Item 1. Financial Statements
Item 1. Financial Statements
MICROSTRATEGY INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
June 30,
December 31,
2022
2021
(unaudited)
Assets
Current assets:
Cash and cash equivalents
$
69,386
$
63,356
Restricted cash
6,155
1,078
Accounts receivable, net
118,645
189,280
Prepaid expenses and other current assets
25,496
14,251
Total current assets
219,682
267,965
Digital assets
1,987,781
2,850,210
Property and equipment, net
34,580
36,587
Right-of-use assets
65,169
66,760
Deposits and other assets
17,786
15,820
Deferred tax assets, net
243,367
319,782
Total assets
$
2,568,365
$
3,557,124
Liabilities and Stockholders’ (Deficit) Equity
Current liabilities:
Accounts payable, accrued expenses, and operating lease liabilities
$
35,960
$
46,084
Accrued compensation and employee benefits
47,773
54,548
Accrued interest
2,269
1,493
Deferred revenue and advance payments
188,098
209,860
Total current liabilities
274,100
311,985
Long-term debt, net
2,374,863
2,155,151
Deferred revenue and advance payments
8,497
8,089
Operating lease liabilities
72,162
76,608
Other long-term liabilities
25,706
26,224
Deferred tax liabilities
105
109
Total liabilities
2,755,433
2,578,166
Commitments and Contingencies
Stockholders’ (Deficit) Equity
Preferred stock undesignated, $ 0.001 par value; 5,000 shares authorized; no shares issued or outstanding
0
0
Class A common stock, $ 0.001 par value; 330,000 shares authorized; 18,021 shares issued and 9,337 shares outstanding, and 18,006 shares issued and 9,322 shares outstanding, respectively
18
18
Class B convertible common stock, $ 0.001 par value; 165,000 shares authorized; 1,964 shares issued and outstanding, and 1,964 shares issued and outstanding, respectively
2
2
Additional paid-in capital
1,760,288
1,727,143
Treasury stock, at cost; 8,684 shares
( 782,104
)
( 782,104
)
Accumulated other comprehensive loss
( 13,665
)
( 7,543
)
(Accumulated deficit) retained earnings
( 1,151,607
)
41,442
Total stockholders’ (deficit) equity
( 187,068
)
978,958
Total liabilities and stockholders’ (deficit) equity
$
2,568,365
$
3,557,124
The accompanying notes are an integral part of these Consolidated Financial Statements.
1
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Three Months Ended
June 30,
2022
2021
(unaudited)
(unaudited)
Revenues:
Product licenses
$
20,129
$
22,151
Subscription services
14,017
10,342
Total product licenses and subscription services
34,146
32,493
Product support
66,521
71,027
Other services
21,406
21,831
Total revenues
122,073
125,351
Cost of revenues:
Product licenses
431
419
Subscription services
5,498
3,810
Total product licenses and subscription services
5,929
4,229
Product support
5,127
4,862
Other services
14,148
13,947
Total cost of revenues
25,204
23,038
Gross profit
96,869
102,313
Operating expenses:
Sales and marketing
36,862
40,321
Research and development
31,790
28,548
General and administrative
28,502
22,917
Digital asset impairment losses
917,838
424,774
Total operating expenses
1,014,992
516,560
Loss from operations
( 918,123
)
( 414,247
)
Interest expense, net
( 13,187
)
( 4,401
)
Other income (expense), net
5,120
( 897
)
Loss before income taxes
( 926,190
)
( 419,545
)
Provision for (benefit from) income taxes
136,108
( 120,198
)
Net loss
$
( 1,062,298
)
$
( 299,347
)
Basic loss per share (1)
$
( 94.01
)
$
( 30.71
)
Weighted average shares outstanding used in computing basic loss per share
11,300
9,746
Diluted loss per share (1)
$
( 94.01
)
$
( 30.71
)
Weighted average shares outstanding used in computing diluted loss per share
11,300
9,746
(1)
Basic and fully diluted loss per share for class A and class B common stock are the same.
The accompanying notes are an integral part of these Consolidated Financial Statements.
2
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Six Months Ended
June 30,
2022
2021
(unaudited)
(unaudited)
Revenues:
Product licenses
$
36,642
$
43,431
Subscription services
26,862
20,368
Total product licenses and subscription services
63,504
63,799
Product support
133,672
141,676
Other services
44,174
42,778
Total revenues
241,350
248,253
Cost of revenues:
Product licenses
908
907
Subscription services
10,908
7,438
Total product licenses and subscription services
11,816
8,345
Product support
10,318
9,674
Other services
28,747
27,568
Total cost of revenues
50,881
45,587
Gross profit
190,469
202,666
Operating expenses:
Sales and marketing
70,102
78,519
Research and development
65,313
58,031
General and administrative
55,208
44,646
Digital asset impairment losses
1,087,929
618,869
Total operating expenses
1,278,552
800,065
Loss from operations
( 1,088,083
)
( 597,399
)
Interest expense, net
( 24,226
)
( 6,797
)
Other income, net
7,345
367
Loss before income taxes
( 1,104,964
)
( 603,829
)
Provision for (benefit from) income taxes
88,085
( 194,462
)
Net loss
$
( 1,193,049
)
$
( 409,367
)
Basic loss per share (1)
$
( 105.64
)
$
( 42.22
)
Weighted average shares outstanding used in computing basic loss per share
11,294
9,697
Diluted loss per share (1)
$
( 105.64
)
$
( 42.22
)
Weighted average shares outstanding used in computing diluted loss per share
11,294
9,697
(1)
Basic and fully diluted loss per share for class A and class B common stock are the same.
The accompanying notes are an integral part of these Consolidated Financial Statements.
3
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
Three Months Ended
June 30,
2022
2021
(unaudited)
(unaudited)
Net loss
$
( 1,062,298
)
$
( 299,347
)
Other comprehensive (loss) income, net of applicable taxes:
Foreign currency translation adjustment
( 4,113
)
397
Total other comprehensive (loss) income
( 4,113
)
397
Comprehensive loss
$
( 1,066,411
)
$
( 298,950
)
Six Months Ended
June 30,
2022
2021
(unaudited)
(unaudited)
Net loss
$
( 1,193,049
)
$
( 409,367
)
Other comprehensive loss, net of applicable taxes:
Foreign currency translation adjustment
( 6,122
)
( 1,439
)
Total other comprehensive loss
( 6,122
)
( 1,439
)
Comprehensive loss
$
( 1,199,171
)
$
( 410,806
)
The accompanying notes are an integral part of these Consolidated Financial Statements.
4
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY
(in thousands, unaudited)
Class A
Class B Convertible
Additional
Accumulated Other
(Accumulated Deficit)
Common Stock
Common Stock
Paid-in
Treasury Stock
Comprehensive
Retained
Total
Shares
Amount
Shares
Amount
Capital
Shares
Amount
Loss
Earnings
Balance at January 1, 2021
$
446,192
16,307
$
16
1,964
$
2
$
655,241
( 8,684
)
$
( 782,104
)
$
( 3,885
)
$
576,922
Net loss
( 110,020
)
0
0
0
0
0
0
0
0
( 110,020
)
Other comprehensive loss
( 1,836
)
0
0
0
0
0
0
0
( 1,836
)
0
Issuance of class A common stock upon exercise of stock options
23,854
159
0
0
0
23,854
0
0
0
0
Share-based compensation expense
6,848
0
0
0
0
6,848
0
0
0
0
Balance at March 31, 2021
$
365,038
16,466
$
16
1,964
$
2
$
685,943
( 8,684
)
$
( 782,104
)
$
( 5,721
)
$
466,902
Net loss
( 299,347
)
0
0
0
0
0
0
0
0
( 299,347
)
Other comprehensive income
397
0
0
0
0
0
0
0
397
0
Issuance of class A common stock upon exercise of stock options
244
2
0
0
0
244
0
0
0
0
Share-based compensation expense
11,087
0
0
0
0
11,087
0
0
0
0
Balance at June 30, 2021
$
77,419
16,468
$
16
1,964
$
2
$
697,274
( 8,684
)
$
( 782,104
)
$
( 5,324
)
$
167,555
Net loss
( 36,136
)
0
0
0
0
0
0
0
0
( 36,136
)
Other comprehensive loss
( 1,457
)
0
0
0
0
0
0
0
( 1,457
)
0
Issuance of class A common stock upon exercise of stock options
7,282
50
0
0
0
7,282
0
0
0
0
Issuance of class A common stock under employee stock purchase plan
2,854
5
0
0
0
2,854
0
0
0
0
Issuance of class A common stock under public offerings, net of issuance costs
399,469
555
1
0
0
399,468
0
0
0
0
Share-based compensation expense
11,883
0
0
0
0
11,883
0
0
0
0
Balance at September 30, 2021
$
461,314
17,078
$
17
1,964
$
2
$
1,118,761
( 8,684
)
$
( 782,104
)
$
( 6,781
)
$
131,419
Net loss
( 89,977
)
0
0
0
0
0
0
0
0
( 89,977
)
Other comprehensive loss
( 762
)
0
0
0
0
0
0
0
( 762
)
0
Issuance of class A common stock upon exercise of stock options
9,271
58
0
0
0
9,271
0
0
0
0
Issuance of class A common stock upon vesting of restricted stock units, net of withholding taxes
( 4,754
)
11
0
0
0
( 4,754
)
0
0
0
0
Issuance of class A common stock under public offerings, net of issuance costs
590,994
859
1
0
0
590,993
0
0
0
0
Share-based compensation expense
12,872
0
0
0
0
12,872
0
0
0
0
Balance at December 31, 2021
$
978,958
18,006
$
18
1,964
$
2
$
1,727,143
( 8,684
)
$
( 782,104
)
$
( 7,543
)
$
41,442
Net loss
( 130,751
)
0
0
0
0
0
0
0
0
( 130,751
)
Other comprehensive loss
( 2,009
)
0
0
0
0
0
0
0
( 2,009
)
0
Issuance of class A common stock upon exercise of stock options
288
2
0
0
0
288
0
0
0
0
Issuance of class A common stock under employee stock purchase plan
2,805
7
0
0
0
2,805
0
0
0
0
Issuance of class A common stock upon vesting of restricted stock units, net of withholding taxes
( 501
)
3
0
0
0
( 501
)
0
0
0
0
Share-based compensation expense
14,209
0
0
0
0
14,209
0
0
0
0
Balance at March 31, 2022
$
862,999
18,018
$
18
1,964
$
2
$
1,743,944
( 8,684
)
$
( 782,104
)
$
( 9,552
)
$
( 89,309
)
Net loss
( 1,062,298
)
0
0
0
0
0
0
0
0
( 1,062,298
)
Other comprehensive loss
( 4,113
)
0
0
0
0
0
0
0
( 4,113
)
0
Issuance of class A common stock upon exercise of stock options
423
3
0
0
0
423
0
0
0
0
Issuance of class A common stock upon vesting of restricted stock units, net of withholding taxes
( 49
)
0
0
0
0
( 49
)
0
0
0
0
Share-based compensation expense
15,970
0
0
0
0
15,970
0
0
0
0
Balance at June 30, 2022
$
( 187,068
)
18,021
$
18
1,964
$
2
$
1,760,288
( 8,684
)
$
( 782,104
)
$
( 13,665
)
$
( 1,151,607
)
The accompanying notes are an integral part of these Consolidated Financial Statements.
5
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended
June 30,
2022
2021
(unaudited)
(unaudited)
Operating activities:
Net loss
$
( 1,193,049
)
$
( 409,367
)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization
4,767
5,997
Reduction in carrying amount of right-of-use assets
3,990
4,204
Credit losses and sales allowances
606
365
Deferred taxes
76,109
( 197,383
)
Share-based compensation expense
29,688
18,807
Digital asset impairment losses
1,087,929
618,869
Amortization of issuance costs on long-term debt
4,297
2,977
Changes in operating assets and liabilities:
Accounts receivable
9,281
11,197
Prepaid expenses and other current assets
( 7,077
)
( 4,080
)
Deposits and other assets
( 6,578
)
( 1,071
)
Accounts payable and accrued expenses
( 10,216
)
( 8,940
)
Accrued compensation and employee benefits
( 9,802
)
1,368
Accrued interest
776
1,307
Deferred revenue and advance payments
36,945
37,825
Operating lease liabilities
( 4,835
)
( 5,147
)
Other long-term liabilities
32
( 253
)
Net cash provided by operating activities
22,863
76,675
Investing activities:
Purchases of digital assets
( 225,500
)
( 1,615,606
)
Purchases of property and equipment
( 1,519
)
( 1,342
)
Net cash used in investing activities
( 227,019
)
( 1,616,948
)
Financing activities:
Proceeds from convertible senior notes
0
1,050,000
Issuance costs paid for convertible senior notes
0
( 24,742
)
Proceeds from senior secured notes
0
500,000
Issuance costs paid for senior secured notes
0
( 11,269
)
Proceeds from secured term loan, net of lender fees
204,693
0
Issuance costs paid for secured term loan, excluding lender fees
( 107
)
0
Proceeds from other long-term secured debt
11,100
0
Issuance costs paid for other long-term secured debt
( 174
)
0
Proceeds from exercise of stock options
711
24,098
Proceeds from sales under employee stock purchase plan
2,805
0
Payment of withholding tax on vesting of restricted stock units
( 541
)
0
Net cash provided by financing activities
218,487
1,538,087
Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash
( 3,224
)
( 969
)
Net increase (decrease) in cash, cash equivalents, and restricted cash
11,107
( 3,155
)
Cash, cash equivalents, and restricted cash, beginning of period
64,434
60,759
Cash, cash equivalents, and restricted cash, end of period
$
75,541
$
57,604
The accompanying notes are an integral part of these Consolidated Financial Statements.
6
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying Consolidated Financial Statements of MicroStrategy Incorporated (“MicroStrategy” or the “Company”) are unaudited. In the opinion of management, all adjustments necessary for a fair statement of financial position and results of operations have been included. All such adjustments are of a normal recurring nature, unless otherwise disclosed. Interim results are not necessarily indicative of results for a full year.
Certain amounts in the prior year’s Consolidated Statements of Cash Flows have been reclassified to conform to current year presentation. In particular, accrued interest related to the Company’s long-term debt has been reclassified from “Accounts payable and accrued expenses” to “Accrued interest” within operating activities.
The balances presented in the Consolidated Statements of Stockholders’ Equity as of January 1, 2021 include the opening balance adjustments due to the adoption of Accounting Standards Update No. 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): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
The Consolidated Financial Statements and Notes to Consolidated Financial Statements are presented as required by the United States Securities and Exchange Commission (“SEC”) and do not contain certain information included in the Company’s annual financial statements and notes. These financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto filed with the SEC in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. There have been no significant changes in the Company’s accounting policies since December 31, 2021.
The accompanying Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company is not aware of any subsequent event that would require recognition or disclosure.
(2) Digital Assets
The Company accounts for its digital assets, which are comprised solely of bitcoin, as indefinite-lived intangible assets in accordance with Accounting Standards Codification (“ASC”) 350, Intangibles—Goodwill and Other . The Company’s digital assets are initially recorded at cost. Subsequently, they are measured at cost, net of any impairment losses incurred since acquisition. Impairment losses are recognized as “Digital asset impairment losses” in the Company’s Consolidated Statement of Operations in the period in which the impairment occurs.
The following table summarizes the Company’s digital asset holdings (in thousands, except number of bitcoins), as of:
June 30,
December 31,
2022
2021
Approximate number of bitcoins held
129,699
124,391
Digital assets carrying value
$
1,987,781
$
2,850,210
Cumulative digital asset impairment losses
$
1,989,248
$
901,319
The carrying value represents the lowest fair value (based on Level 1 inputs in the fair value hierarchy) of the bitcoins at any time since their acquisition. Therefore, these fair value measurements were made during the period from their acquisition through June 30, 2022 or December 31, 2021, respectively, and not as of June 30, 2022 or December 31, 2021, respectively.
The following table summarizes the Company’s digital asset purchases and digital asset impairment losses (in thousands, except number of bitcoins) for the periods indicated:
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
Approximate number of bitcoins purchased
481
13,759
5,308
34,616
Digital asset purchases
$
10,000
$
529,231
$
225,500
$
1,615,606
Digital asset impairment losses
$
917,838
$
424,774
$
1,087,929
$
618,869
7
The Company did no t sell any of its bitcoins during the three and six months ended June 30, 2022 and 2021, respectively.
As of June 30, 2022, approximately 14,589 of the bitcoins held by the Company serve as part of the collateral for the Company’s 6.125 % Senior Secured Notes due 2028 (the “2028 Secured Notes”), as further described in Note 4, Long-term Debt, to the Consolidated Financial Statements and in Note 8, Long-term Debt, to the Consolidated Financial Statements of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. As of June 30, 2022, approximately 30,051 of the bitcoins held by the Company serve as part of the collateral for a $ 205.0 million term loan (the “2025 Secured Term Loan”) issued to MacroStrategy LLC (“MacroStrategy”), a wholly-owned subsidiary of the Company, by Silvergate Bank (“Silvergate”), as further described in Note 4, Long-term Debt, to the Consolidated Financial Statements.
(3) Contract Balances
The Company invoices its customers in accordance with billing schedules established in each contract. The Company’s rights to consideration from customers are presented separately in the Company’s Consolidated Balance Sheets depending on whether those rights are conditional or unconditional.
The Company presents unconditional rights to consideration from customers within “Accounts receivable, net” in its Consolidated Balance Sheets. All of the Company’s contracts are generally non-cancellable and/or non-refundable, and therefore an unconditional right generally exists when the customer is billed or amounts are billable per the contract.
Accounts receivable (in thousands) consisted of the following, as of:
June 30,
December 31,
2022
2021
Billed and billable
$
121,418
$
192,055
Less: allowance for credit losses
( 2,773
)
( 2,775
)
Accounts receivable, net
$
118,645
$
189,280
Changes in the allowance for credit losses were not material for the three and six months ended June 30, 2022. In estimating its allowance for credit losses as of June 30, 2022 and December 31, 2021, the Company continued to consider the impact from the pandemic caused by a novel strain of coronavirus (“COVID-19”) on the Company’s reserves.
Rights to consideration that are subject to a condition other than the passage of time are considered contract assets and presented within “Prepaid expenses and other current assets” in the Consolidated Balance Sheets since the rights to consideration are expected to become unconditional and transfer to accounts receivable within one year. Contract assets generally consist of accrued sales and usage-based royalty revenue. In these arrangements, consideration is not billed or billable until the royalty reporting is received, generally in the subsequent quarter, at which time the contract asset transfers to accounts receivable and a true-up adjustment is recorded to revenue. These true-up adjustments are generally not material. During the three and six months ended June 30, 2022 and 2021, there were no significant impairments to the Company’s contract assets, nor were there any significant changes in the timing of the Company’s contract assets being reclassified to accounts receivable. Contract assets included in “Prepaid expenses and other current assets” in the Consolidated Balance Sheets consisted of $ 0.8 million and $ 1.1 million in accrued sales and usage-based royalty revenue as of June 30, 2022 and December 31, 2021, respectively.
Contract liabilities are amounts received or due from customers in advance of the Company transferring the software or services to the customer. In the case of multi-year service contract arrangements, the Company generally does not invoice more than one year in advance of services and does not record deferred revenue for amounts that have not been invoiced. Revenue is subsequently recognized in the period(s) in which control of the software or services is transferred to the customer. The Company’s contract liabilities are presented as either current or non-current “Deferred revenue and advance payments” in the Consolidated Balance Sheets, depending on whether the software or services are expected to be transferred to the customer within the next year.
The Company’s “Accounts receivable, net” and “Deferred revenue and advance payments” balances in the Consolidated Balance Sheets include unpaid amounts related to contracts under which the Company has an enforceable right to invoice the customer for non-cancellable and/or non-refundable software and services. Changes in accounts receivable and changes in deferred revenue and advance payments are presented net of these unpaid amounts in “Operating activities” in the Consolidated Statements of Cash Flows.
8
Deferred revenue and advance payments (in thousands) from customers consisted of the following, as of:
June 30,
December 31,
2022
2021
Current:
Deferred product licenses revenue
$
754
$
993
Deferred subscription services revenue
40,295
35,589
Deferred product support revenue
143,524
166,477
Deferred other services revenue
3,525
6,801
Total current deferred revenue and advance payments
$
188,098
$
209,860
Non-current:
Deferred product licenses revenue
$
0
$
68
Deferred subscription services revenue
2,639
1,064
Deferred product support revenue
5,272
6,203
Deferred other services revenue
586
754
Total non-current deferred revenue and advance payments
$
8,497
$
8,089
During the three and six months ended June 30, 2022, the Company recognized revenues of $ 58.9 million and $ 133.8 million, respectively, from amounts included in the total deferred revenue and advance payments balances at the beginning of 2022. During the three and six months ended June 30, 2021, the Company recognized revenues of $ 55.7 million and $ 125.9 million, respectively, from amounts included in the total deferred revenue and advance payments balances at the beginning of 2021. For the three and six months ended June 30, 2022 and 2021, there were no significant changes in the timing of revenue recognition on the Company’s deferred balances.
The Company’s remaining performance obligation represents all future revenue under contract and includes deferred revenue and advance payments and billable non-cancelable amounts that will be invoiced and recognized as revenue in future periods. The remaining performance obligation excludes contracts that are billed in arrears, such as certain time and materials contracts. The portions of multi-year contracts that will be invoiced in the future are not presented on the balance sheet within contract balances and are instead included in the following remaining performance obligation disclosure. As of June 30, 2022, the Company had an aggregate transaction price of $ 273.9 million allocated to the remaining performance obligation related to product support, subscription services, product licenses, and other services contracts. The Company expects to recognize $ 207.3 million within the next 12 months and the remainder thereafter .
(4) Long-term Debt
The net carrying value of the Company’s long-term debt (in thousands) consisted of the following, as of:
June 30, 2022
December 31, 2021
2025 Convertible Notes
$
639,380
$
637,882
2027 Convertible Notes
1,031,268
1,029,263
2028 Secured Notes
488,764
488,006
2025 Secured Term Loan
204,621
0
Other long-term secured debt
10,830
0
Total
$
2,374,863
$
2,155,151
Convertible Senior Notes
In December 2020, the Company issued $ 650.0 million aggregate principal amount of 0.750 % Convertible Senior Notes due 2025 (the “2025 Convertible Notes”) in a private offering. The 2025 Convertible Notes are senior unsecured obligations of the Company and bear interest at a fixed rate of 0.750 % per annum, payable semiannually in arrears on June 15 and December 15 of each year, beginning on June 15, 2021 . Holders of the 2025 Convertible Notes may receive additional interest under specified circumstances as outlined in the indenture relating to the issuance of the 2025 Convertible Notes. The 2025 Convertible Notes will mature on December 15, 2025 , unless earlier converted, redeemed, or repurchased in accordance with their terms. The total net proceeds from the 2025 Convertible Notes offering, after deducting initial purchaser discounts and issuance costs, were approximately $ 634.7 million.
9
In February 2021, the Company issued $ 1.050 billion aggregate principal amount of 2027 Convertible Notes in a private offering. The 2027 Convertible Notes are senior unsecured obligations of the Company and do not bear regular interest. However, holders of the 2027 Convertible Notes may receive special interest under specified circumstances as outlined in the indenture relating to the issuance of the 2027 Convertible Notes. Any special interest is payable semiannually in arrears on February 15 and August 15 of each year, beginning on August 15, 2021 . The 2027 Convertible Notes will mature on February 15, 2027 , unless earlier converted, redeemed, or repurchased in accordance with their terms. The total net proceeds from the 2027 Convertible Notes offering, after deducting initial purchaser discounts and issuance costs, were approximately $ 1.026 billion.
The terms of the 2025 Convertible Notes and 2027 Convertible Notes (collectively, the “Convertible Notes”) are discussed more fully in Note 8, Long-term Debt, to the Consolidated Financial Statements of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
There have been no adjustments to the initial conversion rates for each of the Convertible Notes as of June 30, 2022. As of June 30, 2022, the maximum number of shares into which the Convertible Notes could be potentially converted if the conversion features are triggered are 1,633,190 and 733,005 shares for the 2025 Convertible Notes and 2027 Convertible Notes, respectively.
During the six months ended June 30, 2022, the 2025 Convertible Notes were convertible at the option of the holders of the 2025 Convertible Notes during the first quarter of 2022 only. During the six months ended June 30, 2021, the 2025 Convertible Notes were convertible during the second quarter of 2021 only. During the six months ended June 30, 2022 and 2021, the 2027 Convertible Notes were not convertible at any time. No conversions of the Convertible Notes occurred during the six months ended June 30, 2022 or 2021. The Convertible Notes may be convertible in future periods if one or more of the conversion conditions is satisfied during future measurement periods.
As of June 30, 2022 and December 31, 2021, the net carrying value of the Convertible Notes was classified as a long-term liability in the “Long-term debt, net” line item in the Company’s Consolidated Balance Sheets.
The following is a summary of the Company’s convertible debt instruments as of June 30, 2022 (in thousands):
Outstanding
Unamortized
Net Carrying
Fair Value
Principal Amount
Issuance Costs
Value
Amount
Leveling
2025 Convertible Notes
$
650,000
$
( 10,620
)
$
639,380
$
393,166
Level 2
2027 Convertible Notes
1,050,000
( 18,732
)
1,031,268
497,175
Level 2
Total
$
1,700,000
$
( 29,352
)
$
1,670,648
$
890,341
The following is a summary of the Company’s convertible debt instruments as of December 31, 2021 (in thousands):
Outstanding
Unamortized
Net Carrying
Fair Value
Principal Amount
Issuance Costs
Value
Amount
Leveling
2025 Convertible Notes
$
650,000
$
( 12,118
)
$
637,882
$
1,056,679
Level 2
2027 Convertible Notes
1,050,000
( 20,737
)
1,029,263
774,375
Level 2
Total
$
1,700,000
$
( 32,855
)
$
1,667,145
$
1,831,054
The fair value of the Convertible Notes is determined using observable market data other than quoted prices, specifically the last traded price at the end of the reporting period of identical instruments in the over-the-counter market (Level 2).
For the three months ended June 30, 2022 and 2021, interest expense related to the Convertible Notes was as follows (in thousands):
Three Months Ended June 30, 2022
Three Months Ended June 30, 2021
Contractual
Amortization of
Contractual
Amortization of
Interest Expense
Issuance Costs
Total
Interest Expense
Issuance Costs
Total
2025 Convertible Notes
$
1,219
$
750
$
1,969
$
1,219
$
741
$
1,960
2027 Convertible Notes
0
1,003
1,003
0
999
999
Total
$
1,219
$
1,753
$
2,972
$
1,219
$
1,740
$
2,959
10
For the six months ended June 30, 2022 and 2021, interest expense related to the Convertible Notes was as follows (in thousands):
Six Months Ended June 30, 2022
Six Months Ended June 30, 2021
Contractual
Amortization of
Contractual
Amortization of
Interest Expense
Issuance Costs
Total
Interest Expense
Issuance Costs
Total
2025 Convertible Notes
$
2,438
$
1,498
$
3,936
$
2,438
$
1,480
$
3,918
2027 Convertible Notes
0
2,005
2,005
0
1,432
1,432
Total
$
2,438
$
3,503
$
5,941
$
2,438
$
2,912
$
5,350
For the three and six months ended June 30, 2022, the Company paid $ 2.4 million in interest expense related to the 2025 Convertible Notes. For the three and six months ended June 30, 2021, the Company paid $ 2.5 million in interest related to the 2025 Convertible Notes. The Company has no t paid any special interest expense related to the 2027 Convertible Notes to date.
Senior Secured Notes
On June 14, 2021, the Company issued $ 500.0 million aggregate principal amount of 2028 Secured Notes in a private offering. The 2028 Secured Notes bear interest at a fixed rate of 6.125 % per annum, payable semiannually in arrears on June 15 and December 15 of each year, beginning on December 15, 2021 . The 2028 Secured Notes have a stated maturity date of June 15, 2028 , unless earlier redeemed or repurchased in accordance with their terms and subject to a springing maturity date of September 15, 2025 or November 16, 2026 . The total net proceeds from the 2028 Secured Notes, after deducting initial purchaser discounts and issuance costs, were approximately $ 487.2 million.
The 2028 Secured Notes include a springing maturity feature that will cause the stated maturity date to spring ahead to: (1) September 15, 2025 (the “First Springing Maturity Date”) unless on the First Springing Maturity Date (i) the Company has liquidity (as defined in the 2028 Secured Notes Indenture) in excess of 130 % of the amount required to pay in full in cash the then outstanding aggregate principal amount of and accrued interest on the 2025 Convertible Notes or (ii) less than $ 100,000,000 of the aggregate principal amount of the 2025 Convertible Notes remains outstanding, (2) November 16, 2026 (the “Second Springing Maturity Date”) unless on the Second Springing Maturity Date (i) the Company has liquidity in excess of 130 % of the amount required to pay in full in cash the then outstanding aggregate principal amount of and accrued interest on the 2027 Convertible Notes or (ii) less than $ 100,000,000 of the aggregate principal amount of the 2027 Convertible Notes remains outstanding, or (3) the date (such date, an “FCCR Springing Maturity Date”) that is 91 days prior to the maturity date of any FCCR Convertible Indebtedness (as defined in the indenture for the 2028 Secured Notes) unless on the FCCR Springing Maturity Date (i) the Company has liquidity in excess of 130 % of the amount required to pay in full in cash the then outstanding aggregate principal amount of and accrued interest on such FCCR Convertible Indebtedness or (ii) less than $ 100,000,000 of the aggregate principal amount of such FCCR Convertible Indebtedness remains outstanding.
The terms of the 2028 Secured Notes are discussed more fully in Note 8, Long-term Debt, to the Consolidated Financial Statements of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
The 2028 Secured Notes are governed by an indenture containing certain covenants with which the Company must comply, including covenants with respect to limitations on (i) additional indebtedness, (ii) liens, (iii) certain payments and investments, (iv) the ability to merge or consolidate with another person, or sell or otherwise dispose of substantially all the Company’s assets, and (v) certain transactions with affiliates. The Company was in compliance with its debt covenants as of June 30, 2022.
As of June 30, 2022 and December 31, 2021, the net carrying value of the 2028 Secured Notes was classified as a long-term liability in the “Long-term debt, net” line item in the Company’s Consolidated Balance Sheets.
11
The following is a summary of the 2028 Secured Notes as of June 30, 2022 (in thousands):
Outstanding
Unamortized
Net Carrying
Fair Value
Principal Amount
Issuance Costs
Value
Amount
Leveling
2028 Secured Notes
$
500,000
$
( 11,236
)
$
488,764
$
394,375
Level 2
The following is a summary of the 2028 Secured Notes as of December 31, 2021 (in thousands):
Outstanding
Unamortized
Net Carrying
Fair Value
Principal Amount
Issuance Costs
Value
Amount
Leveling
2028 Secured Notes
$
500,000
$
( 11,994
)
$
488,006
$
502,530
Level 2
The fair value of the 2028 Secured Notes is determined using observable market data other than quoted prices, specifically the last traded price at the end of the reporting period of identical instruments in the over-the-counter market (Level 2).
For the three months ended June 30, 2022 and 2021, interest expense related to the 2028 Secured Notes was as follows (in thousands):
Three Months Ended June 30, 2022
Three Months Ended June 30, 2021
Contractual
Amortization of
Contractual
Amortization of
Interest Expense
Issuance Costs
Total
Interest Expense
Issuance Costs
Total
2028 Secured Notes
$
7,656
$
382
$
8,038
$
1,361
$
65
$
1,426
For the six months ended June 30, 2022 and 2021, interest expense related to the 2028 Secured Notes was as follows (in thousands):
Six Months Ended June 30, 2022
Six Months Ended June 30, 2021
Contractual
Amortization of
Contractual
Amortization of
Interest Expense
Issuance Costs
Total
Interest Expense
Issuance Costs
Total
2028 Secured Notes
$
15,312
$
758
$
16,070
$
1,361
$
65
$
1,426
For the three and six months ended June 30, 2022, the Company paid $ 15.3 million in interest expense related to the 2028 Secured Notes. The Company did no t pay any interest expense related to the 2028 Secured Notes during the three and six months ended June 30, 2021.
Secured Term Loan
On March 23, 2022, MacroStrategy LLC, a wholly-owned subsidiary of the Company, entered into a Credit and Security Agreement (the “Credit and Security Agreement”) with Silvergate pursuant to which Silvergate issued the $ 205.0 million 2025 Secured Term Loan to MacroStrategy. The 2025 Secured Term Loan is a senior secured obligation of MacroStrategy and bears interest at a floating rate equal to the Secured Overnight Financing Rate 30 Day Average as published by the Federal Reserve Bank of New York’s website plus 3.70 %, with a floor of 3.75 %, and is payable monthly in arrears beginning May 2022 . The 2025 Secured Term Loan will mature on March 23, 2025 , unless earlier prepaid or repaid in accordance with the terms of the Credit and Security Agreement. The total net proceeds from the 2025 Secured Term Loan, after deducting lender fees and third-party costs, were approximately $ 204.6 million.
Under the terms of the Credit and Security Agreement, the 2025 Secured Term Loan proceeds may be used (i) by MacroStrategy to purchase bitcoins, (ii) by MacroStrategy to pay fees, interest, and expenses related to the 2025 Secured Term Loan transaction, or (iii) for MacroStrategy’s or the Company’s general corporate purposes. The 2025 Secured Term Loan may be prepaid at any time, subject to prepayment premiums of 0.50 % and 0.25 % of the 2025 Secured Term Loan amount prepaid for prepayments during years one and two of the 2025 Secured Term Loan term, respectively.
12
In accordance with the terms of the Credit and Security Agreement, the 2025 Secured Term Loan was collateralized at closing by bitcoin with a value of approximately $ 820.0 million placed in a collateral account with a custodian mutually authorized by Silvergate and MacroStrategy (the “Bitcoin Collateral Account”). While the 2025 Secured Term Loan is outstanding, MacroStrategy is required to maintain a Loan to collateral value ratio (“LTV Ratio”) of 50 % or less (the “Maximum LTV Ratio”), which would amount to at least $ 410.0 million worth of bitcoin being required to be held in such account assuming the full $ 205.0 million of 2025 Secured Term Loan principal remains outstanding. If the price of bitcoin drops such that the LTV Ratio exceeds 50 %, MacroStrategy is required to either deposit additional bitcoin in the Bitcoin Collateral Account or prepay a portion of the 2025 Secured Term Loan such that the LTV Ratio is reduced to 25 % or less (or 35 % or less, provided that in such case the interest rate on the 2025 Secured Term Loan will be increased by 25 basis points until such time as the LTV Ratio is reduced to 25 % or less). In June 2022, as the price of bitcoin declined causing the LTV Ratio to increase, MacroStrategy deposited 10,585 additional bitcoins into the account securing the borrowing under the Credit and Security Agreement to help ensure that the LTV Ratio remained below the Maximum LTV Ratio. If at any time the LTV Ratio is less than 25 % as a result of excess collateral in the Bitcoin Collateral Account, MacroStrategy is entitled to a return of such excess collateral so long as the LTV Ratio would not exceed 25 % after giving effect to such return .
Separate and apart from the requirements associated with the LTV Ratio, MacroStrategy established a $ 5.0 million cash reserve account (the “Reserve Account”) with Silvergate to serve as additional collateral for the 2025 Secured Term Loan. MacroStrategy is required to maintain at least $5.0 million in the Reserve Account until the last six months of the 2025 Secured Term Loan term, at which time funds in the Reserve Account may be used to make interest payments on the 2025 Secured Term Loan at MacroStrategy’s request, with the amount required to be held in the Reserve Account correspondingly reduced to the extent such payments are made. The collateral for the 2025 Secured Term Loan does not extend beyond assets in the Bitcoin Collateral Account and the Reserve Account. As of June 30, 2022, the Reserve Account is presented within “Restricted cash” in the Company’s Consolidated Balance Sheet and the Bitcoin Collateral Account is presented within “Digital assets” in the Company’s Consolidated Balance Sheet as further described in Note 2, Digital Assets, to the Consolidated Financial Statements.
The 2025 Secured Term Loan is not guaranteed by any party. The Credit and Security Agreement contains customary affirmative and negative covenants for credit facilities of this type, including, among others, limitations on MacroStrategy with respect to the sale of collateral and the incurrence of liens on the collateral. The Credit and Security Agreement does not restrict MacroStrategy from incurring additional debt, permits additional liens so long as such liens are not on the assets serving as collateral for the 2025 Secured Term Loan, and permits MacroStrategy to sell assets so long as they are not serving as collateral for the 2025 Secured Term Loan. There are no restrictions in the Credit and Security Agreement on utilizing bitcoin that is not in the Bitcoin Collateral Account. The Credit and Security Agreement has customary change-of-control provisions, providing Silvergate with a right to accelerate the 2025 Secured Term Loan in full in connection with a change of control of the Company, including the sale of all or substantially all of the Company’s or MacroStrategy’s assets. The Credit and Security Agreement also contains customary events of default with customary grace periods, as applicable. Upon an event of default, Silvergate has the right to accelerate the 2025 Secured Term Loan in full, increase the interest accrual rate by an additional 2 %, and liquidate the collateral to pay the 2025 Secured Term Loan.
MacroStrategy was in compliance with its debt covenants as of June 30, 2022.
The Company incurred approximately $ 0.4 million in lender fees and third-party costs (“issuance costs”) associated with the 2025 Secured Term Loan. The Company accounts for these issuance costs as a reduction to the principal amount of the 2025 Secured Term Loan and amortizes the issuance costs to interest expense over the contractual term of the 2025 Secured Term Loan at an effective interest rate of 3.87 %. As of June 30, 2022, the net carrying value of the 2025 Secured Term Loan was classified as a long-term liability in the “Long-term debt, net” line item in the Company’s Consolidated Balance Sheets.
The following is a summary of the 2025 Secured Term Loan as of June 30, 2022 (in thousands):
Outstanding
Unamortized
Net Carrying
Fair Value
Principal Amount
Issuance Costs
Value
Amount
Leveling
2025 Secured Term Loan
$
205,000
$
( 379
)
$
204,621
$
205,000
Level 3
The principal or par value of the 2025 Secured Term Loan approximates its fair value as of June 30, 2022. The fair value of the 2025 Secured Term Loan is determined using unobservable inputs provided by the lender, specifically hypothetical lending terms attainable as of the end of the reporting period, which are comparable to the loan's original terms (Level 3).
13
For the three and six months ended June 30, 2022, interest expense related to the 2025 Secured Term Loan was as follows (in thousands):
Three Months Ended June 30, 2022
Six Months Ended June 30, 2022
Contractual
Amortization of
Contractual
Amortization of
Interest Expense
Issuance Costs
Total
Interest Expense
Issuance Costs
Total
2025 Secured Term Loan
$
2,207
$
33
$
2,240
$
2,383
$
36
$
2,419
The Company paid $ 1.6 million in interest expense related to the 2025 Secured Term Loan during the three and six months ended June 30, 2022.
Other long-term secured debt
In June 2022, the Company, through a wholly-owned subsidiary, entered into a secured term loan agreement in the amount of $ 11.1 million, bearing interest at an annual rate of 5.2 %, and maturing in June 2027 . The loan is secured by certain non-bitcoin assets of the Company that are not otherwise serving as collateral for any of the Company’s other indebtedness.
Maturities
The following table shows the maturities of the Company’s debt instruments as of June 30, 2022 (in thousands). The principal payments related to the 2028 Secured Notes are included in the table below based on the First Springing Maturity Date of September 15, 2025, as if the springing maturity feature discussed above were triggered. The Company’s expectation is that the springing maturity feature of the 2028 Secured Notes will not be triggered.
Payments due by period ended June 30,
2025 Convertible Notes
2027 Convertible Notes
2028 Secured Notes
2025 Secured Term Loan
Other long-term secured debt
Total
2023
$
0
$
0
$
0
$
0
$
499
$
499
2024
0
0
0
0
525
525
2025
0
0
0
205,000
555
205,555
2026
650,000
0
500,000
0
584
1,150,584
2027
0
1,050,000
0
0
8,937
1,058,937
Thereafter
0
0
0
0
0
0
Total
$
650,000
$
1,050,000
$
500,000
$
205,000
$
11,100
$
2,416,100
(5) Commitments and Contingencies
(a) Commitments
From time to time, the Company enters into certain types of contracts that require it to indemnify parties against third-party claims. These contracts primarily relate to agreements under which the Company assumes indemnity obligations for intellectual property infringement, as well as other obligations from time to time depending on arrangements negotiated with customers and other third parties. The conditions of these obligations vary. Thus, the overall maximum amount of the Company’s indemnification obligations cannot be reasonably estimated. Historically, the Company has not been obligated to make significant payments for these obligations and does not currently expect to incur any material obligations in the future. Accordingly, the Company has not recorded an indemnification liability on its Balance Sheets as of June 30, 2022 or December 31, 2021.
(b) Contingencies
Following an internal review initiated in 2018, the Company believes that its Brazilian subsidiary failed or likely failed to comply with local procurement regulations in conducting business with certain Brazilian government entities.
On February 6, 2020, the Company learned that a Brazilian court authorized the Brazilian Federal Police to use certain investigative measures in its investigation into alleged corruption and procurement fraud involving certain government officials, pertaining to a particular transaction. Pursuant to this court authorization, numerous entities and individuals across Brazil were subject to the freezing of assets and other measures, including former resellers and former employees of the Company’s Brazilian subsidiary. On February 6, 2020, the bank accounts of the Company’s Brazilian subsidiary were also frozen up to an amount of BRL 10.0 million. On May 22, 2020, these bank accounts of the Company’s Brazilian subsidiary were unfrozen based on a court decision that found the evidence provided to support the alleged illicit origin of the relevant funds was insufficient. On October 19, 2021, an appeals court upheld the decision to unfreeze the accounts (which had remained unfrozen while the appeal was pending). This decision is final. The transaction at issue is part of the basis of the previously reported failure or likely failure of the Brazilian subsidiary to comply with local procurement regulations. The Company is not aware of any allegations that any former employee or the Company made any payments to Brazilian
14
government officials. The Brazilian Federal Police expanded the investigation to include other possible cases of procurement fraud involving Brazilian government entities. Criminal penalties may be imposed against individuals; however, neither employees of the Company’s Brazilian subsidiary nor the subsidiary itself have been targets of the Federal Police investigation .
The Company has also learned that Brazil’s Federal Comptroller General filed an administrative action against the Company’s Brazilian subsidiary with respect to the alleged procurement violations. These matters remain the subject of investigation by Brazilian authorities. The Company is taking measures to attempt to resolve these matters.
While the Company believes that it is probable that the resolution of these Brazilian matters will result in a loss, the amount or range of loss is not reasonably estimable at this time. Given the stage of these matters, the outcome may result in a material impact on the Company’s earnings and financial results for the period in which any such liability is accrued. However, the Company believes that the outcome of these matters will not have a material effect on the Company’s financial position.
On November 4, 2020, a complaint was filed against the Company in the U.S. District Court for the Eastern District of Virginia by a patent assertion entity called Daedalus Blue, LLC (“Daedalus”). In its complaint, Daedalus alleges that the Company has infringed U.S. Patent Nos. 8,341,172 (the “’172 Patent”) and 9,032,076 (the “’076 Patent”) based on specific functionality in the MicroStrategy platform. The ’172 Patent relates to a method for providing aggregate data access in response to a query, whereas the ’076 Patent relates to a role-based access control system.
On March 1, 2021, Daedalus provided its formal infringement contentions which included additional accused functionality as part of its infringement allegations from the complaint, materially expanding the scope of its case. The Company has filed a motion to dismiss the complaint with prejudice, asking the court to rule that the asserted claims are invalid as being directed to patent ineligible matter. This matter is in the latter stage of factual discovery. The court conducted a claim construction hearing on July 15, 2021. The court appointed a special master on October 28, 2021 and directed the special master to submit a Report and Recommendation as to the issue of claim construction and the pending motion to dismiss by February 1, 2022. On January 21, 2022, the special master issued two separate Reports and Recommendations. The first Report and Recommendation recommended constructions of certain patent claim terms and the second Report and Recommendation recommended, without reaching the merits, dismissing the Company’s motion to dismiss without prejudice to re-filing after discovery ends. The parties filed their respective objections to the special master’s Reports and Recommendations on February 4, 2022, and their oppositions to the other party’s objections on February 18, 2022. On March 9, 2022, the court issued an order overruling all parties’ objections and adopting the special master’s Reports and Recommendations in full. As per court order, the parties submitted a joint proposed schedule, which the court adopted on April 7, 2022, providing new deadlines for the close of fact discovery, expert reports, expert discovery, and dispositive motions. Fact discovery reopened on April 18, 2022 and closed on June 1, 2022. The case has proceeded to expert discovery and the parties exchanged their opening expert reports on issues for which they bear the burden of proof on July 1, 2022 and exchanged their rebuttal expert reports on July 29, 2022. The outcome of this matter is not presently determinable.
The Company is also involved in various legal proceedings arising in the normal course of business. Although the outcomes of these legal proceedings are inherently difficult to predict, management does not expect the resolution of these legal proceedings to have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
The Company has contingent liabilities that, in management’s judgment, are not probable of assertion. If such unasserted contingent liabilities were to be asserted, or become probable of assertion, the Company may be required to record significant expenses and liabilities in the period in which these liabilities are asserted or become probable of assertion.
(6) Treasury Stock
The Board of Directors has authorized the Company’s repurchase of up to an aggregate of $ 800.0 million of its class A common stock from time to time on the open market through April 29, 2023 (the “Share Repurchase Program”), although the program may be suspended or discontinued by the Company at any time. The timing and amount of any shares repurchased will be determined by the Company’s management based on its evaluation of market conditions and other factors. The Share Repurchase Program may be funded using the Company’s working capital, as well as proceeds from any other funding arrangements that the Company may enter into in the future.
During the three and six months ended June 30, 2022 and 2021, the Company did no t repurchase any shares of its class A common stock pursuant to the Share Repurchase Program. As of June 30, 2022, the Company had repurchased an aggregate of 5,674,226 shares of its class A common stock at an average price per share of $ 104.13 and an aggregate cost of $ 590.9 million pursuant to the Share Repurchase Program. As of June 30, 2022, $ 209.1 million of the Company’s class A common stock remained available for repurchase pursuant to the Share Repurchase Program. The average price per share and aggregate cost amounts disclosed above include broker commissions.
15
(7) Income Taxes
The Company computes its year-to-date provision for (benefit from) income taxes by applying the estimated annual effective tax rate to year-to-date pretax income or loss and adjusts the provision for (benefit from) income taxes for discrete tax items recorded in the period. The estimated effective tax rate is subject to fluctuation based on the level and mix of earnings and losses by tax jurisdiction, foreign tax rate differentials, and the relative impact of permanent book to tax differences. Each quarter, a cumulative adjustment is recorded for any fluctuations in the estimated annual effective tax rate as compared to the prior quarter. As a result of these factors, and due to potential changes in the Company’s period-to-period results, fluctuations in the Company’s effective tax rate and respective tax provisions or benefits may occur. For the six months ended June 30, 2022, the Company recorded a provision for income taxes of $ 88.1 million on a pretax loss of $ 1.105 billion, which resulted in an effective tax rate of ( 8.0 )%. For the six months ended June 30, 2021, the Company recorded a benefit from income taxes of $ 194.5 million on a pretax loss of $ 603.8 million, which resulted in an effective tax rate of 32.2 %. The change in the effective tax rate, as compared to the same period in the prior year, is primarily due to the establishment of a valuation allowance on the Company’s deferred tax asset related to the impairment on its bitcoin holdings, attributable to the decrease in the market value of bitcoin as of June 30, 2022.
As of June 30, 2022, the Company had a valuation allowance of $ 391.3 million primarily related to the Company’s deferred tax asset related to the impairment on its bitcoin holdings that, in the Company’s present estimation, more likely than not will not be realized. If the market value of bitcoin continues to decline or the Company is unable to regain profitability in future periods, the Company may be required to increase further the valuation allowance against its deferred tax assets, which could result in a charge that would materially adversely affect net income (loss) in the period in which the charge is incurred. To the extent the market value of bitcoin rises, the Company may decrease the valuation allowance against its deferred tax asset. The Company will continue to regularly assess the realizability of deferred tax assets.
The Company records liabilities related to its uncertain tax positions. As of June 30, 2022 and December 31, 2021, the Company had gross unrecognized tax benefits of $ 6.2 million, of which $ 2.1 million was recorded in “Other long-term liabilities” and $ 4.1 million was recorded in “Deferred tax assets, net” in the Company’s Consolidated Balance Sheets.
(8) Share-based Compensation
2013 Stock Incentive Plan
The Company’s 2013 Stock Incentive Plan (as amended, the “2013 Equity Plan”) authorizes the issuance of various types of share-based awards to the Company’s employees, officers, directors, and other eligible participants. As of June 30, 2022, a total of 2,750,000 shares of the Company’s class A common stock were authorized for issuance under the 2013 Equity Plan. As of June 30, 2022, there were 179,462 shares of class A common stock reserved and available for future issuance under the 2013 Equity Plan.
Stock option awards
As of June 30, 2022, there were options to purchase 1,489,404 shares of class A common stock outstanding under the 2013 Equity Plan.
The following table summarizes the Company’s stock option activity (in thousands, except per share data and years) for the three months ended June 30, 2022:
Stock Options Outstanding
Weighted Average
Aggregate
Weighted Average
Exercise Price
Intrinsic
Remaining Contractual
Shares
Per Share
Value
Term (Years)
Balance as of April 1, 2022
1,466
$
296.80
Granted
35
$
235.87
Exercised
( 3
)
$
135.54
$
251
Forfeited/Expired
( 9
)
$
527.71
Balance as of June 30, 2022
1,489
$
294.42
Exercisable as of June 30, 2022
720
$
185.18
$
22,425
3.8
Expected to vest as of June 30, 2022
769
$
396.66
$
3,395
8.8
Total
1,489
$
294.42
$
25,820
6.4
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Stock options outstanding as of June 30, 2022 are comprised of the following range of exercise prices per share (in thousands, except per share data and years):
Stock Options Outstanding at June 30, 2022
Weighted Average
Weighted Average
Exercise Price
Remaining Contractual
Range of Exercise Prices per Share
Shares
Per Share
Term (Years)
$121.43 - $200.00
885
$
136.93
4.5
$200.01 - $300.00
20
$
264.69
9.9
$400.01 - $500.00
324
$
408.64
9.6
$600.01 - $691.23
260
$
691.23
8.6
Total
1,489
$
294.42
6.4
An aggregate of 26,250 stock options with an aggregate grant date fair value of $ 2.3 million vested during the three months ended June 30, 2022. The weighted average grant date fair value of stock option awards using the Black-Scholes valuation model was $ 152.69 and $ 252.81 for each share subject to a stock option granted during the three months ended June 30, 2022 and 2021, respectively, based on the following assumptions:
Three months ended
June 30,
2022
2021
Expected term of options in years
6.3
6.3
Expected volatility
69.2% - 69.5%
56.8 %
Risk-free interest rate
2.8% - 2.9%
1.1 %
Expected dividend yield
0.0 %
0.0 %
For the three and six months ended June 30, 2022, the Company recognized approximately $ 12.3 million and $ 22.7 million, respectively, in share-based compensation expense from stock options granted under the 2013 Equity Plan. For the three and six months ended June 30, 2021, the Company recognized approximately $ 8.8 million and $ 14.1 million, respectively, in share-based compensation expense from stock options granted under the 2013 Equity Plan. As of June 30, 2022, there was approximately $ 145.2 million of total unrecognized share-based compensation expense related to unvested stock options. As of June 30, 2022, the Company expects to recognize this remaining share-based compensation expense over a weighted average vesting period of approximately 3.1 years.
Share-settled restricted stock units
As of June 30, 2022, there were 131,953 share-settled restricted stock units outstanding under the 2013 Equity Plan. The following table summarizes the Company’s share-settled restricted stock unit activity (in thousands) for the periods indicated:
Share-Settled Restricted Stock Units Outstanding
Aggregate
Intrinsic
Units
Value
Balance as of April 1, 2022
108
Granted
28
Vested
0
$
134
Forfeited
( 4
)
Balance as of June 30, 2022
132
Expected to vest as of June 30, 2022
132
$
21,680
During the three months ended June 30, 2022, 367 share-settled restricted stock units having an aggregate grant date fair value of $ 0.2 million vested, and 134 shares were withheld to satisfy tax obligations, resulting in 233 issued shares. The weighted average grant date fair value of share-settled restricted stock units granted during the three months ended June 30, 2022 and 2021 was $ 222.66 and $ 616.88 , respectively, based on the fair value of the Company’s class A common stock. For the three and six months ended June 30, 2022, the Company recognized approximately $ 3.2 million and $ 6.4 million, respectively, in share-based compensation expense from share-settled restricted stock units granted under the 2013 Equity Plan. For the three and six months ended June 30, 2021, the Company recognized approximately $ 1.4 million and $ 2.6 million, respectively, in share-based compensation expense from share-settled restricted stock units granted under the 2013 Equity Plan. As of June 30, 2022, there was approximately $ 45.2 million of total unrecognized share-
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based compensation expense related to unvested share-settled restricted stock units. As of June 30, 2022 , the Company expects to recognize this remaining share-based compensation expense over a weighted average vesting period of approximately 3 . 1 years .
Other stock-based awards and cash-settled restricted stock units
From time to time the Company has granted “other stock-based awards” and “cash-settled restricted stock units” under the 2013 Equity Plan. Other stock-based awards are similar to stock options, and cash-settled restricted stock units are similar to the Company’s share-settled restricted stock units, except in each case these awards are settled in cash only and not in shares of the Company’s class A common stock. Due to their required cash settlement feature, these awards are classified as liabilities in the Company’s Consolidated Balance Sheets and the fair value of the awards is remeasured each quarterly reporting period. For the three and six months ended June 30, 2022, the Company recognized a reduction of approximately $ 0.7 million and $ 0.5 million, respectively, in share-based compensation expense from other stock-based awards and cash-settled restricted stock units. For the three months ended June 30, 2021, the Company recognized an insignificant amount of share-based compensation expense from other stock-based awards and cash-settled restricted stock units. For the six months ended June 30, 2021, the Company recognized $ 0.9 million in share-based compensation expense from other stock-based awards and cash-settled restricted stock units. As of June 30, 2022, there was approximately $ 0.4 million of total unrecognized share-based compensation expense related to other stock-based awards and cash-settled restricted stock units. As of June 30, 2022, the Company expects to recognize this remaining share-based compensation expense over a weighted average vesting period of approximately 2.7 years, subject to additional fair value adjustments through the earlier of settlement or expiration.
2021 ESPP
The Company also maintains the 2021 Employee Stock Purchase Plan (the “2021 ESPP”). The purpose of the 2021 ESPP is to provide eligible employees of the Company and certain of its subsidiaries with opportunities to purchase shares of the Company’s class A common stock, commencing at such time and on such dates as the Board of Directors of the Company shall determine. The first offering period under the 2021 ESPP commenced on February 16, 2021 and ended on August 15, 2021. After this first offering period, the Board of Directors of the Company determined to provide subsequent 6-month offering periods commencing on each March 1 and September 1 for the remaining term of the 2021 ESPP. An aggregate of 100,000 shares of the Company’s class A common stock has been authorized for issuance under the 2021 ESPP. During the three months ended June 30, 2022, no shares of class A common stock were issued in connection with the 2021 ESPP. As of June 30, 2022, 87,938 shares of the Company’s class A common stock remained available for issuance under the 2021 ESPP.
For the three and six months ended June 30, 2022, the Company recognized approximately $ 0.5 million and $ 1.1 million, respectively, in share-based compensation expense related to the 2021 ESPP. For the three and six months ended June 30, 2021, the Company recognized approximately $ 0.8 million and $ 1.2 million, respectively, in share-based compensation expense related to the 2021 ESPP. As of June 30, 2022, there was approximately $ 0.3 million of total unrecognized share-based compensation expense related to the 2021 ESPP. As of June 30, 2022, the Company expects to recognize this remaining share-based compensation expense over a period of approximately 0.2 years.
Tax Benefits Related to Equity Plans
For the three and six months ended June 30, 2022 and 2021, tax (benefit) expense related to the Company’s equity plans was as follows (in thousands):
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
Tax (benefit) expense related to:
Share-based compensation expense
$
( 3,343
)
$
( 1,992
)
$
( 6,240
)
$
( 3,277
)
Exercises of stock options and vesting of share-settled restricted stock units
57
( 153
)
110
( 22,277
)
Total tax benefit related to the Company's equity plans
$
( 3,286
)
$
( 2,145
)
$
( 6,130
)
$
( 25,554
)
(9) Basic and Diluted Loss per Share
The Company has two classes of common stock: class A common stock and class B common stock. Holders of class A common stock generally have the same rights, including rights to dividends, as holders of class B common stock, except that holders of class A common stock have one vote per share while holders of class B common stock have 10 votes per share. Each share of class B common stock is convertible at any time, at the option of the holder, into one share of class A common stock. As such, basic and fully diluted earnings per share for class A common stock and for class B common stock are the same. The Company has never declared or paid any cash dividends on either class A or class B common stock. As of June 30, 2022 and December 31, 2021, there were no shares of preferred stock issued or outstanding.
Potential common shares are included in the diluted earnings per share calculation when dilutive. Potential common shares consisting of class A common stock issuable upon the exercise of outstanding stock options, the vesting of restricted stock units, and in connection
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with the 2021 ESPP are computed using the treasury stock method. Potential common shares consisting of class A common stock issuable upon conversion of the Convertible Notes are computed using the if-converted method. In computing diluted earnings per share, the Company first calculates the earnings per incremental share (“EPIS”) for each class of potential common shares and ranks the classes from the most dilutive (i.e. , lowest EPIS) to the least dilutive (i.e. , highest EPIS) . Basic earnings per share is then adjusted for the effect of each class of shares, in sequence and cumulatively, until a particular class no longer produces further dilution.
For the three and six months ended June 30, 2022 and 2021, the following weighted average shares of potential class A common stock were excluded from the diluted loss per share calculation because their impact would have been anti-dilutive (in thousands):
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
Stock Options
1,474
1,275
1,393
1,243
Restricted Stock Units
116
88
111
85
Employee Stock Purchase Plan
5
5
4
4
2025 Convertible Notes
1,633
1,633
1,633
1,633
2027 Convertible Notes
733
733
733
535
Total
3,961
3,734
3,874
3,500
(10) Segment Information
The Company manages its business in one reportable operating segment. The Company’s one reportable operating segment is engaged in the design, development, marketing, and sales of its software platform through licensing arrangements and cloud subscriptions and related services. The following table presents total revenues, gross profit, and long-lived assets (in thousands) according to geographic region. Long-lived assets are comprised of right-of-use assets and property and equipment, net.
Geographic regions:
Domestic
EMEA
Other Regions
Consolidated
Three months ended June 30, 2022
Total revenues
$
75,024
$
35,578
$
11,471
$
122,073
Gross profit
$
61,366
$
27,335
$
8,168
$
96,869
Three months ended June 30, 2021
Total revenues
$
68,770
$
41,834
$
14,747
$
125,351
Gross profit
$
57,028
$
33,706
$
11,579
$
102,313
Six months ended June 30, 2022
Total revenues
$
143,431
$
74,866
$
23,053
$
241,350
Gross profit
$
116,071
$
58,037
$
16,361
$
190,469
Six months ended June 30, 2021
Total revenues
$
138,977
$
81,651
$
27,625
$
248,253
Gross profit
$
115,959
$
65,675
$
21,032
$
202,666
As of June 30, 2022
Long-lived assets
$
88,126
$
6,992
$
4,631
$
99,749
As of December 31, 2021
Long-lived assets
$
89,817
$
7,874
$
5,656
$
103,347
The domestic region consists of the United States and Canada. The EMEA region includes operations in Europe, the Middle East, and Africa. The other regions include all other foreign countries, generally comprising Latin America and the Asia Pacific region. For the three and six months ended June 30, 2022 and the six months ended June 30, 2021, no individual foreign country accounted for 10% or more of total consolidated revenues. For the three months ended June 30, 2021, no individual foreign country other than Germany accounted for 10% or more of total consolidated revenues.
For the three and six months ended June 30, 2022 and 2021, no individual customer accounted for 10% or more of total consolidated revenues.
As of June 30, 2022 and December 31, 2021, no individual foreign country accounted for 10% or more of total consolidated assets.
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(11) Related Party Transaction
In June 2021, Michael J. Saylor , the Company’s Chairman of the Board of Directors & Chief Executive Officer, entered into an indemnification agreement (the “Original Agreement”) with the Company for an initial term of 90 days and subject to successive 90-day term extensions at the election of the Company. All term extensions were exercised, most recently in February 2022 for a final 90-day period that began in March 2022. Pursuant to the Original Agreement, Mr. Saylor provided during the term of the agreement, from his personal funds, indemnity coverage to the Company for the benefit of the directors and officers (“D&Os”) of the Company and its subsidiaries in the event such coverage was not indemnifiable by the Company, up to a total of $ 40 million. In return, the Company paid Mr. Saylor $ 388,945 for each of the initial and successive 90-day terms.
On June 12, 2022, Mr. Saylor and the Company entered into a renewed indemnification agreement (the “Renewed Agreement”) for an initial term of 90 days, which became effective upon the expiration of the final 90-day extension of the Original Agreement. In return, the Company paid Mr. Saylor a one-time fee of $ 388,945 for the initial 90-day term (the “Renewal Payment”).
On June 24, 2022, the Company bound D&O liability insurance policies (the “Commercial Policies”) with several third-party carriers for $ 30 million in coverage. Concurrently, Mr. Saylor and the Company also entered into (i) an indemnification agreement (the “Excess Agreement”) for Mr. Saylor to provide $ 10 million in excess indemnity coverage payable only after the exhaustion of the Commercial Policies, and (ii) an indemnification agreement (the “Tail Agreement”) for Mr. Saylor to provide $ 40 million in indemnity coverage for claims made at any time based on actions or omissions occurring prior to the inception date of the Commercial Policies. The Company paid Mr. Saylor $ 600,000 for a one-year term under the Excess Agreement , and $ 150,000 for a 90-day term under the Tail Agreement. At the option of the Company, the Company may elect to extend the term under the Tail Agreement for up to a total of twenty-three additional 90 -day periods, for $ 150,000 per additional 90-day term.
Under the Excess Agreement and Tail Agreement, Mr. Saylor will provide, during the term of each agreement, from his personal funds, indemnity coverage to the Company for the benefit of the D&Os of the Company and its subsidiaries in the event such coverage is not provided by the Commercial Policies or indemnifiable by the Company. The Excess Agreement and the Tail Agreement expressly supersede the Original Agreement and the Renewed Agreement. Mr. Saylor refunded the Company $ 337,086 , which is the pro rata portion of the Renewal Payment, in connection with the release of his obligations under the Renewed Agreement.
Prior to entering into the Original Agreement, Renewed Agreement, Excess Agreement, and Tail Agreement with Mr. Saylor, the Company obtained and considered market quotes for D&O liability insurance policies. The Company determined that the policies considered at such times would have provided insufficient coverage and would have required substantial premiums to the extent coverage were available, and that obtaining indemnification coverage provided by Mr. Saylor was appropriate and in the best interest of the Company.
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