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Long-term Debt | 9 Months Ended
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Sep. 30, 2022
Debt Disclosure [Abstract] |
Long-term Debt | (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 |
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). 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 not 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 not 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. 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 not 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 not 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. 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). 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 |

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