Greetings, and welcome to the Bakkt Quarter Fourth and Full Year 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference call is being recorded. I will now turn the call over to Ann DeVries, Head of Investor Relations at Bakkt. Please go ahead.

Good evening, and thank you for joining us for Bakkt's fourth quarter earnings call. Today's presentation, including the separate earnings call presentation that can be found at our investor relations website at www.investors.bakkt.com will contain certain forward-looking statements. These statements are based on management's current expectations and are subject to risks and uncertainties, which may cause actual results to differ materially from those expressed or implied in such forward-looking statements. For a more complete discussion on forward-looking statements and the risks and uncertainties related to Bakkt's business, please refer to its filings with the Securities and Exchange Commission. During today's presentation, in addition to discussing results that are calculated in accordance with Generally Accepted Accounting Principles, we will refer to certain non-GAAP financial measures. For more information on this, the basis of the presentation for our financial results and our non-GAAP measures, please refer to our earnings release which was filed this morning with the SEC. Joining me on today's call are Andy Main, Bakkt's Incoming Chief Executive Officer; and Karen Alexander, Chief Financial Officer. After our prepared remarks, we will answer questions we receive from our investors through the Say Technologies platform. After that, Andy and Karen will be available to answer questions from the analyst community. I'll now turn it over to Andy.

Thank you, Ann. And good evening, everyone. It's great to speak to you on my first Bakkt earnings call. Let me firstly start off by saying how excited I am to be Bakkt CEO. I want to thank you for being here today and for your ongoing interest in Bakkt. Seeing it's our first time together, I thought I should do a quick introduction with a focus on my most recent experience. I've been working in digital platforms, championing technologies and selling products for the bulk of my career. Starting in 2013, I was the head of Deloitte Digital, And over seven years grew that business from a startup into a multi-billion dollar business and a globally recognized brand. After that, in 2020, I moved on to become Ogilvy's global CEO, where I led a rapid turnaround of a then lagging business to become the world's leading creative agency in just two years, one year ahead of market expectations. I have also been a Bakkt Board Member since October 2021. I've certainly gained a lot of satisfaction from achieving the ambitions of those businesses. So that's enough about me and now onto talking about Bakkt. So on Page 4, I'm excited to share my perspectives on the business. Let's first start by talking about what's happening in the markets. 2023 undoubtedly brought some challenges and as the market spent the first half of the year rebounding from the industry events of 2022. But with the new milestones, like the approval of spot Bitcoin ETFs and new record Bitcoin price highs, we've finally begun to see strong tailwinds. In Q1 2024, we are already seeing higher transaction volumes from our retail clients as their target audiences and customers are showing greater interest in crypto. So we're cautiously optimistic that with all…

Thanks, Andy. I'll now walk you through our fourth quarter financial results. A quick reminder that, in accordance with GAAP, we present crypto services revenues and crypto costs and execution clearing and brokerage fees on a gross basis, since we are a principal in the crypto services we provide our customers. By contrast, we are an agent in the loyalty redemption services we provide our loyalty customers. So loyalty revenue is presented on a one-line net basis. Crypto costs and execution clearing and brokerage fees, which we will refer to as crypto costs in ECB for the remainder of this call, drive gross crypto services revenue. And the difference between these line items represents crypto's trading's contribution to margin. Please see the notes section of our earnings presentation for additional detail on crypto services revenue and related cost. Turning to Slide 10, we have our fourth quarter 2023 financial results. We had total revenue of $214.5 million, of which, $199.4 million was gross crypto services revenue. Total revenues increased significantly year-over-year due to our acquisition of Bakkt Crypto, which closed on April 1, 2023. We had $15.1 million of net loyalty services revenue. Operating expenses were $293 million, which reflects a significant year-over-year increase in crypto costs and ECB, driven by related crypto services activity. During the fourth quarter, in accordance with generally accepted accounting principles, we conducted our annual goodwill and intangible asset impairment testing. Earlier this year, we spoke about strategically allocating more of our capital towards the crypto business, while maintaining existing offerings and relationships in the loyalty business. Given the pullback and significant investments in the loyalty business, we've lowered long-term revenue growth expectations for this business. Additionally, the impairment accounting rules do not allow us to consider operating forecasts for new products and markets without…

Thanks Karen for taking us through the financials. Before we close, I just want to emphasize how excited I am to be in this role alongside the rest of the Bakkt team at this pivotal time. Bakkt has built a formidable platform and product suite serving a real human need, to help businesses bring the benefits of crypto to their customers and grow alongside the ever-changing digital economy. Our focus on compliance, security, and a flexible and scalable solutions gives our clients the confidence they need to incorporate the latest technology innovations, specifically crypto, directly into their own products. While there have been ups and downs in the last few years, now that we're able to put the going concern behind us, we look forward to leveraging our product suite for our clients, while expanding the client base to more businesses so they can better serve their customers. With the recent momentum in the crypto markets, we are now intensely focused on enhancing shareholder value and excited about the opportunity ahead. And at the end of the day, Bakkt helps our clients innovate their business models to solve for unmet or even unknown human needs. And this is why this market is so exciting and why Bakkt is very well positioned. People are buying and selling crypto, investing in it, paying with it and holding onto it to see the power it has to transform our global financial system. They see the innovation, the convenience, and they want to participate firsthand in that innovation. In some cases, they want to own a piece of this. And in order to do these things, they turn the companies they trust to help meet their needs, while managing the risk that's inherent in new innovations. And that's the same reason why our clients turn to Bakkt. Thank you everyone for your ongoing interest in Bakkt. And I will now turn it over to Ann to manage the Q&A. So Ann, over to you.

Thanks, Andy. Let's move over to questions from the investor community. Leading into our Q&A session, we'll start by answering the top questions from Say, ranked by number of votes. We have consolidated some of the questions that address similar themes. After that, we'll turn to live questions from the analyst community. The first question we will address is around our share price. A number of investors, including [Jason S and Reggie S] (ph) would like to understand why our stock price is underperforming while prices for Bitcoin and other crypto have been very strong this year. Karen, can you please provide your thoughts on this?

Sure, I can take that question. First off, I want to convey that I understand the frustration from our shareholders over the stock price. As a fellow shareholder with a vested interest in seeing our company and stock price do well, it's been incredibly difficult to witness our stock underperform the market by so much. There are a few factors which have negatively impacted our stock. The first is related to a series of amended SEC filings, which contain certain statements around risks to our ability to continue with a going concern that were negatively interpreted by some participants in the media and investors. These amended SEC filings were part of process for us to obtain an effective shelf registration in order to access the capital markets. As you may recall, we started the process of seeking an effective shelf in April of 2023 and worked diligently with the SEC throughout the course of the year to meet the requirements. This process took an extraordinarily long time. By the time our shelf is deemed effective, we needed to raise a relatively large amount of capital to address the risk of whether we could continue as a going concern under the conservative forecasting parameters required by the accounting rules. The capital raise in and of itself also created downward pressure on our stock price as the relatively large size created dilution to our shareholders. Notably, we now believe we have alleviated the issues that led to the disclosure of the going concern risk. I know many of you have been frustrated that we haven't been in the news recently with updates around our positive achievements. As a public company, we are held to the highest standards around compliance. We pride ourselves on our approach to being compliance-first focused in everything we do. That's what differentiates us to our clients and prospects. We take this very seriously. As a public company, we have to obey the rules around blackout periods in the weeks leading up to our earnings release, where we are restricted in what we are able to share publicly. I know the last few months have been challenging, and I hope that you will remain patient. We believe our stock price will react positively once we're able to demonstrate a consistent track record of building scale and driving financial results towards profitability.

Thanks, Karen. Our next question is from [indiscernible], who wants to understand why Bakkt has not been named a custodian for the Bitcoin ETFs and what we are doing to address this? Karen, can you please take that question?

Yes, I can jump in here. As Andy mentioned earlier on this call, we're pleased to have signed an agreement with our intention to be the custody provider for 7RCC, which is an investment manager launching an ETF combining Bitcoin and carbon credits. We're excited to be entering the Bitcoin ETF space. We're in advanced conversations with several other market participants and hope to have additional updates on our progress in this space with [indiscernible].

Thanks. Next up, investors including Laura H. and Brandon C. would like to understand what Bakkt plans to do to increase share price and break out of penny stock territory. Andy, can you please answer this question?

Ann, thanks so much for the question. I think Karen touched on this before, but we believe by demonstrating a consistent track record of building scale and driving our financial results towards profitability will ultimately be the impetus for driving long-term shareholder value. We are committed to making this happen and we'll put our resources behind this to drive us forward to that successful outcome. In order to resolve potential delisting issues around our current stock price in the short term, we plan to pursue a reverse stock split, which will be subject to shareholder vote.

Thanks, Andy. Next up, [Janet and En] (ph), Braden L, and Syed H want to better understand the future of the company, our growth plans, and whether we can remain in business. Andy, can you please take this one too?

Yes, Ann. I'm very happy to. So we are intensely focused on making every possible effort to increase value for our shareholders. We spent the time and resources to build a robust foundation for the company, which includes being publicly traded and NYDFS regulated embedded crypto platform, with separate trading and custody functions, and comprehensive security and operational controls. And as I mentioned earlier, we believe we are in an inflection point. Our key focus as we move forward is on leveraging a robust foundation to commercialize and scale our platform to drive shareholder value. We'll achieve this with our partnerships and growing the Bakkt ecosystem, strategically shifting our business mix to more recurring revenue streams, prudently managing expenses to demonstrate strong operational leverage, and continuing to innovate our products by building upon our acquisition of Bakkt Crypto and growing our institutional capabilities. I firmly believe we have the right platform, the right products, the right strategy, and the right team in place to drive growth for our company. And I'm excited to be joining the company at this time to lead us onward.

Thanks, Andy. Our last question from the Say platform is from Syed H, who wants to know what that will do to regain the confidence of our shareholders. Andy, can you take this one as well?

Yes, sure. Thank you so much for the question. I know that we've obviously had a lot of activity lately, which have been the ups and downs of building a cutting edge digital business. You, our shareholders, have dealt with much of this volatility, and I thank you for your continued support to us. I'm excited too about our opportunities ahead to efficiently scale and deliver financial results that we as a team can be proud of. I'm eager to deliver strong results for our shareholders. While you don't know me well yet, I'm confident that with my experience, combined with Bakkt’s strong product foundation and co-competencies, we can deliver results that will help us regain confidence from the market.

Thanks, Andy. And with that, I would now like to turn the call back over to the operator to open up the phone line to take questions from the analyst community.

Of course. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from a line of Andrew Bond with Rosenblatt Securities. Your line is now open.

Thanks. Hey, good evening. Andy, you mentioned the goal of being EBITDA breakeven, with what kind of no target. And I think that the company's original target was the end of 2024. So, just wanted to know when you think you guys can reach that adjusted EBITDA breakeven target.

Hey, Andrew. It's Karen. Good to talk to you. Yes, so in our comments and obviously in how we've been organizing our targets, we're still striving to achieve that break even on an adjusted EBITDA basis. And we're actually optimistic about our ability to continue to activate revenue from new clients, manage expenses, and recognize the synergies from the integration of the regulated entities, which we received approval on last week. To be candid, some of the noise that we experienced in the recent disclosures of conditions that raised doubt about our ability to continue as a going concern did impact the timing of some of our commercial execution. We were obviously very pleased to report on this call and in the 10-K that we have resolved that risk. And that is providing the tailwinds that we need to make sure that we are reinvigorating those commercial discussions and we're seeing good traction on those. So, given the disruption that we saw over the past month with some of those disclosures, we haven't put any comments on here in terms of timing to break even on an adjusted EBITDA basis, although it still remains our longer-term goal. Again, we want to just take a quarter or two to process through what's happened in terms of the pacing of our commercial discussions before we provide a more specific outlet.

Got it. Follow-up in terms of the custody business, and you mentioned some potential growth from some of the ETF providers. But Bakkt made a bunch of announcements around partnerships and enhancements to the platform and potential wins. So just in terms of visibility of revenue growth, when can you expect to see some of this kind of hit the top line?

Yes. And that's a great question. So when we provided guidance both back in November and then what you saw today, I haven't broken out the institutional portion of crypto. Historically, it has not been material to our results, but we do expect that to pick up, especially in the second half of the year. So, yes, we are seeing traction in terms of [indiscernible] for instance, the unchanged relationship that we announced the other week, the exciting announcement that we have with 7RCC. It's just going to take until the second half of the year before you start seeing that contribute to the overall crypto revenue picture.

Got it. And just lastly on the trading volume quarter to date increase, I believe it's 260% from last quarter. How does that translate or how should we think about that from a net revenue perspective?

Yes. So, in terms of just the revenue for the year for crypto, that range that we have now on a net basis of $20 million to $30 million. We are definitely expecting a strong first quarter. We have, at the moment, we're almost finished with March. We see volumes, notional volumes going in the range of $560 million so far for March. So we expected it to be a strong volume quarter. In terms of the take rate on that, our take rate, as I mentioned, has been influenced by the adjustment that we had with our rev share agreement with Webull Pay. So we were in 80 basis point takeover Q4. I expected it to come down a little bit, but I still think it's going to be higher than the 30 to 40 bps that we had seen before Q3. So I would expect to -- I think we're excited to be able to share the full Q1 trading results, but you'll see a significant uptick in the contribution of retail trading.

Cool. Got it, Karen. Thank you.

Thank you for your question. The next comes from the line is Peter Christiansen with Citi. Your line is now open.

Thank you. Good evening. Welcome, Andy. I wish you the best of luck here.

Thank you.

Karen, the guides for the year-end cash, is that free and unrestricted or does that include a restricted cash?

Hey, Pete, it's Karen again. That does not include any restricted cash. So that's truly cash that we have available to fund our operations. Our restricted cash has had some movement in it, as I mentioned during the call. So in 2024 to date, we did actually have to post some additional collateral related to the surety bonds that were required to hold. We did also move some cash that we've always disclosed as supporting the Bank of America purchasing card facility into a facility that will not be restricted cash. So we've taken all of that into account when I have provided the expectation that we will end the year at about $35 million to $50 million.

That's super helpful. And then as I think about like the business going through a scaling phase, I would assume that would require additional collateral for some of your business lines. How are you thinking about that and factoring that throughout this year?

Yes. So as we mentioned, we saw an exceptionally strong Q1, an exceptionally strong March in particular. We actually work with a number of liquidity providers to make sure that we have multiple sources of liquidity for a Bitcoin we offer on the platform. So we've been able to manage that, those liquidity relationships with the cashless that we have on hand. The forecast that I provided has what we believe to be the best estimate in terms of what's truly available for cash and operations and does not anticipate any significant increases in, for instance, segregated restricted cash accounts in that regard. And so far with what we've seen in trading in March, that has sustained, that assumption has sustained itself.

That's helpful. And then I guess, I mean, thinking towards the end of the year, I'm not going to make any presumptions about 2025 and the need for cash at that point. But assuming that the company will need to raise further capital and given the process, filing the shelf and stuff, is that something you feel like you're in a better position to expedite for potential future funding? Just want to get a sense of that. Thank you.

Yes. So certainly having the shelf helps us quickly access additional liquidity should we need that. As I mentioned on the call, we believe we have sufficient liquidity for at least the next 12 months. Since it's not 12 months and we fall off, there's at least 12 months from how we have to think about disclosing the liquidity position of the company. So at the moment, there is no anticipation in the near term that we would have to access the capital markets again, but certainly having the effective S3 gives us the ability to do that, should a situation change.

That's great. I guess I wanted to ask Andy real quick about collaborative custody and the pockets of demand that you're seeing there. I was just wondering if you could put some color on that business and some of the demands that you're seeing from clients for this product and really how Bakkt fits in.

Yes. So thanks for the question. So that's a really exciting area for this. And it's -- we view it as really innovative, right? So like -- so what it does, right, and we're working with Unchained Capital as our partner in bringing this to market. But unlike traditional custody, where we as custodians have full control over the clients key material. In collaborative custody, we only hold a secure portion of the key. So it's just like a really good solution to give clients more control over their assets, which is super important for an offer. So you're right, it's opening the door to new revenue streams. And so, we're really going after the market here. And we think with this, it will increase our assets under custody as a result, which is only good for Bakkt's overall revenue picture.

That's helpful. Thanks all for the deep transparency. Thank you.

Thank you for your question. Our next question comes from the line of John Roy with Water Tower Research. Your line is now open.

Thank you. Andy, certainly there's been a lot of discussion about scaling up this year and in future years. I wonder if you could give us a little more color on your experience that would relate to how you would scale up and how your background can help manage this process?

Yes, thanks for the question. I think a lot of people also have that same question as well. So first of all, I know Bakkt super well, right? Because I was on the board for the last couple of years, even before the [DSPAC] (ph). So I've been very intimately involved with the business and particularly in my role on the board I was working a lot with product development, marketing and sales, so that was really helping in the market, right, with our teams there. So that's built in relationships. And then, secondly, the crypto market overall is been something I'm very passionate about in terms of the needs it solves for people who want to participate in this, not only in consumers, but also like institutions who are taking positions in crypto on behalf of theirs, and also large -- larger investors too. And then, most recently, I would say that I am a business builder. And I think that's been evidence from the fact that it was one of the folks who scaled Deloitte Digital into a multi-billion business from a fairly -- it's basically a start-up to begin with clearly with a large company. But we scaled that into a very large business. And then recently I was the global CEO of Ogilvy, the advertising, marketing, creative agency company, and basically led a turnaround of that business and got it back on a path to sustainable growth and higher profitability, but did that also well ahead of market expectations. So bringing all these things together, I believe, is a really good confluence and all these intersections that will work in the context of that. And then just when I was at Deloitte Digital, as Bakkt as a digital platform business, Deloitte Digital very much as part of this business was all about digital platforms like connectivity, speed, convenience with great branding and great service and all that good stuff in the latest technology. And certainly got a very good attitude towards how to build and get leverage from digital platforms. And one thing that excites me about Bakkt is that, we built this amazing platform and we've got all these services that are therefore consumable to build on future offers. So our ROI on what we built thus far should be super good because we've got all that to play with to take us forward. So that's why I do that. My prior experience can come in very helpful in this rule of Bakkt that I've taken on.

All right. Thanks, Andy. So, Karen, as a slightly different question, if you look at the linearity of net revenue through the year, can you give us any kind of color on how we should be thinking of that from a modeling perspective?

Sorry, John, were you asking about the revenue or the operating expenses, because I didn't catch that piece of it.

Revenue, net revenue.

Yes. So in terms of it, we've obviously provided a guidance range. When you take the revenue numbers that we have provided on the crypto side and deduct the crypto costs and ECB from the gross crypto revenues, we're getting a range of $20 million to 30 million. And so what we've tried to do in thinking about that range is consider a variety of potential things that could influence where we land. One of them is clearly what we are seeing in terms of retail crypto trading demand. As we mentioned several times, March has been exceptionally strong. In the high of my range I'm not assuming that that exceptionally strong levels continue at the same level. But I do you know think that -- when you think about how the platform has performed in 2022 and 2023, I think we are coming out of the dirt of trading that we saw in the third quarter of 2023. I also commented a bit in terms of what we are expecting and working on in terms of new client activation. So there's certainly timing considerations there. There's also things where, as Andy mentioned, we've been listening to the voice of our customer in terms of what's going to make them and their customers most successful in terms of what they're seeking out of crypto. So for instance, internationally, we know that USBC and Crypto Coin pairs is really important to that customer base. So we're working on getting that stood up and we should see some influence on that in the second half of the year. And then, thinking about what we're seeing on the institutional side. As I mentioned from a previous call, I think you're really going to see that start picking up with us getting assets under custody in the second quarter and then seeing those steadily ramp up through the year. So hopefully that gives our investors some sense in terms of the things that we're looking at both internally and within the market that will influence where we'll land on a revenue basis.

Thank you for your question, John. That concludes today's call. Thank you for you participation and enjoy the rest of your day.