Item 1. Financial Statements
Item 1. Financial Statements
MICROSTRATEGY INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
September 30,
December 31,
2021
2020
(unaudited)
Assets
Current assets:
Cash and cash equivalents
$
56,975
$
59,675
Restricted cash
1,149
1,084
Accounts receivable, net
123,748
197,461
Prepaid expenses and other current assets
15,750
14,400
Total current assets
197,622
272,620
Digital assets
2,405,739
1,054,302
Property and equipment, net
38,133
42,975
Right-of-use assets
68,755
73,597
Deposits and other assets
14,857
15,615
Deferred tax assets, net
261,138
6,503
Total assets
$
2,986,244
$
1,465,612
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable, accrued expenses, and operating lease liabilities
$
45,454
$
45,119
Accrued compensation and employee benefits
47,759
49,249
Deferred revenue and advance payments
160,697
191,250
Total current liabilities
253,910
285,618
Long-term debt, net
2,153,034
486,366
Deferred revenue and advance payments
8,302
14,662
Operating lease liabilities
78,939
84,328
Other long-term liabilities
28,934
33,382
Deferred tax liabilities
1,811
8,211
Total liabilities
2,524,930
912,567
Commitments and Contingencies
Stockholders’ 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; 17,078 shares issued and 8,394 shares outstanding, and 16,307 shares issued and 7,623 shares outstanding, respectively
17
16
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
1,118,761
763,051
Treasury stock, at cost; 8,684 shares and 8,684 shares, respectively
( 782,104
)
( 782,104
)
Accumulated other comprehensive loss
( 6,781
)
( 3,885
)
Retained earnings
131,419
575,965
Total stockholders’ equity
461,314
553,045
Total liabilities and stockholders’ equity
$
2,986,244
$
1,465,612
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
September 30,
2021
2020
(unaudited)
(unaudited)
Revenues:
Product licenses
$
25,830
$
29,573
Subscription services
10,853
8,305
Total product licenses and subscription services
36,683
37,878
Product support
70,387
71,352
Other services
20,924
18,178
Total revenues
127,994
127,408
Cost of revenues:
Product licenses
383
545
Subscription services
4,282
3,656
Total product licenses and subscription services
4,665
4,201
Product support
4,679
5,679
Other services
12,975
11,856
Total cost of revenues
22,319
21,736
Gross profit
105,675
105,672
Operating expenses:
Sales and marketing
38,209
35,330
Research and development
28,211
26,638
General and administrative
23,751
19,733
Digital asset impairment losses
65,165
44,242
Total operating expenses
155,336
125,943
Loss from operations
( 49,661
)
( 20,271
)
Interest (expense) income, net
( 10,723
)
209
Other income (expense), net
1,264
( 2,971
)
Loss before income taxes
( 59,120
)
( 23,033
)
Benefit from income taxes
( 22,984
)
( 8,804
)
Net loss
$
( 36,136
)
$
( 14,229
)
Basic loss per share (1)
$
( 3.61
)
$
( 1.48
)
Weighted average shares outstanding used in computing basic loss per share
9,999
9,616
Diluted loss per share (1)
$
( 3.61
)
$
( 1.48
)
Weighted average shares outstanding used in computing diluted loss per share
9,999
9,616
(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)
Nine Months Ended
September 30,
2021
2020
(unaudited)
(unaudited)
Revenues:
Product licenses
$
69,261
$
56,973
Subscription services
31,221
24,294
Total product licenses and subscription services
100,482
81,267
Product support
212,063
212,548
Other services
63,702
55,601
Total revenues
376,247
349,416
Cost of revenues:
Product licenses
1,290
1,729
Subscription services
11,720
11,512
Total product licenses and subscription services
13,010
13,241
Product support
14,353
19,234
Other services
40,543
37,795
Total cost of revenues
67,906
70,270
Gross profit
308,341
279,146
Operating expenses:
Sales and marketing
116,728
109,799
Research and development
86,242
78,606
General and administrative
68,397
60,514
Digital asset impairment losses
684,034
44,242
Total operating expenses
955,401
293,161
Loss from operations
( 647,060
)
( 14,015
)
Interest (expense) income, net
( 17,520
)
2,627
Other income (expense), net
1,631
( 4,532
)
Loss before income taxes
( 662,949
)
( 15,920
)
Benefit from income taxes
( 217,446
)
( 5,735
)
Net loss
$
( 445,503
)
$
( 10,185
)
Basic loss per share (1)
$
( 45.47
)
$
( 1.04
)
Weighted average shares outstanding used in computing basic loss per share
9,798
9,777
Diluted loss per share (1)
$
( 45.47
)
$
( 1.04
)
Weighted average shares outstanding used in computing diluted loss per share
9,798
9,777
(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
September 30,
2021
2020
(unaudited)
(unaudited)
Net loss
$
( 36,136
)
$
( 14,229
)
Other comprehensive (loss) income, net of applicable taxes:
Foreign currency translation adjustment
( 1,457
)
2,612
Unrealized loss on short-term investments
0
( 325
)
Total other comprehensive (loss) income
( 1,457
)
2,287
Comprehensive loss
$
( 37,593
)
$
( 11,942
)
Nine Months Ended
September 30,
2021
2020
(unaudited)
(unaudited)
Net loss
$
( 445,503
)
$
( 10,185
)
Other comprehensive (loss) income, net of applicable taxes:
Foreign currency translation adjustment
( 2,896
)
2,898
Unrealized loss on short-term investments
0
( 147
)
Total other comprehensive (loss) income
( 2,896
)
2,751
Comprehensive loss
$
( 448,399
)
$
( 7,434
)
The accompanying notes are an integral part of these Consolidated Financial Statements.
4
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, unaudited)
Class A
Class B Convertible
Additional
Accumulated Other
Common Stock
Common Stock
Paid-in
Treasury Stock
Comprehensive
Retained
Total
Shares
Amount
Shares
Amount
Capital
Shares
Amount
Loss
Earnings
Balance at January 1, 2020
$
508,559
15,888
$
16
2,035
$
2
$
593,583
( 7,807
)
$
( 658,880
)
$
( 9,651
)
$
583,489
Net income
657
0
0
0
0
0
0
0
0
657
Other comprehensive loss
( 547
)
0
0
0
0
0
0
0
( 547
)
0
Issuance of class A common stock under stock option plans
340
3
0
0
0
340
0
0
0
0
Purchases of treasury stock
( 50,747
)
0
0
0
0
0
( 355
)
( 50,747
)
0
0
Share-based compensation expense
3,164
0
0
0
0
3,164
0
0
0
0
Balance at March 31, 2020
$
461,426
15,891
$
16
2,035
$
2
$
597,087
( 8,162
)
$
( 709,627
)
$
( 10,198
)
$
584,146
Net income
3,387
0
0
0
0
0
0
0
0
3,387
Other comprehensive income
1,011
0
0
0
0
0
0
0
1,011
0
Issuance of class A common stock under stock option plans
1,562
12
0
0
0
1,562
0
0
0
0
Purchases of treasury stock
( 11,128
)
0
0
0
0
0
( 90
)
( 11,128
)
0
0
Share-based compensation expense
2,202
0
0
0
0
2,202
0
0
0
0
Balance at June 30, 2020
$
458,460
15,903
$
16
2,035
$
2
$
600,851
( 8,252
)
$
( 720,755
)
$
( 9,187
)
$
587,533
Net loss
( 14,229
)
0
0
0
0
0
0
0
0
( 14,229
)
Other comprehensive income
2,287
0
0
0
0
0
0
0
2,287
0
Conversion of class B to class A common stock
0
21
0
( 21
)
0
0
0
0
0
0
Issuance of class A common stock under stock option plans
1,714
13
0
0
0
1,714
0
0
0
0
Purchases of treasury stock
( 61,349
)
0
0
0
0
0
( 432
)
( 61,349
)
0
0
Share-based compensation expense
2,409
0
0
0
0
2,409
0
0
0
0
Balance at September 30, 2020
$
389,292
15,937
$
16
2,014
$
2
$
604,974
( 8,684
)
$
( 782,104
)
$
( 6,900
)
$
573,304
Net income
2,661
0
0
0
0
0
0
0
0
2,661
Other comprehensive income
3,015
0
0
0
0
0
0
0
3,015
0
Conversion of class B to class A common stock
0
50
0
( 50
)
0
0
0
0
0
0
Issuance of class A common stock under stock option plans
47,466
320
0
0
0
47,466
0
0
0
0
Share-based compensation expense
2,801
0
0
0
0
2,801
0
0
0
0
Equity component of convertible senior notes, net of issuance cost and deferred tax liability
107,810
0
0
0
0
107,810
0
0
0
0
Balance at December 31, 2020
$
553,045
16,307
$
16
1,964
$
2
$
763,051
( 8,684
)
$
( 782,104
)
$
( 3,885
)
$
575,965
Opening balance adjustment due to the adoption of ASU 2020-06
( 106,853
)
0
0
0
0
( 107,810
)
0
0
0
957
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 under stock option plans
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 under stock option plans
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 under stock option plans
7,282
50
0
0
0
7,282
0
0
0
0
Issuance of class A common stock under employee stock purchase plans
2,854
5
0
0
0
2,854
0
0
0
0
Share-based compensation expense
11,883
0
0
0
0
11,883
0
0
0
0
Issuance of class A common stock under public offerings
399,469
555
1
0
0
399,468
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
The accompanying notes are an integral part of these Consolidated Financial Statements.
5
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended
September 30,
2021
2020
(unaudited)
(unaudited)
Operating activities:
Net loss
$
( 445,503
)
$
( 10,185
)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization
8,639
9,342
Reduction in carrying amount of right-of-use assets
6,190
6,134
Credit losses and sales allowances
748
1,874
Net realized gain on short-term investments
0
( 94
)
Deferred taxes
( 221,328
)
( 13,341
)
Release of liabilities for unrecognized tax benefits
( 152
)
0
Share-based compensation expense
30,973
7,897
Digital asset impairment losses
684,034
44,242
Amortization of issuance costs on long-term debt
5,084
0
Changes in operating assets and liabilities:
Accounts receivable
10,634
6,439
Prepaid expenses and other current assets
( 1,693
)
391
Deposits and other assets
( 594
)
( 175
)
Accounts payable and accrued expenses
( 606
)
902
Accrued compensation and employee benefits
( 1,698
)
( 7,221
)
Deferred revenue and advance payments
24,385
( 12,385
)
Operating lease liabilities
( 7,714
)
( 7,148
)
Other long-term liabilities
( 813
)
1,625
Net cash provided by operating activities
90,586
28,297
Investing activities:
Purchases of digital assets
( 2,035,471
)
( 425,000
)
Proceeds from redemption of short-term investments
0
119,886
Purchases of property and equipment
( 1,882
)
( 1,162
)
Purchases of short-term investments
0
( 9,928
)
Net cash used in investing activities
( 2,037,353
)
( 316,204
)
Financing activities:
Proceeds from convertible senior notes
1,050,000
0
Issuance costs paid for convertible senior notes
( 24,742
)
0
Proceeds from senior secured notes
500,000
0
Issuance costs paid for senior secured notes
( 12,792
)
0
Proceeds from sale of class A common stock under public offerings
403,970
0
Issuance costs paid related to sale of class A common stock under public offerings
( 4,501
)
0
Proceeds from sale of class A common stock under exercise of employee stock options
31,380
3,616
Proceeds from issuance of class A common stock under employee stock purchase plan
2,854
0
Purchases of treasury stock
0
( 122,480
)
Net cash provided by (used in) financing activities
1,946,169
( 118,864
)
Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash
( 2,037
)
2,839
Net decrease in cash, cash equivalents, and restricted cash
( 2,635
)
( 403,932
)
Cash, cash equivalents, and restricted cash, beginning of period
60,759
457,816
Cash, cash equivalents, and restricted cash, end of period
$
58,124
$
53,884
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.
As discussed in Note 2, Recent Accounting Standards, to the Consolidated Financial Statements, the Company adopted 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”), effective January 1, 2021. Comparative prior period Consolidated Financial Statements have not been restated for ASU 2020-06 and are not directly comparable to the current period Consolidated Financial Statements.
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, 2020. During 2021, the Company made the following significant changes in its accounting policies, which are discussed further below:
•
adoption of accounting policies related to senior secured notes;
•
changes to the expected stock price volatility assumption in the Black-Scholes valuation model used to determine the fair value of certain awards granted under the 2013 Stock Incentive Plan (as amended, the “2013 Equity Plan”);
•
adoption of accounting policies related to the 2021 Employee Stock Purchase Plan (the “2021 ESPP”), including determination of the grant date fair value; and
•
adoption of ASU 2020-06 and its impact on accounting for convertible debt arrangements and diluted earnings per share calculations.
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.
(b) Debt Arrangements
As discussed in Note 6, Long-term Debt, to the Consolidated Financial Statements, the Company issued convertible senior notes in December 2020 and February 2021 and senior secured notes in June 2021. The embedded conversion features in each of the convertible notes are indexed to the Company’s own stock and meet the criteria for classification in stockholders’ equity, and therefore derivative accounting does not apply. The Company records the aggregate principal amount of each of the convertible and secured notes as a liability on its Consolidated Balance Sheet, offset by the issuance costs associated with each offering. The issuance costs are amortized to interest expense using the effective interest method over the expected term of each of the notes.
(c) Share-based Compensation
The Company maintains the 2013 Equity Plan, under which the Company’s employees, officers, directors, and other eligible participants may be awarded various types of share-based compensation, including options to purchase shares of the Company’s class A common stock, restricted stock units, and other stock-based awards. During the first quarter of 2021, the Company adopted the 2021 ESPP, and in May 2021, the Company’s stockholders approved the 2021 ESPP, under which eligible employees of the Company and certain of its subsidiaries may be provided with opportunities to purchase shares of the Company’s class A common stock.
The Company recognizes share-based compensation expense associated with the 2013 Equity Plan and the 2021 ESPP on a straight-line basis over the requisite service period (generally, the vesting period for awards under the 2013 Equity Plan and the offering period under the 2021 ESPP). For options and other stock-based awards, the share-based compensation expense is based on the fair value of the awards on the date of grant, as estimated using the Black-Scholes valuation model. For the 2021 ESPP, the share-based compensation expense is based on the grant date fair value, which consists of the intrinsic value of any purchase discount and the fair value of the look-back provision using the Black-Scholes valuation model. For restricted stock units, the share-based compensation expense is based on the fair value of the Company’s class A common stock on the date of grant.
The Black-Scholes valuation model requires the input of certain management assumptions, including the expected term, expected stock price volatility, risk-free interest rate, and expected dividend yield. Beginning in 2021, the Company estimates the expected stock price volatility by calculating a blended rate from the historical stock price volatility of its class A common stock and the implied volatility of the Company’s traded financial instruments with similar terms to the respective award. For stock options granted prior to 2021, the Company relied exclusively on its historical stock price volatility to estimate the expected stock price volatility over the expected term
7
because the Company believed at the date of grant that future volatility was unlikely to differ from the past. The remaining assumptions in the Black-Scholes valuation model have not changed significantly since December 31, 2020. These assumptions are based on management’s best judgment, and changes to these assumptions could materially affect the fair value estimates and amount of share-based compensation expense recognized .
See Note 10, Share-based Compensation, to the Consolidated Financial Statements for further information regarding the 2013 Equity Plan, the 2021 ESPP, related share-based compensation expense, and assumptions used in determining fair value.
(d) Basic and Diluted Earnings Per Share
Basic earnings per share is determined by dividing the net income attributable to common stockholders by the weighted average number of common shares and participating securities outstanding during the period. Participating securities are included in the basic earnings per share calculation when dilutive. Diluted earnings per share is determined by dividing the net income attributable to common stockholders by the weighted average number of common shares and potential common shares outstanding during the period. 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 employee stock options, the vesting of restricted stock units, and in connection with the 2021 ESPP are computed using the treasury stock method. Upon the adoption of ASU 2020-06, potential common shares consisting of class A common stock issuable upon conversion of the Company’s convertible senior notes are computed using the if-converted method. Prior to the adoption of ASU 2020-06, potential common shares consisting of class A common stock issuable upon conversion of the Company’s convertible senior notes were computed using the treasury stock method. See Note 2, Recent Accounting Standards, to the Consolidated Financial Statements for further information regarding the differences in the if-converted and treasury stock methods.
(2) Recent Accounting Standards
Accounting for Convertible Instruments
The Company early adopted ASU 2020-06 effective as of January 1, 2021 using the modified retrospective method, which resulted in a cumulative-effect adjustment to the opening balance of retained earnings on the date of adoption, recorded as follows (in thousands):
December 31, 2020
Effect of the Adoption
January 1, 2021
Consolidated Balance Sheet
As Reported
of ASU 2020-06
As Adjusted
Deferred tax liabilities (assets)
$
8,211
$
( 41,693
)
$
( 33,482
)
Convertible senior notes, net
486,366
148,546
634,912
Additional paid-in-capital
763,051
( 107,810
)
655,241
Retained earnings
575,965
957
576,922
The following significant accounting changes occurred as result of the adoption of ASU 2020-06:
(i)
Elimination of the cash conversion model . Under previous GAAP, instruments that may be partially settled in cash were in the scope of the “cash conversion” model, which required conversion features to be separately reported in equity. Upon the adoption of ASU 2020-06, the cash conversion model was eliminated and the Company no longer records conversion features in equity and instead accounts for its convertible senior notes as single units of debt. As a result, there is no longer a debt discount or subsequent amortization to be recognized as interest expense. Similarly, the Company no longer allocates a portion of the related issuance costs to equity. As a result of these changes, temporary differences between the Company’s book and tax bases have been eliminated and the Company no longer records any related net deferred tax liability with respect to its convertible senior notes.
(ii)
Use of the “if-converted” method for calculating diluted earnings per share . Under previous GAAP, the Company utilized the “treasury stock” method for computing the diluted earnings per share impact of its convertible senior notes. Under the treasury stock method, only the excess of the average stock price of the Company’s class A common stock for the reporting period over the conversion price was used in determining the impact to the diluted earnings per share denominator. Upon the adoption of ASU 2020-06, the Company may no longer use the treasury stock method for instruments with flexible settlement arrangements. Instead, the Company is required to use the if-converted method, which requires all underlying shares be included in the denominator regardless of the average stock price for the reporting period, in addition to adding back to the numerator the related interest expense from the stated coupon and the amortization of issuance costs, if dilutive.
Accounting for income taxes
The Company adopted Accounting Standards Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”) effective as of January 1, 2021. ASU 2019-12 simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities related to outside basis differences. ASU 2019-12 requires certain amendments to be applied
8
prospectively and others retrospectively. The adoption of this guidance did not have a material impact on the Company’s consolidated financial position, results of operations, or cash flows . Prior periods have not been adjusted and no cumulative-effect adjustment to retained earnings was made.
(3) Digital Assets
The Company accounts for its digital assets 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.
During the nine months ended September 30, 2021, the Company purchased approximately 43,573 bitcoins for $ 2.035 billion in cash, including cash from the net proceeds related to the issuance of its convertible senior notes due 2027 and its senior secured notes due 2028, and the sale of its class A common stock offered under the Open Market Sale Agreement described in Note 11, Common Equity and Earnings per Share, to the Consolidated Financial Statements. During the nine months ended September 30, 2020, the Company purchased approximately 38,250 bitcoins for $ 425.0 million in cash, including cash from the liquidation of short-term investments.
During the three months ended September 30, 2021, MacroStrategy LLC (“MacroStrategy”) was extended short-term trade credits by Coinbase Credit, Inc., an affiliate of Coinbase, Inc. (the entity that operates the Coinbase exchange, the Company’s principal market). MacroStrategy is the Company’s subsidiary formed to hold bitcoins and digital assets that are not included in the collateral securing the Company’s senior secured notes due 2028, discussed in Note 6, Long-term Debt, to the Consolidated Financial Statements. The trade credits allowed MacroStrategy to purchase bitcoin in advance of using cash funds in its trading account. The trade credits were due and payable within days after they were extended. Certain of MacroStrategy’s assets, including bitcoin, were subject to a first priority security interest and lien in order to secure the repayment of the trade credits. MacroStrategy only requested trade credits where cash funding was imminent from confirmed sales of stock under the Company’s Open Market Sale Agreement. As of September 30, 2021, MacroStrategy had no outstanding trade credits payable. MacroStrategy may request further such trade credits from Coinbase Credit, Inc.; however, Coinbase Credit, Inc. has no obligation to issue further trade credits. MacroStrategy has no intention to request trade credits in the future unless cash funding under the Company’s Open Market Sale Agreement is imminent.
During the three and nine months ended September 30, 2021, the Company incurred $ 65.2 million and $ 684.0 million, respectively, of impairment losses on its bitcoin, which were recognized as “Digital asset impairment losses” in the Company’s Consolidated Statement of Operations. During the three and nine months ended September 30, 2020, the Company incurred $ 44.2 million of impairment losses on its bitcoin. As of September 30, 2021, the carrying value of the Company’s approximately 114,042 bitcoins was $ 2.406 billion, which reflects cumulative impairments of $ 754.7 million. As of December 31, 2020, the carrying value of the Company’s approximately 70,469 bitcoins was $ 1.054 billion, which reflected cumulative impairments of $ 70.7 million. 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 September 30, 2021 or December 31, 2020, respectively, and not as of September 30, 2021 or December 31, 2020, respectively. The Company did no t sell any of its bitcoins during the three and nine months ended September 30, 2021 and 2020, respectively.
As of September 30, 2021, approximately 13,449 of the bitcoins held by the Company serve as part of the collateral for the Company’s senior secured notes due 2028, as further described in Note 6, Long-term Debt, to the Consolidated Financial Statements.
(4) 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.
9
Accounts receivable (in thousands) consisted of the following, as of:
September 30,
December 31,
2021
2020
Billed and billable
$
126,118
$
200,221
Less: allowance for credit losses
( 2,370
)
( 2,760
)
Accounts receivable, net
$
123,748
$
197,461
Changes in the allowance for credit losses were not material for the three and nine months ended September 30, 2021. In estimating its allowance for credit losses as of September 30, 2021, the Company considered the impact from the pandemic caused by a novel strain of coronavirus (“COVID-19”) and established additional risk pools and reserves relating to customers in certain geographic areas and industries, in addition to separately assessing the reserves for certain customers that have been granted extended payment terms.
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 nine months ended September 30, 2021 and 2020, 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 $ 1.2 million and $ 1.1 million in accrued sales and usage-based royalty revenue as of September 30, 2021 and December 31, 2020, 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 contracts 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.
Deferred revenue and advance payments (in thousands) from customers consisted of the following, as of:
September 30,
December 31,
2021
2020
Current:
Deferred product licenses revenue
$
2,315
$
1,495
Deferred subscription services revenue
23,089
26,258
Deferred product support revenue
130,339
156,216
Deferred other services revenue
4,954
7,281
Total current deferred revenue and advance payments
$
160,697
$
191,250
Non-current:
Deferred product licenses revenue
$
74
$
139
Deferred subscription services revenue
590
8,758
Deferred product support revenue
6,973
5,055
Deferred other services revenue
665
710
Total non-current deferred revenue and advance payments
$
8,302
$
14,662
During the three and nine months ended September 30, 2021, the Company recognized revenues of $ 38.9 million and $ 164.9 million, respectively, from amounts included in the total deferred revenue and advance payments balances at the beginning of 2021. During the three and nine months ended September 30, 2020, the Company recognized revenues of $ 37.3 million and $ 160.5 million, respectively, from amounts included in the total deferred revenue and advance payments balances at the beginning of 2020. For the three and nine months ended September 30, 2021 and 2020, there were no significant changes in the timing of revenue recognition on the Company’s deferred balances.
10
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 September 30, 2021, the Company had an aggregate transaction price of $ 198.9 million allocated to the remaining performance obligation related to product support, subscription services, other services, and, in limited cases, product licenses contracts. The Company expects to recognize $ 168.3 million within the next 12 months and the remainder thereafter .
(5) Leases
The Company leases office space in the United States and foreign locations under operating lease agreements. Office space is the Company’s only material underlying asset class under operating lease agreements. The Company has no material finance leases.
Under the Company’s office space lease agreements, fixed payments and variable payments that depend on an index or rate are typically comprised of base rent and parking fees. Additionally, under these agreements the Company is generally responsible for certain variable payments that typically include certain taxes, utilities and maintenance costs, and other fees. These variable lease payments are generally based on the Company’s occupation or usage percentages and are subject to adjustments by the lessor.
As of September 30, 2021, the Company’s right-of-use (“ROU”) assets and total lease liabilities were $ 58.6 million and $ 77.6 million, respectively, for leases in the United States and $ 10.2 million and $ 11.1 million, respectively, for foreign leases. As of December 31, 2020, the Company’s ROU assets and total lease liabilities were $ 62.2 million and $ 82.9 million, respectively, for leases in the United States and $ 11.4 million and $ 12.2 million, respectively, for foreign leases. The Company’s most significant lease is for its corporate headquarters in Northern Virginia. The ROU asset and total lease liability related to the Company’s corporate headquarters lease were $ 56.2 million and $ 75.2 million, respectively, as of September 30, 2021, and $ 59.0 million and $ 79.7 million, respectively, as of December 31, 2020. During the nine months ended September 30, 2021, $ 2.4 million of ROU assets were obtained in exchange for new operating lease liabilities. During the nine months ended September 30, 2020, $ 0.7 million of ROU assets were obtained in exchange for new operating lease liabilities.
(6) Long-term Debt
As of September 30, 2021, the net carrying value of the Company’s long-term debt consisted of the following (in thousands):
September 30, 2021
2025 Convertible Notes
$
637,136
2027 Convertible Notes
1,028,262
2028 Secured Notes
487,636
Total
$
2,153,034
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 Indenture”). 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.
11
In February 2021, the Company issued $ 1.050 billion aggregate principal amount of 0 % Convertible Senior Notes due 2027 (the “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 (the “2027 Convertible Notes Indenture”). 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 2025 Convertible Notes and 2027 Convertible Notes (collectively, the “Convertible Notes”) are senior unsecured obligations and rank senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the Convertible Notes; equal in right of payment to any of the Company’s unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of the Company’s subsidiaries.
The Convertible Notes are convertible into shares of the Company’s class A common stock at initial conversion rates of 2.5126 shares and 0.6981 shares per $ 1,000 principal amount of Convertible Notes for the 2025 Convertible Notes and 2027 Convertible Notes, respectively (equivalent to an initial conversion price of approximately $ 397.99 per share and $ 1,432.46 per share of class A common stock for the 2025 Convertible Notes and 2027 Convertible Notes, respectively). The conversion rates are subject to customary anti-dilution adjustments. In addition, following certain events that may occur prior to the respective maturity dates or if the Company delivers a notice of redemption, the Company will increase the conversion rate for a holder who elects to convert its Convertible Notes in connection with such corporate event or notice of redemption, as the case may be, in certain circumstances as provided in the 2025 Convertible Notes Indenture and the 2027 Convertible Notes Indenture (collectively, the “Convertible Notes Indentures”), respectively. As of September 30, 2021, 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.
Prior to June 15, 2025 and August 15, 2026 for the 2025 Convertible Notes and 2027 Convertible Notes, respectively, the Convertible Notes are convertible only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on March 31, 2021 and June 30, 2021 for the 2025 Convertible Notes and 2027 Convertible Notes, respectively (and only during such calendar quarter), if the last reported sale price of the Company’s class A common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price of the 2025 Convertible Notes or 2027 Convertible Notes, respectively, on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the “trading price” (as defined in the Convertible Notes Indentures) per $ 1,000 principal amount of the 2025 Convertible Notes or 2027 Convertible Notes, respectively, for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of the Company’s class A common stock and the applicable conversion rate on each such trading day; (3) if the Company calls any or all of the 2025 Convertible Notes or 2027 Convertible Notes, respectively, for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; and (4) upon occurrence of specified corporate events as described in the Convertible Notes Indentures.
On or after June 15, 2025 or August 15, 2026 for the 2025 Convertible Notes and 2027 Convertible Notes, respectively, until the close of business on the second scheduled trading day immediately preceding the maturity dates of the 2025 Convertible Notes or 2027 Convertible Notes, respectively, holders may convert the 2025 Convertible Notes or 2027 Convertible Notes, respectively, at any time. Upon conversion of the Convertible Notes, the Company will pay or deliver, as the case may be, cash, shares of the Company’s class A common stock, or a combination of cash and shares of class A common stock, at the Company’s election.
Prior to December 20, 2023 or February 20, 2024 for the 2025 Convertible Notes and 2027 Convertible Notes, respectively, the Company may not redeem the Convertible Notes. The Company may redeem for cash all or a portion of the 2025 Convertible Notes or 2027 Convertible Notes, at its option, on or after December 20, 2023 or February 20, 2024 , respectively, if the last reported sale price of the Company’s class A common stock has been at least 130 % of the conversion price of the 2025 Convertible Notes or 2027 Convertible Notes, respectively, then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides a notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption. The redemption price will be equal to 100 % of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
12
If the Company undergoes a “fundamental change,” as defined in the Convertible Notes Indentures, prior to maturity, subject to certain conditions, holders may require the Company to repurchase for cash all or any portion of their Convertible Notes at a fundamental change repurchase price equal to 100 % of the principal amount of the Convertible Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
The Convertible Notes Indentures contain customary terms and covenants, including that upon certain events of default occurring and continuing, either the Trustee or the holders of at least 25 % in principal amount of the outstanding 2025 Convertible Notes or 2027 Convertible Notes, respectively, may declare 100 % of the principal of, and accrued and unpaid interest, if any, on, all the 2025 Convertible Notes or 2027 Convertible Notes, respectively, to be due and payable.
During the nine months ended September 30, 2021, the 2025 Convertible Notes were convertible at the option of the holders of the 2025 Convertible Notes during the second quarter of 2021 only. During the nine months ended September 30, 2021, the 2027 Convertible Notes were not convertible at any time. No conversions of the Convertible Notes occurred during the three and nine months ended September 30, 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 September 30, 2021, the last reported sale price of the Company’s class A common stock for at least 20 trading days during the 30 consecutive trading days ending on, and including, September 30, 2021 was greater than or equal to 130 % of the conversion price of the 2025 Convertible Notes on each applicable trading day. Therefore, the 2025 Convertible Notes are convertible at the option of the holders of the 2025 Convertible Notes during the fourth quarter of 2021.
As discussed in Note 2, Recent Accounting Standards, to the Consolidated Financial Statements, the Company adopted ASU 2020-06 effective January 1, 2021. Although the Convertible Notes each contain embedded conversion features, the Company accounts for each of the Convertible Notes in its entirety as a liability because the conversion features are indexed to the Company’s own stock and meet the criteria for classification in stockholders’ equity and therefore do not qualify for separate derivative accounting.
The Company incurred approximately $ 15.3 million and $ 24.2 million in customary offering expenses associated with the 2025 Convertible Notes and 2027 Convertible Notes, respectively (“issuance costs”). The Company accounts for these issuance costs as a reduction to the principal amount of the 2025 Convertible Notes and 2027 Convertible Notes, respectively, and amortizes the issuance costs to interest expense over the contractual term of the 2025 Convertible Notes and 2027 Convertible Notes, respectively, at an effective interest rate of 1.23 % and 0.39 %, respectively.
As of September 30, 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 Sheet. The following is a summary of the Company’s convertible debt instruments as of September 30, 2021 (in thousands):
Outstanding
Unamortized
Net Carrying
Fair Value
Principal Amount
Issuance Costs
Value
Amount
Leveling
2025 Convertible Notes
$
650,000
$
( 12,864
)
$
637,136
$
1,058,915
Level 2
2027 Convertible Notes
1,050,000
( 21,738
)
1,028,262
771,782
Level 2
Total
$
1,700,000
$
( 34,602
)
$
1,665,398
$
1,830,697
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 and nine months ended September 30, 2021 , interest expense related to the Convertible Notes was as follows (in thousands):
Three Months Ended September 30, 2021
Nine Months Ended September 30, 2021
Contractual
Amortization of
Contractual
Amortization of
Interest Expense
Issuance Costs
Total
Interest Expense
Issuance Costs
Total
2025 Convertible Notes
$
1,218
$
744
$
1,962
$
3,656
$
2,224
$
5,880
2027 Convertible Notes
0
1,000
1,000
0
2,432
2,432
Total
$
1,218
$
1,744
$
2,962
$
3,656
$
4,656
$
8,312
The Company did no t pay any interest expense related to the 2025 Convertible Notes during the three months ended September 30, 2021. For the nine months ended September 30, 2021, the Company paid $ 2.5 million in interest expense related to the 2025 Convertible Notes. The Company has no t paid any special interest expense related to the 2027 Convertible Notes to date.
13
Senior Secured Notes
On June 14, 2021, the Company issued $ 500.0 million aggregate principal amount of 6.125 % Senior Secured Notes due 2028 (the “2028 Secured Notes”). The 2028 Secured Notes were sold under a purchase agreement, dated as of June 8, 2021, entered into by and among the Company, MicroStrategy Services Corporation, a wholly owned subsidiary of the Company (the “Guarantor”), and Jefferies LLC, for resale to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to persons outside the United States pursuant to Regulation S under the Securities Act. The terms of the 2028 Secured Notes are governed by an indenture, dated as of June 14, 2021 (the “2028 Secured Notes Indenture”), among the Company, the Guarantor, and U.S. Bank National Association, as trustee and collateral agent.
The 2028 Secured Notes are unconditionally guaranteed, jointly and severally, on a senior secured basis by the Guarantor and certain subsidiaries of the Company that may be formed or acquired on or after June 14, 2021 (collectively, the “Subsidiary Guarantors”). 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 as discussed further below. 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 and the related guarantees are secured, on a senior secured basis with the Company’s existing and future senior indebtedness, by a security interest in substantially all of the Company’s and the Subsidiary Guarantors’ assets (the “Collateral”). The Collateral includes any bitcoins or other digital assets acquired by the Company or a Subsidiary Guarantor on or after June 14, 2021, but excludes bitcoins held by MacroStrategy LLC and certain other excluded assets. MacroStrategy LLC is the Company’s subsidiary formed to hold bitcoins and digital assets that are not included in the Collateral, including bitcoins acquired before June 14, 2021 and bitcoins purchased by MacroStrategy LLC from contributions made to it by the Company with the proceeds from sales of the Company’s class A common stock under the Open Market Sale Agreement described in Note 11, Common Equity and Earnings per Share, to the Consolidated Financial Statements.
The 2028 Secured Notes and the related guarantees are the general senior secured obligations of the Company and the Subsidiary Guarantors and rank pari passu in right of payment with the Company’s and the Subsidiary Guarantors’ existing and future senior indebtedness, are senior in right of payment to all future subordinated indebtedness of the Company and the Subsidiary Guarantors, and are effectively senior to any existing and future unsecured indebtedness of the Company and the Subsidiary Guarantors (including the Convertible Notes) to the extent of the value of the Collateral (after giving effect to the sharing of such Collateral with holders of equal or prior ranking liens on the Collateral).
The 2028 Secured Notes and the guarantees are: (i) secured on a first priority basis by liens on the Collateral (subject to certain permitted liens and certain other exceptions, as provided in the 2028 Secured Notes Indenture) or to the extent there is outstanding ABL Indebtedness (as defined in the 2028 Secured Notes Indenture), secured on a first priority basis by the Notes Priority Collateral (as defined in the 2028 Secured Notes Indenture) and on a second priority basis by liens on the ABL Priority Collateral (as defined in the 2028 Secured Notes Indenture) (subject to certain permitted liens and certain other exceptions), (ii) effectively subordinated to any future ABL Indebtedness to the extent of the value of the ABL Priority Collateral securing such future ABL Indebtedness, (iii) effectively subordinated to any existing and future indebtedness of the Company or any Subsidiary Guarantor that is secured by liens on assets of the Company or any Subsidiary Guarantor that do not constitute a part of the Collateral, and (iv) structurally subordinated to any existing and future indebtedness and other liabilities of MacroStrategy LLC and any other Company subsidiaries that are not Subsidiary Guarantors, other than intercompany indebtedness and liabilities owed to the Company or a Subsidiary Guarantor.
At any time and from time to time prior to June 15, 2024 , the Company may redeem some or all of the 2028 Secured Notes at a redemption price equal to 100% of the principal amount of the 2028 Secured Notes being redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, plus a “make-whole” premium as set forth in the 2028 Secured Notes Indenture. At any time and from time to time on or after June 15, 2024, the Company may redeem some or all of the 2028 Secured Notes at the redemption prices described in the Indenture, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. At any time prior to June 15, 2024, but not more than once during each consecutive twelve-month period, the Company may redeem up to 10% of the aggregate principal amount of the 2028 Secured Notes at a redemption price equal to 103% of the principal amount of the 2028 Secured Notes being redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. At any time prior to June 15, 2024, the Company may redeem, on one or more occasions, up to 40% of the aggregate principal amount of the 2028 Secured Notes with the proceeds of certain equity offerings, at a redemption price equal to 106.125% of the principal amount of the 2028 Secured Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date.
14
If the Company experiences a Change of Control or Fundamental Change (each as defined in the 2028 Secured Notes Indenture), the Company may be required to offer to repurchase the 2028 Secured Notes at a purchase price equal to 101% of their principal amount plus accrued and unpaid interest, if any, to, but excluding, the repurchase date. In certain circumstances, the Company must use certain of the proceeds from a sale of assets to make an offer to repurchase 2028 Secured Notes at a purchase price equal to 100% of their principal amount, plus accrued and unpaid interest, if any, to, but excluding, the repurchase date.
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 2028 Secured Notes Indenture) 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 2028 Secured Notes Indenture contains 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 September 30, 2021.
The Company incurred approximately $ 12.8 million in customary offering expenses associated with the 2028 Secured Notes. The Company accounts for these issuance costs as a reduction to the principal amount of the 2028 Secured Notes and amortizes the issuance costs to interest expense over the contractual term of the 2028 Secured Notes at an effective interest rate of 6.58 %. As of September 30, 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 Sheet. The following is a summary of the Company’s 2028 Secured Notes as of September 30, 2021 (in thousands):
Outstanding
Unamortized
Net Carrying
Fair Value
Principal Amount
Issuance Costs
Value
Amount
Leveling
2028 Secured Notes
$
500,000
$
( 12,364
)
$
487,636
$
505,700
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 and nine months ended September 30, 2021 , interest expense related to the 2028 Secured Notes was as follows (in thousands):
Three months ended September 30, 2021
Nine months ended September 30, 2021
Contractual
Amortization of
Contractual
Amortization of
Interest Expense
Issuance Costs
Total
Interest Expense
Issuance Costs
Total
2028 Secured Notes
$
7,656
$
363
$
8,019
$
9,017
$
428
$
9,445
The Company did no t pay any interest expense related to the 2028 Secured Notes during the three and nine months ended September 30, 2021.
15
Contractual Obligations
The following table shows the future contractual payments related to the Company’s debt instruments (semi-annual interest payments and principal upon maturity), based on the expected due dates of the various installments as of September 30, 2021 (in thousands). The contractual principal payments related to the 2028 Secured Notes are included in the table below based on their stated maturity date of June 15, 2028 and the Company’s expectation that the springing maturity feature of the 2028 Secured Notes will not be triggered.
Payments due by period ended September 30,
2025 Convertible Notes
2027 Convertible Notes
2028 Secured Notes
Total
2022
$
4,875
$
0
$
30,710
$
35,585
2023
4,875
0
30,625
35,500
2024
4,875
0
30,625
35,500
2025
4,875
0
30,625
35,500
2026
652,451
0
30,625
683,076
Thereafter
0
1,050,000
561,250
1,611,250
Total
$
671,951
$
1,050,000
$
714,460
$
2,436,411
(7) 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 September 30, 2021 or December 31, 2020.
See Note 5, Leases, to the Consolidated Financial Statements for information regarding the Company’s commitments that are related to lease agreements.
See Note 6, Long-term Debt, to the Consolidated Financial Statements for information regarding the Company’s commitments related to the Convertible Notes, which may be converted, redeemed, or repurchased prior to their respective maturity dates in accordance with their terms, and the 2028 Secured Notes, which may be redeemed or repurchased prior to their maturity date in accordance with their terms.
See Note 9, Income Taxes, to the Consolidated Financial Statements for information regarding the Company’s commitments that are related to a mandatory deemed repatriation transition tax (“Transition Tax”) imposed under the U.S. Tax Cuts and Jobs Act (the “Tax Act”).
(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 a former reseller and a former employee 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 may be challenged within 15 days of its official publication. 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 the former employee or the Company made any payments to Brazilian 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
16
imposed against individuals; however, neither employees of the Company’s Brazilian subsidiary nor the subsidiary itself were 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 and the parties filed claim construction briefs with the court requesting the court construe the asserted claim terms of the patent. The court conducted a claim construction hearing on July 15, 2021. On August 17, 2021, the case was stayed by the court pending the appointment of a special master to provide assistance to the court with its claim construction order and other outstanding matters including the Company’s motion to dismiss. 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.
(8) 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 nine months ended September 30, 2021, the Company did no t repurchase any shares of its class A common stock pursuant to the Share Repurchase Program. During the three months ended September 30, 2020, the Company did no t repurchase any shares of its class A common stock pursuant to the Share Repurchase Program. During the nine months ended September 30, 2020, the Company repurchased an aggregate of 444,769 shares of its class A common stock at an average price per share of $ 139.12 and an aggregate cost of $ 61.9 million pursuant to the Share Repurchase Program. As of September 30, 2021, 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 September 30, 2021, $ 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.
During the three and nine months ended September 30, 2020, the Company repurchased an aggregate of 432,313 shares of its class A common stock through a “modified Dutch Auction” tender offer (the “Offer”) at a price of $ 140.00 per share for an aggregate cost of $ 61.3 million, inclusive of $ 0.8 million in certain fees and expenses related to the Offer. The Offer expired in September 2020 .
17
(9) Income Taxes
The Company and its subsidiaries conduct business in the United States and various foreign countries and are subject to taxation in numerous domestic and foreign jurisdictions. As a result of its business activities, the Company files tax returns that are subject to examination by various U.S. federal, state, and local, and foreign tax authorities. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or foreign income tax examination by tax authorities for years before 2017 . However, due to the Company’s use of state net operating loss (“NOL”) carryovers in the United States, state tax authorities may attempt to reduce or fully offset the amount of state NOL carryovers from tax years ended 2011 and forward that the Company used in later tax years. The Company’s major foreign tax jurisdictions and tax years that remain subject to potential examination are Poland for tax years 2015 and forward, Germany and Italy for tax years 2016 and forward, and Spain and the United Kingdom for tax years 2017 and forward. To date there have been no material assessments related to audits in any of the applicable foreign jurisdictions.
As of September 30, 2021, the Company had unrecognized tax benefits of $ 4.3 million, of which $ 2.9 million was recorded in “Other long-term liabilities” and $ 1.4 million was recorded in “Deferred tax assets, net” in the Company’s Consolidated Balance Sheet. If recognized, $ 4.3 million of these unrecognized tax benefits would impact the Company’s effective tax rate. The Company recognizes estimated accrued interest related to unrecognized income tax benefits in its (benefit from) provision for income taxes. Penalties relating to income taxes, if incurred, would also be recognized as a component of the Company’s (benefit from) provision for income taxes. Over the next 12 months, the amount of the Company’s liability for unrecognized tax benefits is not expected to change by a material amount. As of September 30, 2021, the amount of cumulative accrued interest expense on unrecognized income tax benefits was approximately $ 0.4 million.
The following table summarizes the Company’s deferred tax assets, net of deferred tax liabilities and valuation allowance (in thousands), as of:
September 30,
December 31,
2021
2020
Deferred tax assets, net of deferred tax liabilities
$
260,625
$
( 449
)
Valuation allowance
( 1,298
)
( 1,259
)
Deferred tax assets, net of deferred tax liabilities and valuation allowance
$
259,327
$
( 1,708
)
The valuation allowances as of September 30, 2021 and December 31, 2020 primarily related to certain foreign tax credit carryforwards that, in the Company’s present estimation, more likely than not will not be realized.
In determining its tax provision or benefit from income taxes, the Company estimates its annual effective tax rate for the full fiscal year and applies that rate to its income or loss before income taxes for the current reporting period. The Company also records discrete items in each respective period as appropriate. 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 (e.g., non-deductible expenses). 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 nine months ended September 30, 2021, the Company recorded a benefit from income taxes of $ 217.4 million that resulted in an effective tax rate of 32.8 %, as compared to a benefit from income taxes of $ 5.7 million that resulted in an effective tax rate of 36.0 % for the nine months ended September 30, 2020. The change in the effective tax rate in 2021 is mainly due to certain discrete items and the change in the expected proportion of U.S. versus foreign income between periods.
In the United States, the Tax Act reduced the U.S. corporate tax rate from 35 % to 21 %, effective January 1, 2018. Additionally, the Tax Act requires certain Global Intangible Low Taxed Income (“GILTI”) earned by controlled foreign corporations (“CFCs”) to be included in the gross income of the CFCs’ U.S. shareholder. The Company has elected the “period cost method” and treats taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred. The Tax Act allows a U.S. corporation a deduction equal to a certain percentage of its foreign-derived intangible income (“FDII”). The Company estimated the impact of the GILTI tax and FDII deduction in determining its 2021 annual effective tax rate that is reflected in its benefit from income taxes for the nine months ended September 30, 2021.
The Tax Act also imposed a Transition Tax on previously untaxed accumulated and current earnings and profits of certain foreign subsidiaries of the Company. As a result of the Tax Act, the Company recorded a final tax expense of $ 37.2 million related to the Transition Tax, comprised of a provisional Transition Tax obligation of $ 40.3 million in 2017 and a subsequent $( 3.1 ) million measurement period adjustment in 2018. As of September 30, 2021, $ 25.1 million of the Transition Tax was unpaid, of which $ 22.1
18
million was recorded in “Other long-term liabilities” and $ 3.0 million was recorded in “Accounts payable, accrued expenses, and operating lease liabilities” in the Company’s Consolidated Balance Sheet. The Company has elected to pay the Transition Tax over an eight-year period beginning in 2018 , as permitted under the Tax Act.
As of September 30, 2021 and December 31, 2020, the amount of cash and cash equivalents held by the Company’s U.S. entities was $ 16.4 million and $ 13.7 million, respectively, and by the Company’s non-U.S. entities was $ 40.6 million and $ 46.0 million, respectively. The Company earns a significant amount of its revenues outside the United States. The Company repatriated foreign earnings and profits of $ 186.6 million during 2020 and $ 57.5 million during the nine months ended September 30, 2021. As of September 30, 2021, the accumulated undistributed foreign earnings and profits is estimated to be $ 109.5 million. Beginning in the third quarter of 2020, the Company determined to no longer permanently reinvest its foreign earnings and profits. Therefore, the Company accrued for foreign withholding tax and U.S. state income taxes on undistributed foreign earnings in addition to the Transition Tax and GILTI tax described above.
In determining the Company’s (benefit from) provision for income taxes, net deferred tax assets, liabilities, and valuation allowances, management is required to make estimates and judgments related to projections of domestic and foreign profitability, the timing and extent of the utilization of NOL carryforwards, applicable tax rates, transfer pricing methods, and prudent and feasible tax planning strategies. As a multinational company, the Company is required to calculate and provide for estimated income tax liabilities for each of the tax jurisdictions in which it operates. This process involves estimating current tax obligations and exposures in each jurisdiction, as well as making judgments regarding the future recoverability of deferred tax assets. Changes in the estimated level of annual pre-tax income, changes in tax laws, particularly changes related to the utilization of NOLs in various jurisdictions, and changes resulting from tax audits can all affect the overall effective income tax rate, which, in turn, impacts the overall level of income tax expense or benefit and net income. According to the guidance under ASC 740, Income Taxes , certain items or events related to continuing operations are specifically excluded from the estimated annual effective tax rate, and their related tax effects are recognized discretely, because these items or events are not estimable. The Company’s digital asset impairment losses of $ 684.0 million incurred during the nine months ended September 30, 2021 were excluded on this basis from the Company’s estimated full year pre-tax book income in calculating the Company’s estimated annual effective tax rate. A tax benefit of $ 191.5 million related to the impairment losses was recorded as a discrete item during the nine months ended September 30, 2021. In addition, the Company had an excess tax benefit of $ 26.0 million from stock option exercises, which was also recorded as a discrete item during the nine months ended September 30, 2021. During the nine months ended September 30, 2020, the Company incurred digital asset impairment losses of $ 44.2 million, which resulted in a discrete tax benefit of $ 12.8 million, and also recorded a discrete tax expense of $ 1.1 million from stock option cancellations.
Estimates and judgments related to the Company’s projections and assumptions are inherently uncertain. Therefore, actual results could differ materially from projections. Currently, the Company expects to use its deferred tax assets, subject to Internal Revenue Code limitations, within the carryforward periods. Valuation allowances have been established where the Company has concluded that it is more likely than not that such deferred tax assets are not realizable. If the Company is unable to regain or increase profitability in future periods, it may be required to increase the valuation allowance against the deferred tax assets, which could result in a charge that would materially adversely affect net income in the period in which the charge is incurred.
(10) Share-based Compensation
2013 Stock Incentive Plan
The Company’s 2013 Equity Plan authorizes the issuance of various types of share-based awards to the Company’s employees, officers, directors, and other eligible participants. In the second quarter of 2021, the Board of Directors authorized and the stockholders approved an amendment to the 2013 Equity Plan to increase the total number of shares of the Company’s class A common stock authorized for issuance under the 2013 Equity Plan from 2,300,000 shares to 2,750,000 shares. As of September 30, 2021, there were 534,992 shares of class A common stock reserved and available for future issuance under the 2013 Equity Plan.
Stock option awards
As of September 30, 2021, there were options to purchase 1,229,829 shares of class A common stock outstanding under the 2013 Equity Plan.
19
The following table summarizes the Company’s stock option activity (in thousands, except per share data and years) for the three months ended September 30, 2021:
Stock Options Outstanding
Weighted Average
Aggregate
Weighted Average
Exercise Price
Intrinsic
Remaining Contractual
Shares
Per Share
Value
Term (Years)
Balance as of July 1, 2021
1,280
$
260.71
Granted
5
$
615.57
Exercised
( 50
)
$
144.64
$
27,633
Forfeited/Expired
( 5
)
$
730.42
Balance as of September 30, 2021
1,230
$
265.00
Exercisable as of September 30, 2021
552
$
131.41
$
246,831
3.4
Expected to vest as of September 30, 2021
678
$
373.86
$
168,911
8.6
Total
1,230
$
265.00
$
415,742
6.3
Stock options outstanding as of September 30, 2021 are comprised of the following range of exercise prices per share (in thousands, except per share data and years):
Stock Options Outstanding at September 30, 2021
Weighted Average
Weighted Average
Exercise Price
Remaining Contractual
Range of Exercise Prices per Share
Shares
Per Share
Term (Years)
$121.43 - $200.00
938
$
137.41
5.3
$400.01 - $500.00
20
$
470.00
9.7
$600.01 - $691.23
272
$
689.84
9.4
Total
1,230
$
265.00
6.3
An aggregate of 15,625 stock options with an aggregate grant date fair value of $ 0.8 million vested during the three months ended September 30, 2021. The weighted average grant date fair value of stock option awards using the Black-Scholes pricing model was $ 334.40 and $ 48.20 for each share subject to a stock option granted during the three months ended September 30, 2021 and 2020, respectively, based on the following assumptions:
Three months ended
September 30,
2021
2020
Expected term of options in years
6.3
6.3
Expected volatility
57.6
%
33.6% - 33.7%
Risk-free interest rate
1.0
%
0.3% - 0.4%
Expected dividend yield
0.0
%
0.0
%
For the three and nine months ended September 30, 2021, the Company recognized approximately $ 8.9 million and $ 23.0 million, respectively, in share-based compensation expense from stock options granted under the 2013 Equity Plan. For the three and nine months ended September 30, 2020, the Company recognized approximately $ 2.4 million and $ 7.8 million, respectively, in share-based compensation expense from stock options granted under the 2013 Equity Plan. As of September 30, 2021, there was approximately $ 106.8 million of total unrecognized share-based compensation expense related to unvested stock options. The Company expects to recognize this remaining share-based compensation expense over a weighted average vesting period of approximately 3.3 years.
20
Restricted stock units
As of September 30, 2021, there were 112,746 restricted stock units outstanding under the 2013 Equity Plan, which the Company intends to settle in shares. The following table summarizes the Company’s restricted stock unit activity (in thousands) for the periods indicated:
Restricted Stock Units Outstanding
Aggregate
Intrinsic
Units
Value
Balance as of July 1, 2021
86
Granted
28
Vested
0
$
0
Forfeited
( 1
)
Balance as of September 30, 2021
113
Expected to vest as of September 30, 2021
113
$
65,212
No restricted stock units vested during the three months ended September 30, 2021. The weighted average grant date fair value of restricted stock units granted during the three months ended September 30, 2021 was $ 747.77 based on the fair value of the Company’s class A common stock. For the three and nine months ended September 30, 2021, the Company recognized approximately $ 2.4 million and $ 5.0 million, respectively, in share-based compensation expense from restricted stock units granted under the 2013 Equity Plan. No restricted stock units were granted under the 2013 Equity Plan prior to the fourth quarter of 2020. As of September 30, 2021, there was approximately $ 40.0 million of total unrecognized share-based compensation expense related to unvested restricted stock units. As of September 30, 2021, the Company expects to recognize this remaining share-based compensation expense over a weighted average vesting period of approximately 3.6 years.
Other stock-based awards and cash-settled restricted stock units
During the three months ended September 30, 2021, the Company granted no “other stock-based awards” under the 2013 Equity Plan. As of September 30, 2021, there were a total of 10,250 other stock-based awards outstanding under the 2013 Equity Plan. These other stock-based awards are similar to stock options, except these awards are settled in cash only and not in shares of the Company’s class A common stock.
During the three months ended September 30, 2021, the Company granted no cash-settled restricted stock units under the 2013 Equity Plan. As of September 30, 2021, there were a total of 900 cash-settled restricted stock units outstanding under the 2013 Equity Plan. These cash-settled restricted stock units are similar to the Company’s other restricted stock units, except they are settled in cash only and not in shares of the Company’s class A common stock.
Both the other stock-based awards and the cash-settled restricted stock units are classified as liabilities in the Company’s Consolidated Balance Sheets due to the required cash settlement feature and the fair value of the awards is remeasured each quarterly reporting period. For the three and nine months ended September 30, 2021, the Company recognized approximately $ 0.3 million and $ 1.2 million, respectively, in share-based compensation expense from other stock-based awards and cash-settled restricted stock units. For the three and nine months ended September 30, 2020, share-based compensation expense from other stock-based awards was not material. No cash-settled restricted stock units were granted under the 2013 Equity Plan prior to the first quarter of 2021. As of September 30, 2021, there was approximately $ 3.0 million of total unrecognized share-based compensation expense related to other stock-based awards and cash-settled restricted stock units. The Company expects to recognize this remaining share-based compensation expense over a weighted average vesting period of approximately 3.0 years, subject to additional fair value adjustments through the earlier of settlement or expiration.
2021 ESPP
During the first quarter of 2021, the Company adopted the 2021 ESPP, and in the second quarter of 2021, the Company’s stockholders approved 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. An aggregate of 100,000 shares of the Company’s class A common stock has been authorized for issuance under the 2021 ESPP.
Unless otherwise determined by the Board of Directors, shares are purchased at a price equal to 85 % of the lesser of the closing price of the Company’s class A common stock on the first or last business day of the offering period, respectively . Share-based compensation expense is based on the grant date fair value, which consists of the intrinsic value of the 15 % discounted share purchase rights and the fair value of the look-back provision using the Black-Scholes valuation model, recognized on a straight-line basis over the offering period. The grant date is the offering period commencement date.
21
The first offering period under the 2021 ESPP commenced on February 16, 2021 and end ed on August 15, 2021 . A second offering period under the 2021 ESPP commenced on September 1, 2021 and will end on February 28, 2022. For the three and nine months ended September 30, 2021 , the Company recognized approximately $ 0.6 million and $ 1.8 million, respectively, in share-based compensation expense related to the 2021 ESPP. As of September 30, 2021 , there was approximately $ 1.3 million of total unrecognized share-based compensation expense related to the 2021 ESPP . The Company expects to recognize this remaining share-based compensation expense over a period of approximately 0.4 years . During the three months ended September 30, 2021 , 4,612 shares of class A common stock were issued in connection with the 2021 ESPP. As of September 30, 2021 , 95,388 shares of the Company’s class A common stock remained available for issuance under the 2021 ESPP.
(11) Common Equity and Earnings 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 September 30, 2021 and December 31, 2020, there were no shares of preferred stock issued or outstanding.
Potential shares of common stock are included in the diluted earnings per share calculation when dilutive. Potential shares of class A common stock issuable upon the exercise of outstanding stock options, the vesting of outstanding restricted stock units, and in connection with the 2021 ESPP are calculated using the treasury stock method. Potential shares of class A common stock issuable upon conversion of the Convertible Notes are calculated 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 nine months ended September 30, 2021 and 2020, 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
Nine Months Ended
September 30,
September 30,
2021
2020
2021
2020
Stock Options
1,252
1,476
1,246
1,536
Restricted Stock Units
103
0
91
0
Employee Stock Purchase Plan
2
0
1
0
2025 Convertible Notes
1,633
0
1,633
0
2027 Convertible Notes
733
0
601
0
Total
3,723
1,476
3,572
1,536
Open Market Sale Agreement
On June 14, 2021, the Company entered into an Open Market Sale Agreement (the “Sale Agreement”) with Jefferies LLC, as agent (“Jefferies”), pursuant to which the Company may issue and sell shares of its class A common stock having an aggregate offering price of up to $ 1.0 billion from time to time through Jefferies (the “Open Market Offering”).
Under the Sale Agreement, any sales of shares will be made by methods deemed to be an “at-the-market offering” as defined in Rule 415(a)(4) promulgated under the Securities Act of 1933, as amended. Any sales of shares under the Sale Agreement will be made in amounts and at times to be determined by the Company from time to time subject to the terms and conditions of the Sale Agreement, but the Company has no obligation to sell any of the shares in an Open Market Offering.
The Company or Jefferies may suspend or terminate the Open Market Offering upon notice to the other party and subject to other conditions. The Company has agreed to pay Jefferies commissions for its services in acting as agent in the sale of the shares in the amount of up to 2.0 % of gross proceeds from the sale of shares pursuant to the Sale Agreement. The Company has also agreed to provide Jefferies with customary indemnification and contribution rights.
During the three and nine months ended September 30, 2021 the Company issued and sold 555,179 shares of its class A common stock under the Sale Agreement, at an average gross price per share of approximately $ 727.64 , for aggregate net proceeds (less $ 4.5 million in sales commissions and expenses) of approximately $ 399.5 million. The sales commissions and expenses related to the Sale Agreement are considered direct and incremental costs and are charged against “Additional paid-in capital” on the balance sheet in the period in
22
which the related shares are issued and sold. As of September 30, 2021, approximately $ 596.0 million of the Company’s class A common stock remained available for issuance and sale pursuant to the Sale Agreement.
(12) 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, excluding long-term deferred tax assets, (in thousands) according to geographic region:
Geographic regions:
Domestic
EMEA
Other Regions
Consolidated
Three months ended September 30, 2021
Total revenues
$
74,530
$
40,886
$
12,578
$
127,994
Gross profit
$
62,526
$
33,571
$
9,578
$
105,675
Three months ended September 30, 2020
Total revenues
$
78,763
$
36,884
$
11,761
$
127,408
Gross profit
$
67,055
$
29,728
$
8,889
$
105,672
Nine months ended September 30, 2021
Total revenues
$
213,507
$
122,537
$
40,203
$
376,247
Gross profit
$
178,485
$
99,246
$
30,610
$
308,341
Nine months ended September 30, 2020
Total revenues
$
206,318
$
109,835
$
33,263
$
349,416
Gross profit
$
166,566
$
86,760
$
25,820
$
279,146
As of September 30, 2021
Long-lived assets
$
2,508,985
$
11,202
$
7,297
$
2,527,484
As of December 31, 2020
Long-lived assets
$
1,165,283
$
11,441
$
9,765
$
1,186,489
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 nine months ended September 30, 2021 and 2020, no individual foreign country accounted for 10% or more of total consolidated revenues.
For the three and nine months ended September 30, 2021 and 2020, no individual customer accounted for 10% or more of total consolidated revenues.
As of September 30, 2021 and December 31, 2020, no individual foreign country accounted for 10% or more of total consolidated assets.
(13) 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 with the Company for an initial term of 90 days. The indemnification agreement provides that Mr. Saylor will provide during the term of the agreement, from his personal funds, directors’ and officers’ indemnity coverage to the Company for the benefit of the directors and officers of the Company and its subsidiaries in the event such coverage is not indemnifiable by the Company, up to a total of $ 40 million. In return, the Company paid Mr. Saylor a one-time fee of $ 388,945 for the initial 90-day term. In August 2021, pursuant to the terms of the indemnification agreement, the Company elected to extend the term for an additional 90-day period which began in September 2021 and paid Mr. Saylor an additional $388,945 for this extension. The Company may elect to extend the term for up to two additional 90-day periods. The Company will pay an additional amount of $ 388,945 to Mr. Saylor for each additional 90-day term that the Company exercises.
Prior to entering into the indemnification agreement with Mr. Saylor, the Company obtained and considered binding market quotes for directors’ and officers’ liability insurance policies. The Company determined that these policies would have provided insufficient coverage and would have required substantial premiums.
23
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.