 | | Subscription and service revenue | $5,087 | $6,540 | $10,600 | $12,554 | | Total revenue | $347,629 | $14,035 | $360,848 | $27,103 | | Crypto services revenue | $335,333 | $661 | $335,776 | $993 | | Loyalty redemption platform revenue | $12,296 | $13,374 | $25,072 | $26,110 | - The company recognized no incremental costs to obtain and/or fulfill contracts with customers for the three and six months ended June 30, 2023 and 2022[3] - As of June 30, 2023, remaining performance obligations totaled $22.2 million, recognized over weighted-average periods of 30 months (subscription) and 15 months (service)[12] 4. Business Combination and Asset Acquisition Bakkt acquired Apex Crypto for $79.2 million, recognizing $51.0 million in goodwill, and Bumped Financial for its licenses - Acquired 100% of Apex Crypto on April 1, 2023, for a total consideration of $79.2 million, including cash, stock, and contingent consideration[4][295] - Recognized $51.0 million in goodwill from the Apex Crypto acquisition, attributed to the assembled workforce and expected growth[4][295] - Acquired Bumped Financial, LLC (renamed Bakkt Brokerage, LLC) on February 8, 2023, for $631,000 in cash, primarily for its broker-dealer licenses[146][299] 5. Goodwill and Intangible Assets, Net Goodwill increased significantly to $66.9 million due to the Apex Crypto acquisition, with total net intangible assets at $67.7 million Goodwill and Intangible Assets Summary | Metric (in thousands) | June 30, 2023 | December 31, 2022 | |:---|:---|:---| | Goodwill | $66,877 | $15,852 | | Intangible assets, net | $67,663 | $55,833 | | Amortization of intangible assets (3 months) | $2,700 | $5,400 | | Amortization of intangible assets (6 months) | $4,700 | $10,800 | - Goodwill increased by $51.0 million due to the Apex Crypto acquisition[295][300] - Owned crypto assets are accounted for as indefinite-lived intangible assets, assessed for impairment continually, and impairment losses are not reversible[304] 6. Consolidated Balance Sheet Components This section details various balance sheet accounts, highlighting changes in receivables, liabilities, and fixed assets Selected Balance Sheet Components | Metric (in thousands) | June 30, 2023 | December 31, 2022 | |:---|:---|:---| | Accounts receivable, net | $21,015 | $25,306 | | Property, equipment and software, net | $20,194 | $19,744 | | Deposits with clearinghouse | $15,309 | $15,150 | | Accounts payable and accrued liabilities | $52,365 | $66,787 | | Other noncurrent liabilities | $38,938 | $23,402 | - Contingent consideration of $13.4 million from the Apex Crypto acquisition is a new component of other noncurrent liabilities[39] - Depreciation and amortization expense related to property, equipment and software amounted to $1.3 million for the three months and $2.3 million for the six months ended June 30, 2023[308] 7. Tax Receivable Agreement No liability has been recorded under the Tax Receivable Agreement as it is not probable the company will realize related tax benefits - The TRA provides for payments to Opco equity holders of 85% of certain net income tax benefits from increases in tax basis due to Opco common unit exchanges[264][313] - As of June 30, 2023, 22,678,761 Opco common units were exchanged for Class A common stock[313] - No TRA liability has been recorded as of June 30, 2023, because it is not probable that the company will realize such tax benefits in the foreseeable future[83][234] 8. Related Parties The company has agreements with ICE and Apex for technical support, while most Bakkt Bitcoin futures contracts were delisted Related Party Expenses | Related Party Expense (in thousands) | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 | |:---|:---|:---| | ICE TSA | $1,000 | $1,600 | | Apex TSA | $500 | N/A (only 3 months reported) | - IFUS delisted all Bakkt Bitcoin futures contracts (except August and September 2023 expiry months) and all Bakkt Bitcoin Option contracts effective July 28, 2023[16] - A contribution requirement of $15.2 million to ICUS, reflected as 'Deposits with clearinghouse,' was maintained as of June 30, 2023[14] 9. Warrants Over 7.1 million public warrants remain outstanding, with the company recognizing a gain from the change in fair value for Q2 2023 - 7,140,808 public warrants were outstanding as of June 30, 2023, with an exercise price of $11.50 per share and an expiration date of October 15, 2026[18] Change in Fair Value of Warrant Liability | Metric (in thousands) | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 | |:---|:---|:---|:---|:---|\ | Gain (loss) from change in fair value of warrant liability | $357 | $(643) | $10,283 | $12,711 | - No proceeds were received from the exercise of public warrants during the three and six months ended June 30, 2023[19] 10. Stockholders' Equity The company has two classes of common stock outstanding, with noncontrolling interest holders owning 67% of Opco common units - No preferred stock has been issued as of June 30, 2023[21] Common Stock Outstanding | Common Stock Class | Shares Issued and Outstanding (June 30, 2023) | Shares Issued and Outstanding (December 31, 2022) | |:---|:---|:---| | Class A Common Stock | 91,286,095 | 80,926,843 | | Class V Common Stock | 183,279,887 | 183,482,777 | - Noncontrolling interest holders' weighted average ownership percentage in Opco was 66.8% for the three months and 67.8% for the six months ended June 30, 2023[31] 11. Share-Based and Unit-Based Compensation The 2021 Incentive Plan was amended to increase authorized shares, with total unrecognized compensation expense of $27.3 million - The 2021 Incentive Plan's authorized shares for Class A common stock issuance increased to a new total of 52,407,412 shares on June 6, 2023[46] Compensation Expense by Type | Compensation Type (in thousands) | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 | |:---|:---|:---|:---|:---| | RSU Share-based compensation expense | $3,600 | $9,400 | $5,800 | $16,700 | | PSU Share-based compensation expense | $500 | $1,900 | $2,800 | $4,600 | | Common incentive unit-based compensation expense | $377 | $919 | $1,033 | $2,106 | | Participation unit-based compensation expense | $(111) | $27 | $(2,017) | $(2,978) | - Unrecognized compensation expense as of June 30, 2023, was $26.9 million for RSUs and PSUs and $0.4 million for common incentive units[49][61] 12. Net Loss per share Basic and diluted net loss per share were $(0.19) for Q2 2023, with potentially dilutive securities excluded due to their anti-dilutive effect Net Loss Per Share Calculation | Metric | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 | |:---|:---|:---|:---|:---| | Net loss attributable to Bakkt Holdings, Inc | $(16,848) | $(30,820) | $(3,897) | $(11,026) | | Weighted average shares outstanding – basic | 89,837,296 | 85,880,289 | 71,226,366 | 64,234,239 | | Net loss per share – basic | $(0.19) | $(0.36) | $(0.05) | $(0.17) | | Net loss per share – diluted | $(0.19) | $(0.36) | $(0.05) | $(0.18) | - Potentially dilutive securities totaling 206.3 million shares were excluded from diluted loss per common share as their effect would be anti-dilutive[72][74] 13. Capital Requirements Bakkt's subsidiaries are subject to various regulatory capital requirements and were in compliance as of June 30, 2023 - Bakkt Trust is subject to NYDFS regulatory capital requirements, including maintaining a defined positive net worth[75] - Bakkt Marketplace and Bakkt Crypto are required to maintain minimum tangible net worth and positive net worth, respectively[77][78] - All subsidiaries were in compliance with their respective regulatory capital requirements as of June 30, 2023[79] 14. Commitments and Contingencies The company reached a $3.0 million settlement for a lawsuit, faces an ongoing SEC inquiry, and has $24.1 million in purchase obligations 401(k) Plan Expense | Expense (in thousands) | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 | |:---|:---|:---| | 401(k) Plan Expense | $700 | $1,700 | - A $3.0 million settlement in principle was reached for a class action lawsuit, with coverage expected from insurance less contractual retention[84] - An SEC inquiry into Bakkt Crypto's business operations, asset classification, and customer relationships is ongoing, with the potential impact currently uncertain[87] - The company has a $35.0 million corporate card facility with Bank of America and $24.05 million in purchase obligations as of June 30, 2023[90][91][97] 15. Income Taxes The company's effective tax rate was negative due to non-taxed losses, and a full valuation allowance is maintained against deferred tax assets Effective Tax Rate | Metric | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 | |:---|:---|:---|:---|:---| | Effective Tax Rate | (0.2)% | (0.4)% | 15.6% | 10.4% | - The effective tax rate differs from statutory rates primarily due to losses not taxed to the company and the inability to realize net operating losses[99] - A full valuation allowance is maintained against net deferred tax assets as of June 30, 2023, and December 31, 2022, due to uncertainty regarding their realizability[100] 16. Fair Value Measurements Safeguarding assets and obligations were valued using Level 2 inputs, while contingent consideration was valued using Level 3 inputs Fair Value of Financial Instruments | Financial Instrument (in thousands) | Total (June 30, 2023) | Level 1 | Level 2 | Level 3 | |:---|:---|:---|:---|:---| | U.S. Treasury debt securities | $14,911 | $14,911 | — | — | | Safeguarding asset for crypto | $659,656 | — | $659,656 | — | | Safeguarding obligation for crypto | $659,656 | — | $659,656 | — | | Contingent consideration | $13,397 | — | — | $13,397 | | Warrant liability—public warrants | $1,428 | $1,428 | — | — | - The contingent consideration liability, valued using Level 3 inputs (Monte Carlo model), increased by $10.4 million during the three months ended June 30, 2023[106] - Fair value of safeguarding obligation and asset for crypto is determined using Level 2 inputs, based on the mid-point of a bid-ask spread[105] 17. Leases The company leases office space under operating leases with a weighted-average remaining term of 89 months - Real estate leases have remaining terms from 34 to 111 months as of June 30, 2023[111] - Key lease agreements include a 90-month Scottsdale lease ($5.7 million), a 94-month New York lease ($7.3 million), and a 47-month Alpharetta call center lease ($5.9 million)[108][110] - The weighted average remaining lease term for operating leases was approximately 89 months, and the weighted average discount rate was 5.3%[114] 18. Safeguarding Obligation For Crypto The company held $659.7 million in safeguarding obligations for crypto as of June 30, 2023, measured at fair value - Safeguarding obligation for crypto was $659.7 million as of June 30, 2023, a significant increase from $15.8 million at December 31, 2022[116][118] - The safeguarding liability and corresponding asset are measured at the fair value of the crypto held for customers, with no safeguarding loss events reported[116] Safeguarding Obligation by Crypto Asset | Crypto Asset (in thousands) | June 30, 2023 | December 31, 2022 | |:---|:---|:---| | Bitcoin | $227,809 | $15,717 | | Ether | $179,632 | $75 | | Shiba Inu | $110,497 | — | | Dogecoin | $65,194 | — | | Other | $76,524 | — | | Total Safeguarding obligation for crypto | $659,656 | $15,792 | 19. Investment in Debt Securities The company holds $14.9 million in U.S. Treasury debt securities, classified as available-for-sale and recorded at fair value Available-for-Sale Debt Securities | Metric (in thousands) | June 30, 2023 | December 31, 2022 | |:---|:---|:---| | Total available-for-sale securities (Fair Value) | $14,911 | $141,062 | | Unrealized Gains/(Losses), net | $(89) | $59 | | Cost Basis | $15,000 | $141,003 | - Unrealized losses on government debt securities are due to changes in interest rates, and the company does not intend to sell these investments before recovery[122] - All debt securities are due in one year or less as of June 30, 2023[125] 20. Subsequent Events No subsequent events requiring recognition or disclosure in the financial statements were identified - No other events or transactions met the definition of a subsequent event for recognition or disclosure[126] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial results, highlighting the impact of the Apex Crypto acquisition, market developments, and liquidity Overview Bakkt connects the digital economy through an ecosystem for crypto and loyalty points, offering SaaS and API solutions to clients - Bakkt builds technology connecting the digital economy, offering an ecosystem for crypto and loyalty points through SaaS and API solutions[136] - The platform is designed for institutional-grade security, supporting KYC, AML, and anti-fraud measures[131] - Key terms defined: Client (businesses), Crypto assets (blockchain assets), Loyalty points (reward points), and Customer (individual users)[129][130][135] Crypto Market Developments Crypto markets continue to be impacted by macroeconomic conditions, market volatility, and increased regulatory scrutiny - Crypto markets are impacted by macroeconomic conditions, including high interest rates, inflation, and market volatility[132] - 2023 saw continued impact from significant crypto asset price volatility, loss of confidence due to major bankruptcies, and increased regulatory scrutiny[138][139] - A recent federal court ruling determined that 'programmatic' sales of XRP to retail investors were not unregistered securities, while sales to institutional investors were[139] Recent Developments Bakkt acquired Apex Crypto to expand its trading platform and partnerships, and Bumped Financial for its broker-dealer licenses - Acquired Apex Crypto on April 1, 2023, to leverage its trading platform, expand asset offerings, and broaden partnerships to fintechs and neo-banks[140] - Bakkt Crypto offers virtual currency purchase, storage, and sale, with future plans for international services, wallet transfers, and NFTs[140][141][143] - Acquired Bumped Financial, LLC (renamed Bakkt Brokerage, LLC) on February 8, 2023, for $631,000 for its broker-dealer licenses[146] Key Factors Affecting Our Performance Performance is driven by client growth, product innovation, competition, and navigating the dynamic crypto regulatory landscape - Performance depends on growing the client base, expanding product offerings, and continuous innovation in the competitive crypto marketplace[147][148][149] - General economic and crypto market conditions, including volatility and regulatory actions, significantly impact client activity and business performance[151][152] - The safeguarding obligation liability for crypto held for other parties was approximately $659.7 million as of June 30, 2023[155][156] Key Performance Indicators All key performance indicators, including crypto-enabled accounts and assets under custody, showed significant growth Key Performance Indicators Summary | KPI | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 | As of June 30, 2023 | As of December 31, 2022 | |:---|:---|:---|:---|:---| | Crypto-enabled accounts | 6.0 million | 11.8 million | N/A | N/A | | Transacting accounts (unique monthly) | 0.9 million | 1.6 million | N/A | N/A | | Notional traded volume | $531.3 million | $724.3 million | N/A | N/A | | Assets under custody | N/A | N/A | $659.7 million | $26.1 million | Results of Operations Revenue increased substantially due to the Apex Crypto acquisition, but higher crypto costs led to increased operating and net losses Three Months Ended June 30, 2023 compared to Three Months Ended June 30, 2022 Revenue increased by $333.6 million, but operating expenses surged by $341.1 million, resulting in a higher operating and net loss Q2 2023 vs Q2 2022 Performance | Metric (in thousands) | June 30, 2023 | June 30, 2022 | Change ($) | Change (%) | |:---|:---|:---|:---|:---| | Total Revenues | $347,629 | $14,035 | $333,594 | n/m | | Operating Expenses | $398,717 | $57,586 | $341,131 | n/m | | Operating Loss | $(51,088) | $(43,551) | $(7,537) | 17.3% | | Net Loss attributable to Bakkt Holdings, Inc | $(16,848) | $(3,897) | $(12,951) | 332.3% | - Revenue increase was driven by $335.0 million in transaction revenue (primarily crypto trading from Apex Crypto acquisition)[172] - Crypto costs increased by $331.3 million, reflecting increased volume from the Apex Crypto acquisition[173] Six Months Ended June 30, 2023 compared to Six Months Ended June 30, 2022 Revenue increased by $333.7 million, but operating expenses rose by $338.2 million, leading to a higher operating and net loss H1 2023 vs H1 2022 Performance | Metric (in thousands) | June 30, 2023 | June 30, 2022 | Change ($) | Change (%) | |:---|:---|:---|:---|:---| | Total Revenues | $360,848 | $27,103 | $333,745 | n/m | | Operating Expenses | $457,382 | $119,139 | $338,243 | n/m | | Operating Loss | $(96,534) | $(92,036) | $(4,498) | 4.9% | | Net Loss attributable to Bakkt Holdings, Inc | $(30,820) | $(8,238) | $(22,582) | 274.1% | - Revenue increase was driven by $335.7 million in transaction revenue (primarily crypto trading from Apex Crypto acquisition)[193] - Crypto costs increased by $331.2 million, reflecting increased volume from the Apex Crypto acquisition[198] Liquidity and Capital Resources The company continues to use cash in operations but expects a decline in overall cash usage in 2023 due to increased revenue Liquidity Position | Metric (in thousands) | June 30, 2023 | December 31, 2022 | |:---|:---|:---| | Cash and cash equivalents | $84,519 | $98,332 | | Restricted cash | $24,858 | $16,500 | | Available-for-sale debt securities | $14,911 | $141,062 | | Net cash used in operating activities (6 months) | $(78,486) | $(60,430) | | Net cash provided by (used in) investing activities (6 months) | $75,116 | $(203,937) | | Net cash (used in) provided by financing activities (6 months) | $(2,502) | $2 | - Expected cash usage in 2023 to decline from 2022 levels due to increased revenue and expense reductions[215] - Future cash requirements depend on revenue growth, hiring, sales and marketing, and software development investments, with potential need for additional capital[217][218] Non-GAAP Financial Measures Adjusted EBITDA loss decreased for the three and six months ended June 30, 2023, primarily due to reduced operating expenses - Adjusted EBITDA is defined as earnings before interest, income taxes, depreciation, amortization, acquisition-related expenses, and other non-recurring items[242] Adjusted EBITDA Reconciliation | Metric (in thousands) | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 | |:---|:---|:---|:---|:---| | Net loss | $(50,511) | $(95,366) | $(27,641) | $(70,962) | | Adjusted EBITDA loss | $(24,496) | $(53,347) | $(29,587) | $(58,514) | - Adjusted EBITDA loss decreased by $5.1 million (17.2%) for the three months and $5.2 million (8.8%) for the six months ended June 30, 2023[245][246] Critical Accounting Policies and Estimates Financial statements rely on estimates and judgments, with no material changes to critical policies since the last Form 10-K - Significant estimates include income tax valuation allowances, useful lives of assets, fair value of financial instruments, and impairment assessments[248][250] - No material changes to critical accounting policies and estimates since the Form 10-K, except for those related to the Apex Crypto acquisition[247] Recently Issued and Adopted Accounting Pronouncements No significant changes from accounting pronouncements disclosed in the Form 10-K were reported for the period - No significant changes to recently adopted accounting pronouncements applicable to the company from those disclosed in the Form 10-K[413] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that there are no applicable quantitative and qualitative disclosures about market risk - Not applicable[253] Item 4. Controls and Procedures Disclosure controls and procedures were deemed effective, with no material changes in internal control over financial reporting - Disclosure controls and procedures were effective as of June 30, 2023[254] - No material changes to internal control over financial reporting during the quarter ended June 30, 2023, except for the ongoing integration of Apex Crypto[255] - Apex Crypto was excluded from the assessment of internal control over financial reporting due to its recent acquisition[255] PART II. OTHER INFORMATION Item 1. Legal Proceedings Bakkt Crypto is subject to an ongoing SEC inquiry with an uncertain outcome, while other proceedings are not expected to be material - Bakkt Crypto received ongoing requests from the SEC for documents and information about its business, with the outcome remaining uncertain[258] - The company believes that the resolution of legal proceedings and claims arising in the ordinary course of business will not have a material adverse effect on its financial position[266] Item 1A. Risk Factors The company faces significant risks related to client retention, crypto asset delisting, evolving government regulations, and litigation - Risks include challenges in attracting, retaining, and growing relationships with clients, especially large ones, due to longer sales cycles and complex requirements[259][260][261] - Delisting of certain crypto assets on the Bakkt Crypto platform has impacted, and may further impact, revenues and customer engagement[272] - The business is subject to extensive, complex, and evolving government regulations, with non-compliance potentially leading to fines, penalties, and operational restrictions[276][277][278][279][281] - The uncertain status of crypto assets as 'securities' under U.S. federal securities laws poses significant regulatory scrutiny and litigation risk[321][323][324][328] - The company is subject to significant litigation risk and regulatory liability, including class action lawsuits and SEC inquiries[329][330][332][334][335] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section states that there were no unregistered sales of equity securities and no use of proceeds to report - None[343] Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities to report - None[344] Item 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable - Not applicable[345] Item 5. Other Information The company amended its Stockholders' and Registration Rights Agreements, shortening the lock-up period for certain contingent shares - On August 9, 2023, an Amendment Agreement was entered into with AFS and PEAK6 Investments LLC, amending the Stockholders' Agreement and Registration Rights Agreement[346] - The amendment shortens the lock-up expiration for 2022 Contingent Shares: two-thirds released at six months and the remainder at eight months[372] - The amendment also removes the deadline for the Resale Registration Statement's effectiveness, contingent on it not being declared effective by August 18, 2023[372][373] Item 6. Exhibits This section lists all exhibits filed with the Quarterly Report on Form 10-Q - Lists various exhibits filed, including amendments to agreements, certificates of incorporation, by-laws, registration rights agreements, and officer certifications[349]