Summary
- It is remarkable that BAKKT is listed on the NYSE, but there it is at about $1.40 per share.
- BAKKT was formed by Intercontinental Exchange as a digital asset (crypto) marketplace, but evolved to include platforms for crypto-based loyalty redemptions and alternate payments.
- On a GAAP basis the company reported YTD 3Q 2022 revenue of $38.9 million - and an incredible net loss of $1.7 billion.
- Unless you’re an inveterate gambler or have legal and actionable knowledge of BKKT and its future prospects and the arcane world of crypto, I recommend investors pass.
It is remarkable that Bakkt Holdings, Inc. ( BKKT ) is listed on the NYSE, but there it is at about $1.40 per share. It was not always so. BKKT provided its shareholders a wild ride up to more than $40.00 per share, albeit briefly. Take a look at this chart:
I plan to evaluate BKKT as a business rather than a concept; a corporation designed to earn profits to benefit its shareholders and in modern terms, its larger group of stakeholders. Of necessity, as its creator and largest investor, I’ll deal with Intercontinental Exchange, Inc.’s (NYSE: ICE ) convoluted involvement with BKKT.
This is not yet a post-mortem.
The Evolving Business Model
BKKT is a start-up company that was formed in 2018 initially as a subsidiary of ICE to create a global crypto exchange like better-known Coinbase (NASDAQ: COIN ) that would provide a digital marketplace for consumers and institutions to buy, sell, store and spend digital assets. Initial funding of $183.0 million was provided by ICE and minority investors. The company made quite a splash because of its parent, which owns the NYSE, and its famous strategic partners including Boston Consulting Group, Microsoft (NASDAQ: MSFT ) and Starbucks (NASDAQ: SBUX ). Over time, the business model evolved to include three components, a 1) digital asset marketplace, 2) loyalty redemption service and 3) alternative payment method.
Digital Asset Marketplace
- An exchange platform for the transaction and storage of crypto currencies. BKKT would earn custodial, transaction and clearing fees from ICE Futures U.S., Inc. (“IFUS”) and ICE Clear US, Inc. (“ICUS”), wholly-owned subsidiaries of ICE, and third-parties.
- Eventually, the plan was to provide a marketplace for NFTs and ETFs.
Loyalty Redemption Platform
- BKKT earns fees for providing a loyalty redemption platform connecting loyalty programs to ecommerce merchants so that customers can redeem their points and/or awards for crypto, merchandise and services.
- There are 1) subscription fees for access to the platform and customer support services, 2) transaction fees for processing transactions, 3) revenue share fees, i.e., rebates from third-party merchants and 4) service fees for customization of new services for merchants.
Alternative Payment Platform
- Allows consumers to pay merchants with crypto, for example, in lieu of a credit card transaction.
- Revenue would be earned through a merchant discount rate.
In 2018 , however, Kelly Loeffler, then-CEO, now a former U.S Senator from Georgia and the wife of ICE CEO Sprecher, described the company in these terms:
Bakkt is designed to serve as a scalable on-ramp for institutional, merchant and consumer participation in digital assets by promoting greater efficiency, security and utility. We are collaborating to build an open platform that helps unlock the transformative potential of digital assets across global markets and commerce.
At first, management clearly viewed the crypto exchange as the prime driver of revenue, but that field was already getting crowded. COIN brought in $522.8 million in revenues that year, BKKT’s were essentially zero. ICE was a company that operated massive exchanges, but its crypto exchange was going nowhere.
How exactly was BKKT to earn revenue?
This was ICE’s problem. The solution was to buy an existing company with revenue, but it wasn’t a crypto exchange. On February 21, 2020, ICE acquired Bridge2 Solutions, a crypto-based loyalty redemption company. On March 12, 2020, BKKT completed $300.0 million in funding with ICE contributing $260.8 million in the form of Bridge2 Solutions, thereby maintaining its majority ownership. Bridge2Solutions - with a revenue run-rate of about $35.0 million - would contribute essentially 100.0% of BKKT’s net revenue.
This is how management saw BKKT evolving:
VPC Impact Acquisitions Holdings September 17, 2021 Prospectus
By April 2020, an astute observer might have speculated that BKKT was not in ICE’s long term plans. During ICE’s Q1 2020 Earnings Conference Call , CEO Jeffrey Sprecher noted that ICE “spent nearly $300 million helping Bakkt to acquire Bridge2 solutions,” but Coindesk writer Nikhilesh De observed:
Aside from two references to Bridge2, Bakkt was not mentioned during the earnings call. No analysts asked any direct questions about the subsidiary, which has been facilitating trading of bitcoin futures and options contracts over the past several months.
Nor were there any questions about Mike Blandina, who stepped down as Bakkt's CEO last week just four months after taking the reins. Blandina was succeeded on an interim basis by ICE's vice president for M&A and integration, David Clifton. There has so far been no word of a permanent replacement CEO.
The lack of questions comes in stark contrast to ICE's last earnings call in February, when a number of analysts asked about ICE's role with Bakkt. That call came right after ICE announced it was acquiring Bridge2, and Sprecher said at the time the move could open a potential $1 trillion market.
SPAC IPO: $2.1 Billion Enterprise Value, $35.0 million Revenue
At this point ICE had committed more than $300.0 million to an unprofitable company with about $35.0 million in revenue – and that company needed capital.
On October 15, 2021, BKKT completed a merger with VPC Impact Acquisition Holdings, a Victory Park Capital-sponsored SPAC that had raised about $200.0 million in an IPO on September 25, 2021. The merger resulted in an enterprise value of $2.1 billion, including $479.0 million of cash on the combined company’s balance sheet, reflecting a contribution of up to $123.0 million of cash from the SPAC, a $325 million concurrent PIPE offering and $31 million of cash from BKKT. ICE bought $47 million in stock through the PIPE. A substantial $1.5 billion of the merger consideration was assigned to goodwill.
The company was promptly renamed Bakkt Holdings, Inc. and listed on the NYSE. At the close of the merger here were the ownership percentages:
- ICE 68%
- Other BKTT shareholders 13%
- Victory Park and affiliates 7%
- PIPE investors 12% - includes $47.0 million ICE investment
Through February 14, 2023, as lock-ups began to expire, investors, insiders, directors and employees had sold 2.7 million shares for $20.6 million, an average price of about $7.56 per share. PIPE investors had paid $10.00 per share. ICE had not sold any shares. As reported in the ICE 2021 10K , however, there had been a very large accounting benefit for ICE. Due to the de-consolidation of BKTT, ICE recognized a non-cash $1.4 billion gain equal to about 24.5% of pre-tax income for 2021.
BKKT Financial Results
We don’t really have much to evaluate in terms of BKKT’s operating results, but what we have is not inspiring.
Revenue YTD 3Q 2022 was $38.9 million - marked in yellow - for a company that had been valued at $2.1 billion, an annualized 40.4 enterprise value to sales ratio, but currently 6.39. In comparison, Coinbase, a company with its own issues but $3.1 billion in TTM sales, has a 4.05 enterprise value to sales ratio. Almost two and a half years after the Bridge2Solutions acquisition, revenue was still almost 100% from the acquired loyalty redemption segment. “Revenue generated from our service offerings in the digital asset marketplace and payments,” noted the BKKT 3Q 2022 10Q , “has been immaterial to date.” The excerpt from BKKT’s 3Q 2022 10Q below, illustrates the point:
Comparable revenue from the loyalty redemption segment increased a robust $11.2 million or 41.0% to $38.9 million YTD 3Q 2022 from $27.3 million in 2021, while contributions from the digital marketplace and alternative payments were negligible. Unfortunately, the loyalty redemption revenue, although a bright spot, was swamped by the company’s huge YTD 3Q 2022 operating expenses of $172.8 million – excluding the goodwill write-off. Note that as recently as October 2021, per a Motley Fool article , management had lofty goals for BKKT’s revenue:
Management expects Bakkt to generate $889 million in revenue this year, with 94% of that total coming from cryptocurrency trades. It also expects Bakkt to remain unprofitable on an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis with a loss of $169 million. But by 2025, Bakkt is projected to generate $6.6 billion in revenue -- most of which will still come from cryptocurrency trades - with a positive adjusted EBITDA of $285 million.
As of this writing, BKKT would need to increase annual revenue by $837.1 million over two years, a 314.0% average annual rate of growth. I would assign this a low probability.
The goodwill write-off – also in yellow – is particularly interesting. In 3Q 2022, management wrote off about 81.3% of BKKT’s $1.9 billion in goodwill and intangible assets. The triggering event was “a delay in partner activations of cryptoasset products and a decline in the company’s stock price,” but the actual size of the write-off was determined by , among other factors, management estimates of future margins and revenue growth rates. From the BKT 3Q 2022 10Q:
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 partners. 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.
Based on management’s observation that revenue from the digital asset marketplace and alternate payments was “immaterial,” it seems fair to conclude that the future prospects of these segments are questionable.
The value of license and trademark/trade name intangible assets were written down by $131.3 million or 54.4% and $26.5 million or 67.1%, respectively. About one year after the merger, goodwill and intangible asset write-offs totaled about 76.0% of the peak $2.1 billion enterprise value.
As a result of the write-offs, on October 29, 2022, ICE wrote off its investment in BKKT by $1.1 billion to a carrying value of about $400.0 million. At this point ICE had invested roughly $420.0 million in cash (estimated ICE first round investment of about $110.0 million) in BKKT, had noncash write-up of $1.4 billion, a non-cash write-down of $1.1 billion and owned 170.4 million BKKT shares worth about $248.2 million as of February 27, 2023, a 59.4% loss on its investment.
Finally, the last area marked in yellow, a cumulative GAAP net loss of $1.7 billion YTD 3Q 2022.
The Future
BKKT was always about the future of crypto; a future financial world where consumers not only wanted to trade and invest in crypto, but to make payments and receive their loyalty points in crypto as well. After five years since start-up, it seems the digital marketplace and alternate payments segments are write-offs. There are other crypto exchanges; Coinbase, Robinhood (NASDAQ: HOOD ), etc. There are companies facilitating payment with crypto; Coinbase, PayPal (NASDAQ: PYPL ), etc. Crypto loyalty redemption, based on the company ICE acquired for BKKT, appears to be the only segment where BKKT has any traction in the market. The FTX blow-up didn’t help BKKT, either.
Although Microsoft and Starbucks appear to be following other paths, BKKT has some major clients, Mastercard (NYSE: MA ) and Fiserv (NASDAQ: FISV ), among others, all apparently for their loyalty redemption segment.
At this point, however, BKKT looks more like a product line than a company. It could provide a nice tuck-in acquisition for a larger tech company seeking to broaden its crypto product offering. As a stand-alone company, BKKT’s future will depend on 1) stripping the company down until the loyalty redemption segment becomes the entire company or 2) finding a profitable acquisition or two with the company’s remaining cash. Until then, at the current cash burn rate, BKKT has less than two years.
Unless you’re an inveterate gambler or have legal and actionable knowledge of BKKT and its future prospects and the arcane world of crypto, I recommend investors pass.
For further details see:
Bakkt Holdings: Backed Into A Corner