Item 1. Financial Statements
Item 1. Financial Statements
MICROSTRATEGY INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
September 30,
December 31,
2022
2021
(unaudited)
Assets
Current assets:
Cash and cash equivalents
$
60,390
$
63,356
Restricted cash
6,578
1,078
Accounts receivable, net
109,926
189,280
Prepaid expenses and other current assets
25,399
14,251
Total current assets
202,293
267,965
Digital assets
1,993,032
2,850,210
Property and equipment, net
33,033
36,587
Right-of-use assets
62,902
66,760
Deposits and other assets
20,992
15,820
Deferred tax assets, net
233,034
319,782
Total assets
$
2,545,286
$
3,557,124
Liabilities and Stockholders’ (Deficit) Equity
Current liabilities:
Accounts payable, accrued expenses, and operating lease liabilities
$
36,846
$
46,084
Accrued compensation and employee benefits
46,346
54,548
Accrued interest
11,394
1,493
Deferred revenue and advance payments
165,934
209,860
Total current liabilities
260,520
311,985
Long-term debt, net
2,376,935
2,155,151
Deferred revenue and advance payments
8,754
8,089
Operating lease liabilities
69,278
76,608
Other long-term liabilities
30,088
26,224
Deferred tax liabilities
0
109
Total liabilities
2,745,575
2,578,166
Commitments and Contingencies
Stockholders’ (Deficit) Equity
Preferred stock undesignated, $ 0.001 par value; 5,000 shares authorized; no shares issued or outstanding
0
0
Class A common stock, $ 0.001 par value; 330,000 shares authorized; 18,038 shares issued and 9,354 shares outstanding, and 18,006 shares issued and 9,322 shares outstanding, respectively
18
18
Class B convertible common stock, $ 0.001 par value; 165,000 shares authorized; 1,964 shares issued and outstanding, and 1,964 shares issued and outstanding, respectively
2
2
Additional paid-in capital
1,778,660
1,727,143
Treasury stock, at cost; 8,684 shares
( 782,104
)
( 782,104
)
Accumulated other comprehensive loss
( 18,179
)
( 7,543
)
(Accumulated deficit) retained earnings
( 1,178,686
)
41,442
Total stockholders’ (deficit) equity
( 200,289
)
978,958
Total liabilities and stockholders’ (deficit) equity
$
2,545,286
$
3,557,124
The accompanying notes are an integral part of these Consolidated Financial Statements.
1
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Three Months Ended
September 30,
2022
2021
(unaudited)
(unaudited)
Revenues:
Product licenses
$
22,286
$
25,830
Subscription services
16,414
10,853
Total product licenses and subscription services
38,700
36,683
Product support
66,010
70,387
Other services
20,650
20,924
Total revenues
125,360
127,994
Cost of revenues:
Product licenses
406
383
Subscription services
6,395
4,282
Total product licenses and subscription services
6,801
4,665
Product support
5,224
4,679
Other services
13,360
12,975
Total cost of revenues
25,385
22,319
Gross profit
99,975
105,675
Operating expenses:
Sales and marketing
35,409
38,209
Research and development
30,498
28,211
General and administrative
27,283
23,751
Digital asset impairment losses
727
65,165
Total operating expenses
93,917
155,336
Income (loss) from operations
6,058
( 49,661
)
Interest expense, net
( 14,073
)
( 10,723
)
Other income, net
4,897
1,264
Loss before income taxes
( 3,118
)
( 59,120
)
Provision for (benefit from) income taxes
23,961
( 22,984
)
Net loss
$
( 27,079
)
$
( 36,136
)
Basic loss per share (1)
$
( 2.39
)
$
( 3.61
)
Weighted average shares outstanding used in computing basic loss per share
11,308
9,999
Diluted loss per share (1)
$
( 2.39
)
$
( 3.61
)
Weighted average shares outstanding used in computing diluted loss per share
11,308
9,999
(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,
2022
2021
(unaudited)
(unaudited)
Revenues:
Product licenses
$
58,928
$
69,261
Subscription services
43,276
31,221
Total product licenses and subscription services
102,204
100,482
Product support
199,682
212,063
Other services
64,824
63,702
Total revenues
366,710
376,247
Cost of revenues:
Product licenses
1,314
1,290
Subscription services
17,303
11,720
Total product licenses and subscription services
18,617
13,010
Product support
15,542
14,353
Other services
42,107
40,543
Total cost of revenues
76,266
67,906
Gross profit
290,444
308,341
Operating expenses:
Sales and marketing
105,511
116,728
Research and development
95,811
86,242
General and administrative
82,491
68,397
Digital asset impairment losses
1,088,656
684,034
Total operating expenses
1,372,469
955,401
Loss from operations
( 1,082,025
)
( 647,060
)
Interest expense, net
( 38,299
)
( 17,520
)
Other income, net
12,242
1,631
Loss before income taxes
( 1,108,082
)
( 662,949
)
Provision for (benefit from) income taxes
112,046
( 217,446
)
Net loss
$
( 1,220,128
)
$
( 445,503
)
Basic loss per share (1)
$
( 107.99
)
$
( 45.47
)
Weighted average shares outstanding used in computing basic loss per share
11,299
9,798
Diluted loss per share (1)
$
( 107.99
)
$
( 45.47
)
Weighted average shares outstanding used in computing diluted loss per share
11,299
9,798
(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,
2022
2021
(unaudited)
(unaudited)
Net loss
$
( 27,079
)
$
( 36,136
)
Other comprehensive loss, net of applicable taxes:
Foreign currency translation adjustment
( 4,514
)
( 1,457
)
Total other comprehensive loss
( 4,514
)
( 1,457
)
Comprehensive loss
$
( 31,593
)
$
( 37,593
)
Nine Months Ended
September 30,
2022
2021
(unaudited)
(unaudited)
Net loss
$
( 1,220,128
)
$
( 445,503
)
Other comprehensive loss, net of applicable taxes:
Foreign currency translation adjustment
( 10,636
)
( 2,896
)
Total other comprehensive loss
( 10,636
)
( 2,896
)
Comprehensive loss
$
( 1,230,764
)
$
( 448,399
)
The accompanying notes are an integral part of these Consolidated Financial Statements.
4
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY
(in thousands, unaudited)
Class A
Class B Convertible
Additional
Accumulated Other
(Accumulated Deficit)
Common Stock
Common Stock
Paid-in
Treasury Stock
Comprehensive
Retained
Total
Shares
Amount
Shares
Amount
Capital
Shares
Amount
Loss
Earnings
Balance at January 1, 2021
$
446,192
16,307
$
16
1,964
$
2
$
655,241
( 8,684
)
$
( 782,104
)
$
( 3,885
)
$
576,922
Net loss
( 110,020
)
0
0
0
0
0
0
0
0
( 110,020
)
Other comprehensive loss
( 1,836
)
0
0
0
0
0
0
0
( 1,836
)
0
Issuance of class A common stock upon exercise of stock options
23,854
159
0
0
0
23,854
0
0
0
0
Share-based compensation expense
6,848
0
0
0
0
6,848
0
0
0
0
Balance at March 31, 2021
$
365,038
16,466
$
16
1,964
$
2
$
685,943
( 8,684
)
$
( 782,104
)
$
( 5,721
)
$
466,902
Net loss
( 299,347
)
0
0
0
0
0
0
0
0
( 299,347
)
Other comprehensive income
397
0
0
0
0
0
0
0
397
0
Issuance of class A common stock upon exercise of stock options
244
2
0
0
0
244
0
0
0
0
Share-based compensation expense
11,087
0
0
0
0
11,087
0
0
0
0
Balance at June 30, 2021
$
77,419
16,468
$
16
1,964
$
2
$
697,274
( 8,684
)
$
( 782,104
)
$
( 5,324
)
$
167,555
Net loss
( 36,136
)
0
0
0
0
0
0
0
0
( 36,136
)
Other comprehensive loss
( 1,457
)
0
0
0
0
0
0
0
( 1,457
)
0
Issuance of class A common stock upon exercise of stock options
7,282
50
0
0
0
7,282
0
0
0
0
Issuance of class A common stock under employee stock purchase plan
2,854
5
0
0
0
2,854
0
0
0
0
Issuance of class A common stock under public offerings, net of issuance costs
399,469
555
1
0
0
399,468
0
0
0
0
Share-based compensation expense
11,883
0
0
0
0
11,883
0
0
0
0
Balance at September 30, 2021
$
461,314
17,078
$
17
1,964
$
2
$
1,118,761
( 8,684
)
$
( 782,104
)
$
( 6,781
)
$
131,419
Net loss
( 89,977
)
0
0
0
0
0
0
0
0
( 89,977
)
Other comprehensive loss
( 762
)
0
0
0
0
0
0
0
( 762
)
0
Issuance of class A common stock upon exercise of stock options
9,271
58
0
0
0
9,271
0
0
0
0
Issuance of class A common stock upon vesting of restricted stock units, net of withholding taxes
( 4,754
)
11
0
0
0
( 4,754
)
0
0
0
0
Issuance of class A common stock under public offerings, net of issuance costs
590,994
859
1
0
0
590,993
0
0
0
0
Share-based compensation expense
12,872
0
0
0
0
12,872
0
0
0
0
Balance at December 31, 2021
$
978,958
18,006
$
18
1,964
$
2
$
1,727,143
( 8,684
)
$
( 782,104
)
$
( 7,543
)
$
41,442
Net loss
( 130,751
)
0
0
0
0
0
0
0
0
( 130,751
)
Other comprehensive loss
( 2,009
)
0
0
0
0
0
0
0
( 2,009
)
0
Issuance of class A common stock upon exercise of stock options
288
2
0
0
0
288
0
0
0
0
Issuance of class A common stock under employee stock purchase plan
2,805
7
0
0
0
2,805
0
0
0
0
Issuance of class A common stock upon vesting of restricted stock units, net of withholding taxes
( 501
)
3
0
0
0
( 501
)
0
0
0
0
Share-based compensation expense
14,209
0
0
0
0
14,209
0
0
0
0
Balance at March 31, 2022
$
862,999
18,018
$
18
1,964
$
2
$
1,743,944
( 8,684
)
$
( 782,104
)
$
( 9,552
)
$
( 89,309
)
Net loss
( 1,062,298
)
0
0
0
0
0
0
0
0
( 1,062,298
)
Other comprehensive loss
( 4,113
)
0
0
0
0
0
0
0
( 4,113
)
0
Issuance of class A common stock upon exercise of stock options
423
3
0
0
0
423
0
0
0
0
Issuance of class A common stock upon vesting of restricted stock units, net of withholding taxes
( 49
)
0
0
0
0
( 49
)
0
0
0
0
Share-based compensation expense
15,970
0
0
0
0
15,970
0
0
0
0
Balance at June 30, 2022
$
( 187,068
)
18,021
$
18
1,964
$
2
$
1,760,288
( 8,684
)
$
( 782,104
)
$
( 13,665
)
$
( 1,151,607
)
Net loss
( 27,079
)
0
0
0
0
0
0
0
0
( 27,079
)
Other comprehensive loss
( 4,514
)
0
0
0
0
0
0
0
( 4,514
)
0
Issuance of class A common stock upon exercise of stock options
621
4
0
0
0
621
0
0
0
0
Issuance of class A common stock under employee stock purchase plan
1,668
9
0
0
0
1,668
0
0
0
0
Issuance of class A common stock upon vesting of restricted stock units, net of withholding taxes
( 642
)
4
0
0
0
( 642
)
0
0
0
0
Share-based compensation expense
16,725
0
0
0
0
16,725
0
0
0
0
Balance at September 30, 2022
$
( 200,289
)
18,038
$
18
1,964
$
2
$
1,778,660
( 8,684
)
$
( 782,104
)
$
( 18,179
)
$
( 1,178,686
)
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,
2022
2021
(unaudited)
(unaudited)
Operating activities:
Net loss
$
( 1,220,128
)
$
( 445,503
)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization
6,917
8,639
Reduction in carrying amount of right-of-use assets
6,020
6,190
Credit losses and sales allowances
1,189
748
Deferred taxes
90,166
( 221,328
)
Release of liabilities for unrecognized tax benefits
0
( 152
)
Share-based compensation expense
46,587
30,973
Digital asset impairment losses
1,088,656
684,034
Amortization of issuance costs on long-term debt
6,490
5,084
Changes in operating assets and liabilities:
Accounts receivable
5,586
10,634
Prepaid expenses and other current assets
( 7,837
)
( 1,693
)
Deposits and other assets
( 8,314
)
( 594
)
Accounts payable and accrued expenses
( 8,880
)
( 10,788
)
Accrued compensation and employee benefits
( 13,105
)
( 1,698
)
Accrued interest
9,901
10,182
Deferred revenue and advance payments
25,401
24,385
Operating lease liabilities
( 7,390
)
( 7,714
)
Other long-term liabilities
150
( 813
)
Net cash provided by operating activities
21,409
90,586
Investing activities:
Purchases of digital assets
( 231,478
)
( 2,035,471
)
Purchases of property and equipment
( 1,851
)
( 1,882
)
Net cash used in investing activities
( 233,329
)
( 2,037,353
)
Financing activities:
Proceeds from convertible senior notes
0
1,050,000
Issuance costs paid for convertible senior notes
0
( 24,742
)
Proceeds from senior secured notes
0
500,000
Issuance costs paid for senior secured notes
0
( 12,792
)
Proceeds from secured term loan, net of lender fees
204,693
0
Issuance costs paid for secured term loan, excluding lender fees
( 107
)
0
Proceeds from other long-term secured debt
11,100
0
Issuance costs paid for other long-term secured debt
( 214
)
0
Repayments of other long-term secured debt
( 121
)
0
Proceeds from sale of common stock under public offerings
0
403,970
Issuance costs paid related to sale of common stock under public offerings
0
( 4,501
)
Proceeds from exercise of stock options
1,332
31,380
Proceeds from sales under employee stock purchase plan
4,473
2,854
Payment of withholding tax on vesting of restricted stock units
( 1,105
)
0
Net cash provided by financing activities
220,051
1,946,169
Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash
( 5,597
)
( 2,037
)
Net increase (decrease) in cash, cash equivalents, and restricted cash
2,534
( 2,635
)
Cash, cash equivalents, and restricted cash, beginning of period
64,434
60,759
Cash, cash equivalents, and restricted cash, end of period
$
66,968
$
58,124
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.
In the prior year’s Consolidated Statements of Cash Flows, accrued interest related to the Company’s long-term debt has been reclassified from “Accounts payable and accrued expenses” to “Accrued interest” within operating activities to conform to current year presentation.
The balances presented in the Consolidated Statements of Stockholders’ Equity as of January 1, 2021 include the opening balance adjustments due to the adoption of Accounting Standards Update No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
The Consolidated Financial Statements and Notes to Consolidated Financial Statements are presented as required by the United States Securities and Exchange Commission (“SEC”) and do not contain certain information included in the Company’s annual financial statements and notes. These financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto filed with the SEC in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. There have been no significant changes in the Company’s accounting policies since December 31, 2021.
The accompanying Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company is not aware of any subsequent event that would require recognition or disclosure.
(2) Digital Assets
The Company accounts for its digital assets, which are comprised solely of bitcoin, as indefinite-lived intangible assets in accordance with Accounting Standards Codification (“ASC”) 350, Intangibles—Goodwill and Other . The Company’s digital assets are initially recorded at cost. Subsequently, they are measured at cost, net of any impairment losses incurred since acquisition. Impairment losses are recognized as “Digital asset impairment losses” in the Company’s Consolidated Statement of Operations in the period in which the impairment occurs.
The following table summarizes the Company’s digital asset holdings (in thousands, except number of bitcoins), as of:
September 30,
December 31,
2022
2021
Approximate number of bitcoins held
130,000
124,391
Digital assets carrying value
$
1,993,032
$
2,850,210
Cumulative digital asset impairment losses
$
1,989,975
$
901,319
The carrying value represents the lowest fair value (based on Level 1 inputs in the fair value hierarchy) of the bitcoins at any time since their acquisition. Therefore, these fair value measurements were made during the period from their acquisition through September 30, 2022 or December 31, 2021, respectively, and not as of September 30, 2022 or December 31, 2021, respectively.
7
The following table summarizes the Company’s digital asset purchases and digital asset impairment losses (in thousands, except number of bitcoins) for the periods indicated:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2022
2021
2022
2021
Approximate number of bitcoins purchased
301
8,957
5,609
43,573
Digital asset purchases
$
5,978
$
419,865
$
231,478
$
2,035,471
Digital asset impairment losses
$
727
$
65,165
$
1,088,656
$
684,034
From time to time, the Company may be extended short-term credits from Coinbase to purchase bitcoin in advance of using cash funds in the Company’s trading account. The trade credits are due and payable in cash within days after they are extended. As of September 30, 2022, the Company had no outstanding trade credits payable. The Company did no t sell any of its bitcoins during the three and nine months ended September 30, 2022 and 2021, respectively.
As of September 30, 2022, approximately 14,890 of the bitcoins held by the Company serve as part of the collateral for the Company’s 6.125 % Senior Secured Notes due 2028 (the “2028 Secured Notes”), as further described in Note 4, Long-term Debt, to the Consolidated Financial Statements and in Note 8, Long-term Debt, to the Consolidated Financial Statements of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. As of September 30, 2022, approximately 30,051 of the bitcoins held by the Company serve as part of the collateral for a $ 205.0 million term loan (the “2025 Secured Term Loan”) issued to MacroStrategy LLC (“MacroStrategy”), a wholly-owned subsidiary of the Company, by Silvergate Bank (“Silvergate”), as further described in Note 4, Long-term Debt, to the Consolidated Financial Statements.
(3) Contract Balances
The Company invoices its customers in accordance with billing schedules established in each contract. The Company’s rights to consideration from customers are presented separately in the Company’s Consolidated Balance Sheets depending on whether those rights are conditional or unconditional.
The Company presents unconditional rights to consideration from customers within “Accounts receivable, net” in its Consolidated Balance Sheets. All of the Company’s contracts are generally non-cancellable and/or non-refundable, and therefore an unconditional right generally exists when the customer is billed or amounts are billable per the contract.
Accounts receivable (in thousands) consisted of the following, as of:
September 30,
December 31,
2022
2021
Billed and billable
$
113,031
$
192,055
Less: allowance for credit losses
( 3,105
)
( 2,775
)
Accounts receivable, net
$
109,926
$
189,280
Changes in the allowance for credit losses were not material for the three and nine months ended September 30, 2022.
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, 2022 and 2021, there were no significant impairments to the Company’s contract assets, nor were there any significant changes in the timing of the Company’s contract assets being reclassified to accounts receivable. Contract assets included in “Prepaid expenses and other current assets” in the Consolidated Balance Sheets consisted of $ 0.7 million and $ 1.1 million in accrued sales and usage-based royalty revenue as of September 30, 2022 and December 31, 2021, respectively.
Contract liabilities are amounts received or due from customers in advance of the Company transferring the software or services to the customer. In the case of multi-year service contract arrangements, the Company generally does not invoice more than one year in advance of services and does not record deferred revenue for amounts that have not been invoiced. Revenue is subsequently recognized in the period(s) in which control of the software or services is transferred to the customer. The Company’s contract liabilities are
8
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,
2022
2021
Current:
Deferred product licenses revenue
$
442
$
993
Deferred subscription services revenue
38,272
35,589
Deferred product support revenue
123,203
166,477
Deferred other services revenue
4,017
6,801
Total current deferred revenue and advance payments
$
165,934
$
209,860
Non-current:
Deferred product licenses revenue
$
70
$
68
Deferred subscription services revenue
2,943
1,064
Deferred product support revenue
5,172
6,203
Deferred other services revenue
569
754
Total non-current deferred revenue and advance payments
$
8,754
$
8,089
During the three and nine months ended September 30, 2022, the Company recognized revenues of $ 42.5 million and $ 176.3 million, respectively, from amounts included in the total deferred revenue and advance payments balances at the beginning of 2022. 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. For the three and nine months ended September 30, 2022 and 2021, there were no significant changes in the timing of revenue recognition on the Company’s deferred balances.
The Company’s remaining performance obligation represents all future revenue under contract and includes deferred revenue and advance payments and billable non-cancelable amounts that will be invoiced and recognized as revenue in future periods. The remaining performance obligation excludes contracts that are billed in arrears, such as certain time and materials contracts. The portions of multi-year contracts that will be invoiced in the future are not presented on the balance sheet within contract balances and are instead included in the following remaining performance obligation disclosure. As of September 30, 2022, the Company had an aggregate transaction price of $ 255.9 million allocated to the remaining performance obligation related to product support, subscription services, product licenses, and other services contracts. The Company expects to recognize $ 190.6 million within the next 12 months and the remainder thereafter .
(4) Long-term Debt
The net carrying value of the Company’s long-term debt (in thousands) consisted of the following, as of:
September 30, 2022
December 31, 2021
2025 Convertible Notes
$
640,133
$
637,882
2027 Convertible Notes
1,032,272
1,029,263
2028 Secured Notes
489,152
488,006
2025 Secured Term Loan
204,654
0
Other long-term secured debt
10,724
0
Total
$
2,376,935
$
2,155,151
9
Convertible Senior Notes
In December 2020, the Company issued $ 650.0 million aggregate principal amount of 0.750 % Convertible Senior Notes due 2025 (the “2025 Convertible Notes”) in a private offering. The 2025 Convertible Notes are senior unsecured obligations of the Company and bear interest at a fixed rate of 0.750 % per annum, payable semiannually in arrears on June 15 and December 15 of each year, beginning on June 15, 2021 . Holders of the 2025 Convertible Notes may receive additional interest under specified circumstances as outlined in the indenture relating to the issuance of the 2025 Convertible Notes. The 2025 Convertible Notes will mature on December 15, 2025 , unless earlier converted, redeemed, or repurchased in accordance with their terms. The total net proceeds from the 2025 Convertible Notes offering, after deducting initial purchaser discounts and issuance costs, were approximately $ 634.7 million.
In February 2021, the Company issued $ 1.050 billion aggregate principal amount of 2027 Convertible Notes in a private offering. The 2027 Convertible Notes are senior unsecured obligations of the Company and do not bear regular interest. However, holders of the 2027 Convertible Notes may receive special interest under specified circumstances as outlined in the indenture relating to the issuance of the 2027 Convertible Notes. Any special interest is payable semiannually in arrears on February 15 and August 15 of each year, beginning on August 15, 2021 . The 2027 Convertible Notes will mature on February 15, 2027 , unless earlier converted, redeemed, or repurchased in accordance with their terms. The total net proceeds from the 2027 Convertible Notes offering, after deducting initial purchaser discounts and issuance costs, were approximately $ 1.026 billion.
The terms of the 2025 Convertible Notes and 2027 Convertible Notes (collectively, the “Convertible Notes”) are discussed more fully in Note 8, Long-term Debt, to the Consolidated Financial Statements of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
There have been no adjustments to the initial conversion rates for each of the Convertible Notes as of September 30, 2022. As of September 30, 2022, the maximum number of shares into which the Convertible Notes could be potentially converted if the conversion features are triggered are 1,633,190 and 733,005 shares for the 2025 Convertible Notes and 2027 Convertible Notes, respectively.
During the nine months ended September 30, 2022, the 2025 Convertible Notes were convertible at the option of the holders of the 2025 Convertible Notes during the first quarter of 2022 only. During the nine months ended September 30, 2021, the 2025 Convertible Notes were convertible during the second quarter of 2021 only. During the nine months ended September 30, 2022 and 2021, the 2027 Convertible Notes were not convertible at any time. No conversions of the Convertible Notes occurred during the nine months ended September 30, 2022 or 2021. The Convertible Notes may be convertible in future periods if one or more of the conversion conditions is satisfied during future measurement periods.
As of September 30, 2022 and December 31, 2021, the net carrying value of the Convertible Notes was classified as a long-term liability in the “Long-term debt, net” line item in the Company’s Consolidated Balance Sheets.
The following is a summary of the Company’s convertible debt instruments as of September 30, 2022 (in thousands):
Outstanding
Unamortized
Net Carrying
Fair Value
Principal Amount
Issuance Costs
Value
Amount
Leveling
2025 Convertible Notes
$
650,000
$
( 9,867
)
$
640,133
$
485,141
Level 2
2027 Convertible Notes
1,050,000
( 17,728
)
1,032,272
480,648
Level 2
Total
$
1,700,000
$
( 27,595
)
$
1,672,405
$
965,789
The following is a summary of the Company’s convertible debt instruments as of December 31, 2021 (in thousands):
Outstanding
Unamortized
Net Carrying
Fair Value
Principal Amount
Issuance Costs
Value
Amount
Leveling
2025 Convertible Notes
$
650,000
$
( 12,118
)
$
637,882
$
1,056,679
Level 2
2027 Convertible Notes
1,050,000
( 20,737
)
1,029,263
774,375
Level 2
Total
$
1,700,000
$
( 32,855
)
$
1,667,145
$
1,831,054
The fair value of the Convertible Notes is determined using observable market data other than quoted prices, specifically the last traded price at the end of the reporting period of identical instruments in the over-the-counter market (Level 2).
10
For the three months ended September 30, 2022 and 2021, interest expense related to the Convertible Notes was as follows (in thousands):
Three Months Ended September 30, 2022
Three 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
$
753
$
1,971
$
1,218
$
744
$
1,962
2027 Convertible Notes
0
1,004
1,004
0
1,000
1,000
Total
$
1,218
$
1,757
$
2,975
$
1,218
$
1,744
$
2,962
For the nine months ended September 30, 2022 and 2021, interest expense related to the Convertible Notes was as follows (in thousands):
Nine Months Ended September 30, 2022
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
$
3,656
$
2,251
$
5,907
$
3,656
$
2,224
$
5,880
2027 Convertible Notes
0
3,009
3,009
0
2,432
2,432
Total
$
3,656
$
5,260
$
8,916
$
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, 2022 and 2021. For the nine months ended September 30, 2022 and 2021, the Company paid $ 2.4 million and $ 2.5 million, respectively, in interest related to the 2025 Convertible Notes. The Company has no t paid any special interest expense related to the 2027 Convertible Notes to date.
Senior Secured Notes
On June 14, 2021, the Company issued $ 500.0 million aggregate principal amount of 2028 Secured Notes in a private offering. The 2028 Secured Notes bear interest at a fixed rate of 6.125 % per annum, payable semiannually in arrears on June 15 and December 15 of each year, beginning on December 15, 2021 . The 2028 Secured Notes have a stated maturity date of June 15, 2028 , unless earlier redeemed or repurchased in accordance with their terms and subject to a springing maturity date of September 15, 2025 or November 16, 2026 . The total net proceeds from the 2028 Secured Notes, after deducting initial purchaser discounts and issuance costs, were approximately $ 487.2 million.
The 2028 Secured Notes include a springing maturity feature that will cause the stated maturity date to spring ahead to: (1) September 15, 2025 (the “First Springing Maturity Date”), unless on the First Springing Maturity Date (i) the Company has liquidity (as defined in the 2028 Secured Notes Indenture) in excess of 130 % of the amount required to pay in full in cash the then outstanding aggregate principal amount of, and accrued interest on, the 2025 Convertible Notes or (ii) less than $ 100,000,000 of the aggregate principal amount of the 2025 Convertible Notes remains outstanding, (2) November 16, 2026 (the “Second Springing Maturity Date”), unless on the Second Springing Maturity Date (i) the Company has liquidity in excess of 130 % of the amount required to pay in full in cash the then outstanding aggregate principal amount of, and accrued interest on, the 2027 Convertible Notes or (ii) less than $ 100,000,000 of the aggregate principal amount of the 2027 Convertible Notes remains outstanding, or (3) the date (such date, an “FCCR Springing Maturity Date”) that is 91 days prior to the maturity date of any FCCR Convertible Indebtedness (as defined in the indenture for the 2028 Secured Notes), unless on the FCCR Springing Maturity Date (i) the Company has liquidity in excess of 130 % of the amount required to pay in full in cash the then outstanding aggregate principal amount of and accrued interest on such FCCR Convertible Indebtedness or (ii) less than $ 100,000,000 of the aggregate principal amount of such FCCR Convertible Indebtedness remains outstanding.
The terms of the 2028 Secured Notes are discussed more fully in Note 8, Long-term Debt, to the Consolidated Financial Statements of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
The 2028 Secured Notes are governed by an indenture containing certain covenants with which the Company must comply, including covenants with respect to limitations on (i) additional indebtedness, (ii) liens, (iii) certain payments and investments, (iv) the ability to merge or consolidate with another person, or sell or otherwise dispose of substantially all the Company’s assets, and (v) certain transactions with affiliates. The Company was in compliance with its debt covenants as of September 30, 2022.
As of September 30, 2022 and December 31, 2021, the net carrying value of the 2028 Secured Notes was classified as a long-term liability in the “Long-term debt, net” line item in the Company’s Consolidated Balance Sheets.
11
The following is a summary of the 2028 Secured Notes as of September 30, 2022 (in thousands):
Outstanding
Unamortized
Net Carrying
Fair Value
Principal Amount
Issuance Costs
Value
Amount
Leveling
2028 Secured Notes
$
500,000
$
( 10,848
)
$
489,152
$
413,295
Level 2
The following is a summary of the 2028 Secured Notes as of December 31, 2021 (in thousands):
Outstanding
Unamortized
Net Carrying
Fair Value
Principal Amount
Issuance Costs
Value
Amount
Leveling
2028 Secured Notes
$
500,000
$
( 11,994
)
$
488,006
$
502,530
Level 2
The fair value of the 2028 Secured Notes is determined using observable market data other than quoted prices, specifically the last traded price at the end of the reporting period of identical instruments in the over-the-counter market (Level 2).
For the three months ended September 30, 2022 and 2021, interest expense related to the 2028 Secured Notes was as follows (in thousands):
Three Months Ended September 30, 2022
Three Months Ended September 30, 2021
Contractual
Amortization of
Contractual
Amortization of
Interest Expense
Issuance Costs
Total
Interest Expense
Issuance Costs
Total
2028 Secured Notes
$
7,657
$
388
$
8,045
$
7,656
$
363
$
8,019
For the nine months ended September 30, 2022 and 2021, interest expense related to the 2028 Secured Notes was as follows (in thousands):
Nine Months Ended September 30, 2022
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
$
22,969
$
1,146
$
24,115
$
9,017
$
428
$
9,445
The Company did no t pay any interest expense related to the 2028 Secured Notes during the three months ended September 30, 2022 and 2021. For the nine months ended September 30, 2022, the Company paid $ 15.3 million in interest expense related to the 2028 Secured Notes. The Company did no t pay any interest expense related to the 2028 Secured Notes during the nine months ended September 30, 2021.
Secured Term Loan
On March 23, 2022, MacroStrategy LLC, a wholly-owned subsidiary of the Company, entered into a Credit and Security Agreement (the “Credit and Security Agreement”) with Silvergate pursuant to which Silvergate issued the $ 205.0 million 2025 Secured Term Loan to MacroStrategy. The 2025 Secured Term Loan is a senior secured obligation of MacroStrategy and bears interest at a floating rate equal to the Secured Overnight Financing Rate 30 Day Average as published by the Federal Reserve Bank of New York’s website plus 3.70 %, with a floor of 3.75 %, and is payable monthly in arrears beginning May 2022 . The 2025 Secured Term Loan will mature on March 23, 2025 , unless earlier prepaid or repaid in accordance with the terms of the Credit and Security Agreement. The total net proceeds from the 2025 Secured Term Loan, after deducting lender fees and third-party costs, were approximately $ 204.6 million.
Under the terms of the Credit and Security Agreement, the 2025 Secured Term Loan proceeds may be used (i) by MacroStrategy to purchase bitcoins, (ii) by MacroStrategy to pay fees, interest, and expenses related to the 2025 Secured Term Loan transaction, or (iii) for MacroStrategy’s or the Company’s general corporate purposes. The 2025 Secured Term Loan may be prepaid at any time, subject to a prepayment premium of 0.50 % or 0.25 % of the principal balance being prepaid, if such prepayment is made during the first year or second year, respectively, of the 2025 Secured Term Loan. There is no premium or penalty for prepayments made after March 23, 2024 .
12
In accordance with the terms of the Credit and Security Agreement, the 2025 Secured Term Loan was collateralized at closing by bitcoin with a value of approximately $ 820.0 million placed in a collateral account (the “Bitcoin Collateral Account”) with a custodian mutually authorized by Silvergate and MacroStrategy. While the 2025 Secured Term Loan is outstanding, MacroStrategy is required to maintain a loan to collateral value ratio (“LTV Ratio”) of less than 50 % (the “Maximum LTV Ratio”). As a result, MacroStrategy is required to maintain more than $ 410.0 million of bitcoin in the Bitcoin Collateral Account, assuming the full $ 205.0 million of 2025 Secured Term Loan principal remains outstanding. If the price of bitcoin drops such that the LTV Ratio equals or exceeds the Maximum LTV Ratio, MacroStrategy will be required to either deposit additional bitcoin in the Bitcoin Collateral Account or prepay a portion of the 2025 Secured Term Loan such that the LTV Ratio is reduced to 25 % or less (or 35 % or less, provided that in such case the interest rate on the 2025 Secured Term Loan will be increased by 25 basis points until such time as the LTV Ratio is reduced to 25 % or less). In June 2022, as the price of bitcoin declined causing the LTV Ratio to increase, MacroStrategy deposited 10,585 additional bitcoins into the Bitcoin Collateral Account to help ensure that the LTV Ratio remained below the Maximum LTV Ratio. If at any time the LTV Ratio is less than 25 % as a result of excess collateral in the Bitcoin Collateral Account, MacroStrategy is entitled to a return of such excess collateral so long as the LTV Ratio would not exceed 25 % after giving effect to such return .
Separate and apart from the requirements associated with the LTV Ratio, MacroStrategy established a $ 5.0 million cash reserve account (the “Reserve Account”) with Silvergate to serve as additional collateral for the 2025 Secured Term Loan. MacroStrategy is required to maintain at least $5.0 million in the Reserve Account until the last six months of the 2025 Secured Term Loan term, at which time funds in the Reserve Account may be used to make interest payments on the 2025 Secured Term Loan at MacroStrategy’s request, with the amount required to be held in the Reserve Account correspondingly reduced to the extent such payments are made. The collateral for the 2025 Secured Term Loan does not extend beyond assets in the Bitcoin Collateral Account and the Reserve Account. As of September 30, 2022, the Reserve Account is presented within “Restricted cash” in the Company’s Consolidated Balance Sheet and the Bitcoin Collateral Account is presented within “Digital assets” in the Company’s Consolidated Balance Sheet as further described in Note 2, Digital Assets, to the Consolidated Financial Statements.
The 2025 Secured Term Loan is not guaranteed by any party. The Credit and Security Agreement contains customary affirmative and negative covenants for credit facilities of this type, including, among others, limitations on MacroStrategy with respect to the sale of collateral and the incurrence of liens on the collateral. The Credit and Security Agreement, however, does not restrict MacroStrategy from incurring additional debt, incurring additional liens on assets not serving as collateral for the 2025 Secured Term Loan, or selling assets not serving as collateral for the 2025 Secured Term Loan. There are no restrictions in the Credit and Security Agreement on utilizing bitcoin that is not in the Bitcoin Collateral Account. The Credit and Security Agreement has customary change-of-control provisions, providing Silvergate with a right to accelerate the 2025 Secured Term Loan in full in connection with a change of control of the Company, including the sale of all or substantially all of the Company’s or MacroStrategy’s assets. The Credit and Security Agreement also contains customary events of default with customary grace periods, as applicable. Upon an event of default, Silvergate has the right to accelerate the 2025 Secured Term Loan in full, increase the interest accrual rate by an additional 2 %, and liquidate the collateral to pay the 2025 Secured Term Loan.
MacroStrategy was in compliance with its debt covenants as of September 30, 2022.
The Company incurred approximately $ 0.4 million in lender fees and third-party costs (“issuance costs”) associated with the 2025 Secured Term Loan. The Company accounts for these issuance costs as a reduction to the principal amount of the 2025 Secured Term Loan and amortizes the issuance costs to interest expense over the contractual term of the 2025 Secured Term Loan at an effective interest rate of 3.87 %. As of September 30, 2022, the net carrying value of the 2025 Secured Term Loan was classified as a long-term liability in the “Long-term debt, net” line item in the Company’s Consolidated Balance Sheets.
The following is a summary of the 2025 Secured Term Loan as of September 30, 2022 (in thousands):
Outstanding
Unamortized
Net Carrying
Fair Value
Principal Amount
Issuance Costs
Value
Amount
Leveling
2025 Secured Term Loan
$
205,000
$
( 346
)
$
204,654
$
205,000
Level 3
The principal or par value of the 2025 Secured Term Loan approximates its fair value as of September 30, 2022. The fair value of the 2025 Secured Term Loan is determined using unobservable inputs provided by the lender, specifically hypothetical lending terms attainable as of the end of the reporting period, which are comparable to the loan's original terms (Level 3).
13
For the three and nine months ended September 30, 2022, interest expense related to the 2025 Secured Term Loan was as follows (in thousands):
Three Months Ended September 30, 2022
Nine Months Ended September 30, 2022
Contractual
Amortization of
Contractual
Amortization of
Interest Expense
Issuance Costs
Total
Interest Expense
Issuance Costs
Total
2025 Secured Term Loan
$
2,931
$
33
$
2,964
$
5,314
$
69
$
5,383
The Company paid $ 2.7 million and $ 4.3 million in interest expense related to the 2025 Secured Term Loan during the three and nine months ended September 30, 2022, respectively.
Other long-term secured debt
In June 2022, the Company, through a wholly-owned subsidiary, entered into a secured term loan agreement in the amount of $ 11.1 million, bearing interest at an annual rate of 5.2 %, and maturing in June 2027 . The loan is secured by certain non-bitcoin assets of the Company that are not otherwise serving as collateral for any of the Company’s other indebtedness. As of September 30, 2022, the loan had a net carrying value of $ 10.7 million and an outstanding principal balance of $ 11.0 million, after monthly payments made under the terms of the agreement.
Maturities
The following table shows the maturities of the Company’s debt instruments as of September 30, 2022 (in thousands). The principal payments related to the 2028 Secured Notes are included in the table below based on the First Springing Maturity Date of September 15, 2025, as if the springing maturity feature discussed above were triggered. The Company’s expectation is that the springing maturity feature of the 2028 Secured Notes will not be triggered.
Payments due by period ended September 30,
2025 Convertible Notes
2027 Convertible Notes
2028 Secured Notes
2025 Secured Term Loan
Other long-term secured debt
Total
2023
$
0
$
0
$
0
$
0
$
506
$
506
2024
0
0
0
0
532
532
2025
0
0
500,000
205,000
562
705,562
2026
650,000
0
0
0
592
650,592
2027
0
1,050,000
0
0
8,787
1,058,787
Thereafter
0
0
0
0
0
0
Total
$
650,000
$
1,050,000
$
500,000
$
205,000
$
10,979
$
2,415,979
(5) Commitments and Contingencies
(a) Commitments
From time to time, the Company enters into certain types of contracts that require it to indemnify parties against third-party claims. These contracts primarily relate to agreements under which the Company assumes indemnity obligations for intellectual property infringement, as well as other obligations from time to time depending on arrangements negotiated with customers and other third parties. The conditions of these obligations vary. Thus, the overall maximum amount of the Company’s indemnification obligations cannot be reasonably estimated. Historically, the Company has not been obligated to make significant payments for these obligations and does not currently expect to incur any material obligations in the future. Accordingly, the Company has not recorded an indemnification liability on its Balance Sheets as of September 30, 2022 or December 31, 2021.
(b) Contingencies
Following an internal review initiated in 2018, the Company believes that its Brazilian subsidiary failed or likely failed to comply with local procurement regulations in conducting business with certain Brazilian government entities.
On February 6, 2020, the Company learned that a Brazilian court authorized the Brazilian Federal Police to use certain investigative measures in its investigation into alleged corruption and procurement fraud involving certain government officials, pertaining to a particular transaction. The transaction at issue is part of the basis of the previously reported failure or likely failure of the Brazilian subsidiary to comply with local procurement regulations. The Company is not aware of any allegations that any former employee or the Company made any payments to Brazilian government officials. The Brazilian Federal Police expanded the investigation to include other possible cases of procurement fraud involving Brazilian government entities. Criminal penalties may be imposed against individuals; however, neither employees of the Company’s Brazilian subsidiary nor the subsidiary itself have been targets of the Federal Police investigation.
14
The Company has also learned that Brazil’s Federal Comptroller General filed an administrative action against the Company’s Brazilian subsidiary with respect to the alleged procurement violations. These matters remain the subject of investigation by Brazilian authorities. The Company is taking measures to attempt to resolve these matters .
While the Company believes that it is probable that the resolution of these Brazilian matters will result in a loss, the amount or range of loss is not reasonably estimable at this time. Given the stage of these matters, the outcome may result in a material impact on the Company’s earnings and financial results for the period in which any such liability is accrued. However, the Company believes that the outcome of these matters will not have a material effect on the Company’s financial position.
On November 4, 2020, a complaint was filed against the Company in the U.S. District Court for the Eastern District of Virginia by a patent assertion entity called Daedalus Blue, LLC (“Daedalus”). In its complaint, Daedalus alleges that the Company has infringed U.S. Patent Nos. 8,341,172 (the “’172 Patent”) and 9,032,076 (the “’076 Patent”) based on specific functionality in the MicroStrategy platform. The ’172 Patent relates to a method for providing aggregate data access in response to a query, whereas the ’076 Patent relates to a role-based access control system.
On March 1, 2021, Daedalus provided its formal infringement contentions which included additional accused functionality as part of its infringement allegations from the complaint, materially expanding the scope of its case. The Company has filed a motion to dismiss the complaint with prejudice, asking the court to rule that the asserted claims are invalid as being directed to patent ineligible matter. This matter is in the latter stage of factual discovery. The court conducted a claim construction hearing on July 15, 2021. The court appointed a special master on October 28, 2021 and directed the special master to submit a Report and Recommendation as to the issue of claim construction and the pending motion to dismiss by February 1, 2022. On January 21, 2022, the special master issued two separate Reports and Recommendations. The first Report and Recommendation recommended constructions of certain patent claim terms and the second Report and Recommendation recommended, without reaching the merits, dismissing the Company’s motion to dismiss without prejudice to re-filing after discovery ends. The parties filed their respective objections to the special master’s Reports and Recommendations on February 4, 2022, and their oppositions to the other party’s objections on February 18, 2022. On March 9, 2022, the court issued an order overruling all parties’ objections and adopting the special master’s Reports and Recommendations in full. As per court order, the parties submitted a joint proposed schedule, which the court adopted on April 7, 2022, providing new deadlines for the close of fact discovery, expert reports, expert discovery, and dispositive motions. Fact discovery reopened on April 18, 2022 and closed on June 1, 2022. In July 2022, the case proceeded to expert discovery and the parties exchanged their opening expert reports on issues for which they bear the burden of proof on July 1, 2022, their rebuttal reports on July 29, 2022, and their reply reports on August 12, 2022. The parties engaged in expert depositions the weeks of August 22 and August 29, 2022 and on September 21, 2022, the parties filed their respective motions for summary judgment. The outcome of this matter is not presently determinable.
On August 31, 2022, the District of Columbia (the “District”), through its Office of the Attorney General, filed a civil complaint in the Superior Court of the District of Columbia naming as defendants (i) Michael J. Saylor, the Chairman of the Company’s Board of Directors and the Company’s Executive Chairman, in his personal capacity, and (ii) the Company. The District is seeking, among other relief, monetary damages under the District’s False Claims Act for the alleged failure of Mr. Saylor to pay personal income taxes to the District over a number of years together with penalties, interest, and treble damages. The complaint alleges that the amount of personal income taxes purportedly involved is more than $ 25 million. The complaint also alleges that the Company has violated the District’s False Claims Act by conspiring to assist Mr. Saylor’s alleged failure to pay personal income taxes. The Company believes that the District’s claims against the Company have no merit and is defending itself aggressively against these allegations. On October 26, 2022, the Company filed a motion to dismiss the District’s complaint. The Company filed a motion to stay discovery on September 28, 2022, and the court granted this motion on October 28, 2022. The outcome of this matter is not presently determinable.
The Company is also involved in various legal proceedings arising in the normal course of business. Although the outcomes of these legal proceedings are inherently difficult to predict, management does not expect the resolution of these legal proceedings to have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
The Company has contingent liabilities that, in management’s judgment, are not probable of assertion. If such unasserted contingent liabilities were to be asserted, or become probable of assertion, the Company may be required to record significant expenses and liabilities in the period in which these liabilities are asserted or become probable of assertion.
(6) Treasury Stock
The Board of Directors has authorized the Company’s repurchase of up to an aggregate of $ 800.0 million of its class A common stock from time to time on the open market through April 29, 2023 (the “Share Repurchase Program”), although the program may be suspended or discontinued by the Company at any time. The timing and amount of any shares repurchased will be determined by the Company’s management based on its evaluation of market conditions and other factors. The Share Repurchase Program may be funded using the Company’s working capital, as well as proceeds from any other funding arrangements that the Company may enter into in the future.
15
During the three and nine months ended September 30, 2022 and 2021, the Company did no t repurchase any shares of its class A common stock pursuant to the Share Repurchase Program. As of September 30, 2022, the Company had repurchased an aggregate of 5,674,226 shares of its class A common stock at an average price per share of $ 104.13 and an aggregate cost of $ 590.9 million pursuant to the Share Repurchase Program. As of September 30, 2022, $ 209.1 million of the Company’s class A common stock remained available for repurchase pursuant to the Share Repurchase Program. The average price per share and aggregate cost amounts disclosed above include broker commissions.
(7) Income Taxes
The Company computes its year-to-date provision for (benefit from) income taxes by applying the estimated annual effective tax rate to year-to-date pretax income or loss and adjusts the provision for (benefit from) income taxes for discrete tax items recorded in the period. The estimated effective tax rate is subject to fluctuation based on the level and mix of earnings and losses by tax jurisdiction, foreign tax rate differentials, and the relative impact of permanent book to tax differences. Each quarter, a cumulative adjustment is recorded for any fluctuations in the estimated annual effective tax rate as compared to the prior quarter. As a result of these factors, and due to potential changes in the Company’s period-to-period results, fluctuations in the Company’s effective tax rate and respective tax provisions or benefits may occur. For the nine months ended September 30, 2022, the Company recorded a provision for income taxes of $ 112.0 million on a pretax loss of $ 1.108 billion, which resulted in an effective tax rate of ( 10.1 )%. For the nine months ended September 30, 2021, the Company recorded a benefit from income taxes of $ 217.4 million on a pretax loss of $ 662.9 million, which resulted in an effective tax rate of 32.8 %. The change in the effective tax rate, as compared to the same period in the prior year, is primarily due to the establishment of a valuation allowance on the Company’s deferred tax asset related to the impairment on its bitcoin holdings, attributable to the decrease in the market value of bitcoin as of September 30, 2022.
As of September 30, 2022, the Company had a valuation allowance of $ 411.8 million primarily related to the Company’s deferred tax asset related to the impairment on its bitcoin holdings that, in the Company’s present estimation, more likely than not will not be realized. If the market value of bitcoin continues to decline or the Company is unable to regain profitability in future periods, the Company may be required to increase further the valuation allowance against its deferred tax assets, which could result in a charge that would materially adversely affect net income (loss) in the period in which the charge is incurred. To the extent the market value of bitcoin rises, the Company may decrease the valuation allowance against its deferred tax asset. The Company will continue to regularly assess the realizability of deferred tax assets.
The Company records liabilities related to its uncertain tax positions. As of September 30, 2022, the Company had gross unrecognized tax benefits of $ 6.3 million, which was recorded in “Other long-term liabilities” in the Company’s Consolidated Balance Sheet. As of December 31, 2021, the Company had gross unrecognized tax benefits of $ 6.2 million, of which $ 2.1 million was recorded in “Other long-term liabilities” and $ 4.1 million was recorded in “Deferred tax assets, net” in the Company’s Consolidated Balance Sheet.
(8) Share-based Compensation
2013 Stock Incentive Plan
The Company’s 2013 Stock Incentive Plan (as amended, the “2013 Equity Plan”) authorizes the issuance of various types of share-based awards to the Company’s employees, officers, directors, and other eligible participants. As of September 30, 2022, a total of 2,750,000 shares of the Company’s class A common stock were authorized for issuance under the 2013 Equity Plan. As of September 30, 2022, there were 121,221 shares of class A common stock reserved and available for future issuance under the 2013 Equity Plan.
Stock option awards
As of September 30, 2022, there were options to purchase 1,539,279 shares of class A common stock outstanding under the 2013 Equity Plan.
16
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, 2022:
Stock Options Outstanding
Weighted Average
Aggregate
Weighted Average
Exercise Price
Intrinsic
Remaining Contractual
Shares
Per Share
Value
Term (Years)
Balance as of July 1, 2022
1,489
$
294.42
Granted
60
$
231.25
Exercised
( 4
)
$
141.84
$
491
Forfeited/Expired
( 6
)
$
381.84
Balance as of September 30, 2022
1,539
$
292.07
Exercisable as of September 30, 2022
727
$
183.43
$
53,146
3.6
Expected to vest as of September 30, 2022
812
$
389.31
$
13,107
8.7
Total
1,539
$
292.07
$
66,253
6.3
Stock options outstanding as of September 30, 2022 are comprised of the following range of exercise prices per share (in thousands, except per share data and years):
Stock Options Outstanding at September 30, 2022
Weighted Average
Weighted Average
Exercise Price
Remaining Contractual
Range of Exercise Prices per Share
Shares
Per Share
Term (Years)
$121.43 - $200.00
879
$
136.87
4.2
$200.01 - $300.00
80
$
239.61
9.9
$400.01 - $500.00
322
$
408.66
9.3
$600.01 - $691.23
258
$
691.23
8.4
Total
1,539
$
292.07
6.3
An aggregate of 15,625 stock options with an aggregate grant date fair value of $ 0.7 million vested during the three months ended September 30, 2022. The weighted average grant date fair value of stock option awards using the Black-Scholes valuation model was $ 153.74 and $ 334.40 for each share subject to a stock option granted during the three months ended September 30, 2022 and 2021, respectively, based on the following assumptions:
Three months ended
September 30,
2022
2021
Expected term of options in years
6.3
6.3
Expected volatility
70.9 %
57.6 %
Risk-free interest rate
3.5 %
1.0 %
Expected dividend yield
0.0 %
0.0 %
For the three and nine months ended September 30, 2022, the Company recognized approximately $ 12.7 million and $ 35.4 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, 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. As of September 30, 2022, there was approximately $ 141.4 million of total unrecognized share-based compensation expense related to unvested stock options, which the Company expects to recognize over a weighted average vesting period of approximately 2.9 years.
17
Share-settled restricted stock units
As of September 30, 2022, there were 129,969 share-settled restricted stock units outstanding under the 2013 Equity Plan. The following table summarizes the Company’s share-settled restricted stock unit activity (in thousands) for the periods indicated:
Share-Settled Restricted Stock Units Outstanding
Aggregate
Intrinsic
Units
Value
Balance as of July 1, 2022
132
Granted
7
Vested
( 6
)
$
1,907
Forfeited
( 3
)
Balance as of September 30, 2022
130
Expected to vest as of September 30, 2022
130
$
27,587
During the three months ended September 30, 2022, 5,975 share-settled restricted stock units having an aggregate grant date fair value of $ 4.5 million vested, and 2,012 shares were withheld to satisfy tax obligations, resulting in 3,963 issued shares. The weighted average grant date fair value of share-settled restricted stock units granted during the three months ended September 30, 2022 and 2021 was $ 249.20 and $ 747.77 , respectively, based on the fair value of the Company’s class A common stock. For the three and nine months ended September 30, 2022, the Company recognized approximately $ 3.6 million and $ 10.0 million, respectively, in share-based compensation expense from share-settled restricted stock units granted under the 2013 Equity Plan. 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 share-settled restricted stock units granted under the 2013 Equity Plan. As of September 30, 2022, there was approximately $ 41.7 million of total unrecognized share-based compensation expense related to unvested share-settled restricted stock units, which the Company expects to recognize over a weighted average vesting period of approximately 2.9 years.
Other stock-based awards and cash-settled restricted stock units
From time to time the Company has granted “other stock-based awards” and “cash-settled restricted stock units” under the 2013 Equity Plan. Other stock-based awards are similar to stock options, and cash-settled restricted stock units are similar to the Company’s share-settled restricted stock units, except in each case these awards are settled in cash only and not in shares of the Company’s class A common stock. Due to their required cash settlement feature, these awards are classified as liabilities in the Company’s Consolidated Balance Sheets and the fair value of the awards is remeasured each quarterly reporting period. For the three and nine months ended September 30, 2022, the Company recognized approximately $ 0.2 million in share-based compensation expense and a reduction of approximately $ 0.4 million in share-based compensation expense, respectively, from other stock-based awards and cash-settled restricted stock units. For the three and nine months ended September 30, 2021, the Company recognized $ 0.3 million and $ 1.2 million, respectively, in share-based compensation expense from other stock-based awards and cash-settled restricted stock units. As of September 30, 2022, there was approximately $ 0.5 million of total unrecognized share-based compensation expense related to other stock-based awards and cash-settled restricted stock units, which the Company expects to recognize over a weighted average vesting period of approximately 2.4 years, subject to additional fair value adjustments through the earlier of settlement or expiration.
2021 ESPP
The Company also maintains the 2021 Employee Stock Purchase Plan (the “2021 ESPP”). The purpose of the 2021 ESPP is to provide eligible employees of the Company and certain of its subsidiaries with opportunities to purchase shares of the Company’s class A common stock, commencing at such time and on such dates as the Board of Directors of the Company shall determine. The first offering period under the 2021 ESPP commenced on February 16, 2021 and ended on August 15, 2021. After this first offering period, the Board of Directors of the Company determined to provide subsequent 6-month offering periods commencing on each March 1 and September 1 for the remaining term of the 2021 ESPP. An aggregate of 100,000 shares of the Company’s class A common stock has been authorized for issuance under the 2021 ESPP. During the three months ended September 30, 2022, 8,475 shares of class A common stock were issued in connection with the 2021 ESPP. As of September 30, 2022, 79,463 shares of the Company’s class A common stock remained available for issuance under the 2021 ESPP.
For the three and nine months ended September 30, 2022, the Company recognized approximately $ 0.5 million and $ 1.6 million, respectively, in share-based compensation expense related to the 2021 ESPP. 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, 2022, there was approximately $ 1.3 million of total unrecognized share-based compensation expense related to the 2021 ESPP, which the Company expects to recognize over a period of approximately 0.4 years.
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Tax Benefits Related to Equity Plans
For the three and nine months ended September 30, 2022 and 2021, tax benefit related to the Company’s equity plans was as follows (in thousands):
Three Months Ended
Nine Months Ended
September 30,
September 30,
2022
2021
2022
2021
Tax (benefit) expense related to:
Share-based compensation expense
$
( 2,906
)
$
( 2,212
)
$
( 9,146
)
$
( 5,489
)
Exercises of stock options and vesting of share-settled restricted stock units
680
( 3,687
)
790
( 25,964
)
Total tax benefit related to the Company's equity plans
$
( 2,226
)
$
( 5,899
)
$
( 8,356
)
$
( 31,453
)
(9) Basic and Diluted Loss per Share
The Company has two classes of common stock: class A common stock and class B common stock. Holders of class A common stock generally have the same rights, including rights to dividends, as holders of class B common stock, except that holders of class A common stock have one vote per share while holders of class B common stock have 10 votes per share. Each share of class B common stock is convertible at any time, at the option of the holder, into one share of class A common stock. As such, basic and fully diluted earnings per share for class A common stock and for class B common stock are the same. The Company has never declared or paid any cash dividends on either class A or class B common stock. As of September 30, 2022 and December 31, 2021, there were no shares of preferred stock issued or outstanding.
Potential common shares are included in the diluted earnings per share calculation when dilutive. Potential common shares consisting of class A common stock issuable upon the exercise of outstanding stock options, the vesting of restricted stock units, and in connection with the 2021 ESPP are computed using the treasury stock method. Potential common shares consisting of class A common stock issuable upon conversion of the Convertible Notes are computed using the if-converted method. In computing diluted earnings per share, the Company first calculates the earnings per incremental share (“EPIS”) for each class of potential common shares and ranks the classes from the most dilutive (i.e., lowest EPIS) to the least dilutive (i.e., highest EPIS). Basic earnings per share is then adjusted for the effect of each class of shares, in sequence and cumulatively, until a particular class no longer produces further dilution.
For the three and nine months ended September 30, 2022 and 2021, the following weighted average shares of potential class A common stock were excluded from the diluted loss per share calculation because their impact would have been anti-dilutive (in thousands):
Three Months Ended
Nine Months Ended
September 30,
September 30,
2022
2021
2022
2021
Stock Options
1,497
1,252
1,428
1,246
Restricted Stock Units
130
103
118
91
Employee Stock Purchase Plan
5
2
2
1
2025 Convertible Notes
1,633
1,633
1,633
1,633
2027 Convertible Notes
733
733
733
601
Total
3,998
3,723
3,914
3,572
(10) At-the-Market Equity Offerings
2021 Open Market Offering
On June 14, 2021, the Company entered into an Open Market Sale Agreement (the “2021 Open Market Sale Agreement”) with Jefferies LLC, as agent (“Jefferies”), pursuant to which the Company issued and sold shares of its class A common stock having an aggregate offering price of approximately $ 1.0 billion from time to time through Jefferies (the “2021 Open Market Offering”). The Company 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 2021 Open Market Sale Agreement. The Company 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 2021 Open Market 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 2021 Open Market Sale Agreement were considered direct and incremental costs and were charged against “Additional paid-in capital” on the balance sheet in the period in which the related shares were issued and sold. As of December 31, 2021, the cumulative aggregate offering price of the shares of class A common stock sold under the 2021 Open Market Sale Agreement was approximately $ 1.0 billion, inclusive of sales commissions, constituting the maximum program amount under the 2021 Open Market Sale Agreement.
19
2022 At-the-Market Equity Offering
On September 9, 2022, the Company entered into a Sales Agreement (the “2022 Sales Agreement”) with Cowen and Company LLC and BTIG, LLC, as agents (collectively, the “2022 Sales Agents”), pursuant to which the Company may issue and sell shares of its class A common stock having an aggregate offering price of up to $ 500.0 million from time to time through the 2022 Sales Agents. The Company agreed to pay the 2022 Sales Agents commissions for their services in acting as agents 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 2022 Sales Agreement. The Company also agreed to provide the 2022 Sales Agents with customary indemnification and contribution rights.
As of September 30, 2022, the Company has no t issued and sold any shares of class A common stock under the 2022 Sales Agreement. Expenses totaling $ 0.4 million related to the 2022 Sales Agreement were considered direct and incremental costs and have been deferred on the balance sheet in “Prepaid expenses and other current assets” and will be charged against “Additional paid-in-capital” in future periods in which related shares are issued and sold.
(11) Segment Information
The Company manages its business in one reportable operating segment. The Company’s one reportable operating segment is engaged in the design, development, marketing, and sales of its software platform through licensing arrangements and cloud subscriptions and related services. The following table presents total revenues, gross profit, and long-lived assets (in thousands) according to geographic region. Long-lived assets are comprised of right-of-use assets and property and equipment, net.
Geographic regions:
Domestic
EMEA
Other Regions
Consolidated
Three months ended September 30, 2022
Total revenues
$
77,629
$
36,065
$
11,666
$
125,360
Gross profit
$
62,908
$
28,798
$
8,269
$
99,975
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
Nine months ended September 30, 2022
Total revenues
$
221,060
$
110,931
$
34,719
$
366,710
Gross profit
$
178,979
$
86,835
$
24,630
$
290,444
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
As of September 30, 2022
Long-lived assets
$
85,716
$
6,172
$
4,047
$
95,935
As of December 31, 2021
Long-lived assets
$
89,817
$
7,874
$
5,656
$
103,347
The domestic region consists of the United States and Canada. The EMEA region includes operations in Europe, the Middle East, and Africa. The other regions include all other foreign countries, generally comprising Latin America and the Asia Pacific region. For the three and nine months ended September 30, 2022 and 2021, no individual foreign country accounted for 10% or more of total consolidated revenues.
For the three and nine months ended September 30, 2022 and 2021, no individual customer accounted for 10% or more of total consolidated revenues.
As of September 30, 2022 and December 31, 2021, no individual foreign country accounted for 10% or more of total consolidated assets.
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(12) Related Party Transaction
In June 2021, Michael J. Saylor , the Company’s Chairman of the Board of Directors and Executive Chairman and, at that time, the Company’s Chief Executive Officer, entered into an indemnification agreement (the “Original Agreement”) with the Company for an initial term of 90 days and subject to successive 90-day term extensions at the election of the Company. All term extensions were exercised, most recently in February 2022 for a final 90-day period that began in March 2022. Pursuant to the Original Agreement, Mr. Saylor provided during the term of the agreement, from his personal funds, indemnity coverage to the Company for the benefit of the directors and officers (“D&Os”) of the Company and its subsidiaries in the event such coverage was not indemnifiable by the Company, up to a total of $ 40 million. In return, the Company paid Mr. Saylor $ 388,945 for each of the initial and successive 90-day terms.
On June 12, 2022, Mr. Saylor and the Company entered into a renewed indemnification agreement (the “Renewed Agreement”) for an initial term of 90 days, which became effective upon the expiration of the final 90-day extension of the Original Agreement. In return, the Company paid Mr. Saylor a one-time fee of $ 388,945 for the initial 90-day term (the “Renewal Payment”).
On June 24, 2022, the Company bound D&O liability insurance policies (the “Initial Commercial Policies”) with several third-party carriers for $ 30 million in coverage. Concurrently, Mr. Saylor and the Company also entered into (i) an indemnification agreement (the “Excess Agreement”) for Mr. Saylor to provide $ 10 million in excess indemnity coverage payable only after the exhaustion of the Initial Commercial Policies, and (ii) an indemnification agreement (the “Tail Agreement”) for Mr. Saylor to provide $ 40 million in indemnity coverage for claims made at any time based on actions or omissions occurring prior to the inception date of the Initial Commercial Policies. The Company paid Mr. Saylor $ 600,000 for a one-year term under the Excess Agreement , and $ 150,000 for a 90-day term under the Tail Agreement. At the option of the Company, the Company may elect to extend the term under the Tail Agreement for up to a total of twenty-three additional 90 -day periods, for $ 150,000 per additional 90-day term. In connection with the execution of the Initial Commercial Policies and the release of his obligations under the Renewed Agreement, Mr. Saylor refunded the Company $ 337,086 , which is the pro rata portion of the Renewal Payment attributable to the period from the date of the Initial Commercial Policies through the end of the original term of the Renewed Agreement.
On August 30, 2022, the Company bound additional D&O liability insurance policies (the “Excess Commercial Policies”) with third-party carriers for $ 10 million in excess coverage payable only after the exhaustion of the Initial Commercial Policies. Effective as of the same date, the Company and Mr. Saylor executed an amendment (the “Amendment”) to the Excess Agreement to limit Mr. Saylor’s obligation to provide indemnification under the Excess Agreement to claims made during the term of the Excess Agreement which arise from wrongful acts occurring upon or after the commencement of the Excess Agreement but prior to the effective date of the Amendment. In connection with the Amendment, Mr. Saylor refunded $ 489,863 to the Company, representing the pro rata portion of the $600,000 originally paid by the Company to Mr. Saylor under the Excess Agreement attributable to the period from the date of the Amendment through the end of the original term of the Excess Agreement. Also during the third quarter of 2022, pursuant to the terms of the Tail Agreement, the Company elected to extend the term of the Tail Agreement for an additional 90 -day period and paid Mr. Saylor $ 150,000 for this extension.
Under the Excess Agreement and Tail Agreement, Mr. Saylor will provide, during the term of each agreement, from his personal funds, indemnity coverage to the Company for the benefit of the D&Os of the Company and its subsidiaries in the event such coverage is not provided by the Initial Commercial Policies, the Excess Commercial Policies or indemnifiable by the Company. The Excess Agreement and the Tail Agreement expressly supersede the Original Agreement and the Renewed Agreement.
Prior to entering into the Original Agreement, Renewed Agreement, Excess Agreement, and Tail Agreement with Mr. Saylor, the Company obtained and considered market quotes for D&O liability insurance policies. The Company determined that the policies considered at such times would have provided insufficient coverage and would have required substantial premiums to the extent coverage were available, and that obtaining indemnification coverage provided by Mr. Saylor was appropriate and in the best interests of the Company.
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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.