MICROSTRATEGY INCORPORATED Forward-Looking Information
This Annual Report contains forward-looking statements within the meaning of Section 21E of the Exchange Act. For this purpose, any statements contained herein that are not statements of historical fact, including without limitation, certain statements regarding industry prospects and our results of operations or financial position, may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," and similar expressions are intended to identify forward-looking statements. The important factors discussed under "Part I. Item 1A. Risk Factors," among others, could cause actual results to differ materially from those indicated by forward-looking statements made herein and presented elsewhere by management from time to time. Such forward-looking statements represent management's current expectations and are inherently uncertain. Investors are warned that actual results may differ from management's expectations.
Management's Discussion and Analysis for the Year Ended
Management's discussion and analysis of financial condition and results of operations for the year endedDecember 31, 2019 , including comparison of our results for the years endedDecember 31, 2020 and 2019, is included in Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2020 .
Business Overview
MicroStrategy pursues two corporate strategies in the operation of its business. One strategy is to acquire and hold bitcoin and the other strategy is to grow our enterprise analytics software business. We believe that undertaking these two, interdependent corporate strategies serves as a key differentiator for our business, as our bitcoin acquisition strategy has raised our profile with potential software customers while our enterprise analytics software business has provided stable cash flows that allow us to acquire and hold bitcoin for the long-term. We pursue, as part of our overall corporate strategy, a strategy of acquiring bitcoin with our liquid assets that exceed working capital requirements, and from time to time, subject to market conditions, issuing debt or equity securities in capital raising transactions with the objective of using the proceeds to purchase bitcoin. We view our bitcoin holdings as long-term holdings, and we do not plan to engage in regular trading of bitcoin and have not hedged or otherwise entered into derivative contracts with respect to our bitcoin holdings, though we may sell bitcoin in future periods as needed to generate cash for treasury management and other general corporate purposes. We have not set any specific target for the amount of bitcoin we seek to hold, and we will continue to monitor market conditions in determining whether to conduct debt or equity financings to purchase additional bitcoin. We believe that bitcoin is attractive because it can serve as a store of value, supported by a robust and public open source architecture, that is untethered to sovereign monetary policy and can therefore serve as a hedge against inflation. We also believe that bitcoin offers additional opportunity for appreciation in value with increasing adoption due to its limited supply. In addition, we believe that our bitcoin acquisition strategy is complementary to our enterprise analytics software and services business, as we believe that our bitcoin and related activities in support of the bitcoin network enhance awareness of our brand and can provide opportunities to secure new customers for our analytics offerings. We are also exploring opportunities to apply bitcoin related technologies such as blockchain analytics into our software offerings.
As of
We are also a global leader in enterprise analytics software and services. Our vision is to enable Intelligence Everywhere. TheMicroStrategy platform brings together data from our customers' enterprise applications, such as their financial systems, human resources systems, and supply chain and customer relationship management tools, to provide analytics for actionable insights. Customers can also use our consulting and education offerings to harnessMicroStrategy's innovative technology and empower their people to make better, faster decisions.
Our customers include leading companies from a wide range of industries, including retail, consulting, technology, manufacturing, banking, insurance, finance, healthcare, telecommunications, as well as the public sector.
The analytics market is highly competitive. Our future success depends on the
effectiveness with which we can differentiate our offerings from those offered
by large software vendors that provide products across multiple lines of
business, including one or more products that directly compete with our
offerings, and other potential competitors across analytics implementation
projects of varying sizes. We
39
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believe a key differentiator of MicroStrategy is our modern, open, comprehensive
enterprise platform that can be extended to other tools and systems, can scale
across the enterprise, is optimized for cloud or on-premises deployments, and
can be combined with unique packages of our expert services and education
offerings.
Our Bitcoin Acquisition Strategy
InSeptember 2020 , our Board of Directors adopted a Treasury Reserve Policy (as amended to date, the "Treasury Reserve Policy") that updated our treasury management and capital allocation strategies, under which our treasury reserve assets will consist of:
• cash and cash equivalents and short-term investments ("Cash Assets") held
by us that exceed working capital requirements; and
• bitcoin held by us, with bitcoin serving as the primary treasury reserve
asset on an ongoing basis, subject to market conditions and anticipated
needs of the business for Cash Assets.
In the first quarter of 2021, we adopted, in addition to and in conjunction with our Treasury Reserve Policy, a corporate strategy of acquiring and holding bitcoin, and from time to time, subject to market conditions, issuing debt or equity securities in capital raising transactions with the objective of using the proceeds to purchase bitcoin. During 2020 and 2021, we issued the following debt and equity securities to raise capital to purchase bitcoin, which issuances are further described in the "Convertible Senior Notes and 2028 Senior Secured Notes" and "Open Market Sale Agreement" sections under this "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations":
•
due 2025 (the "2025 Convertible Notes") issued in
•
2027 (the "2027 Convertible Notes" and, together with the 2025 Convertible
Notes, the "Convertible Notes") issued in
•
2028 (the "2028 Secured Notes") issued in
• 1,413,767 shares of class A common stock issued during 2021, for aggregate
gross proceeds of
with
The following table presents a rollforward of our bitcoin holdings, including
additional information related to our bitcoin purchases and digital asset
impairment losses within the respective periods. We have not sold any of our
bitcoin as of the date of this Annual Report.
Source
of Digital Asset Digital Asset
Capital Digital Asset Impairment Carrying
Used to Original Cost Losses Value Approximate Approximate
Purchase Basis (in (in Number of Average Purchase
Bitcoin (in thousands) thousands) thousands) Bitcoins Held Price Per Bitcoin
Balance at December
31, 2019 $ 0 $ 0 $ 0 0 n/a
Digital asset
purchases (a) 1,125,000 1,125,000 70,469 15,964
Digital asset
impairment losses (70,698 ) (70,698 )
Balance at December
31, 2020 $ 1,125,000 $ (70,698 ) $ 1,054,302 70,469 $ 15,964
Digital asset
purchases (b) 2,626,529 2,626,529 53,922 48,710
Digital asset
impairment losses (830,621 ) (830,621 )
Balance at December
31, 2021 $ 3,751,529 $ (901,319 ) $ 2,850,210 124,391 $ 30,159
(a) During 2020, we purchased bitcoin using
our issuance of the 2025 Convertible Notes and excess cash, including cash
from the liquidation of short-term investments.
(b) During 2021, we purchased bitcoin using
our issuance of the 2027 Convertible Notes,
from our sale of 1,413,767 shares of class A common stock offered under the
Open Market Sale Agreement,
of the 2028 Secured Notes, and excess cash.
40
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The following table shows the approximate number of bitcoins held at the end of
each respective period, as well as market value calculations of our bitcoin
holdings based on the lowest, highest, and ending market prices of one bitcoin
on the Coinbase exchange (our principal market) for each respective year, as
further defined below:
Market Market Market
Value of Value of Value of
Bitcoin Bitcoin Bitcoin
Held at End Held at End Held at End
of Year of Year of Year
Using Using Using
Lowest Highest Ending
Lowest Market Market Highest Market Market Market
Approximate Number Price Per Price (in Price Per Price (in Market Price Price (in
of Bitcoins Held Bitcoin During thousands) Bitcoin During thousands) Per Bitcoin at thousands)
at End of Year Year (a) (b) Year (c) (d) End of Year (e) (f)
December 31, 2019 0 n/a n/a n/a n/a n/a n/a
December 31, 2020 70,469 $ 8,905.84 $ 627,586 $ 29,321.90 $ 2,066,285 $ 29,181.00 $ 2,056,356
December 31, 2021 124,391 $ 27,678.00 $ 3,442,894 $ 69,000.00 $ 8,582,979 $ 45,879.97 $ 5,707,055 (a) The "Lowest Market Price Per Bitcoin During Year" represents the lowest
market price for one bitcoin reported on the
respective year, without regard to when we purchased any of our bitcoin. For
the year ended
above table reflects the lowest market price for one bitcoin reported on the
quarterly period that we purchased and held bitcoin) to
(b) The "Market Value of Bitcoin Held Using Lowest Market Price" represents a
mathematical calculation consisting of the lowest market price for one
bitcoin reported on the
2020, during the period
number of bitcoins held by us at the end of the applicable year.
(c) The "Highest Market Price Per Bitcoin During Year" represents the highest
market price for one bitcoin reported on the
respective year, without regard to when we purchased any of our bitcoin. For
the year ended
above table reflects the highest market price for one bitcoin reported on the
(d) The "Market Value of Bitcoin Held Using Highest Market Price" represents a
mathematical calculation consisting of the highest market price for one
bitcoin reported on the
2020, during the period
number of bitcoins held by us at the end of the applicable year.
(e) The "Market Price Per Bitcoin at End of Year" represents the market price of
one bitcoin on the
day of the respective year.
(f) The "Market Value of Bitcoin Held at End of Year Using Ending Market Price"
represents a mathematical calculation consisting of the market price of one
bitcoin on the
the respective year multiplied by the number of bitcoins held by us at the
end of the applicable year.
The amounts reported as "Market Value" in the above table represent only a mathematical calculation consisting of the price for one bitcoin reported on theCoinbase exchange (our principal market) in each scenario defined above multiplied by the number of bitcoins held by us at the end of the applicable year.The Securities and Exchange Commission has previously stated that there has not been a demonstration that (i) bitcoin and bitcoin markets are inherently resistant to manipulation or that the spot price of bitcoin may not be subject to fraud and manipulation; and (ii) adequate surveillance-sharing agreements with bitcoin-related markets are in place, as bitcoin-related markets are either not significant, not regulated, or both. Accordingly, the Market Value amounts reported above may not accurately represent fair market value, and the actual fair market value of our bitcoin may be different from such amounts and such deviation may be material. Moreover, (i) the bitcoin market historically has been characterized by significant volatility in price, limited liquidity and trading volumes compared to sovereign currencies markets, relative anonymity, a developing regulatory landscape, potential susceptibility to market abuse and manipulation, and various other risks that are, or may be, inherent in its entirely electronic, virtual form and decentralized network and (ii) we may not be able to sell our bitcoins at the Market Value amounts indicated above, at the market price as reported on theCoinbase exchange (our principal market) on the date of sale, or at all. Our digital asset impairment losses have significantly contributed to our operating expenses and net loss. During 2021, digital asset impairment losses of$830.6 million represented 69.0% of our operating expenses, contributing to our net loss of$535.5 million for 2021, compared to digital asset impairment losses of$70.7 million during 2020, representing 17.5% of our operating expenses and contributing to our net loss of$7.5 million for 2020.
As of
41
--------------------------------------------------------------------------------Impact of COVID-19 on Our Software Strategy
The COVID-19 pandemic has resulted, and may continue to result, in significant economic disruption despite progress made in the development and distribution of vaccines. It has continued to disrupt global travel and supply chains and adversely impacted global commercial activity. Considerable uncertainty still surrounds COVID-19, the evolution of its variants, its potential long-term economic effects, as well as the effectiveness of any responses taken by government authorities and businesses and of various efforts to inoculate the global population. The travel restrictions, limits on hours of operations and/or closures of non-essential businesses, and other efforts to curb the spread of COVID-19 have significantly disrupted business activity globally and there is uncertainty as to when these disruptions will fully subside. Significant uncertainty continues to exist concerning the impact of the COVID-19 pandemic on our customers' and prospects' business and operations in future periods. Although our total revenues for the years endedDecember 31, 2021 and 2020 were not materially impacted by COVID-19, we believe our revenues may be negatively impacted in future periods until the effects of the pandemic have fully subsided and the current macroeconomic environment has substantially recovered. The uncertainty related to COVID-19 may also result in increased volatility in the financial projections we use as the basis for estimates and assumptions used in our financial statements. We have adapted our operations to meet the challenges of this uncertain and rapidly evolving situation, including establishing remote working arrangements for our employees, limiting non-essential business travel, and cancelling or shifting our customer, employee, and industry events to a virtual-only format for the foreseeable future. Our sales and marketing expenses decreased significantly sinceDecember 31, 2019 , as we adapted to the challenges of selling in the current depressed macroeconomic environment, adopted virtual sales and marketing practices, and streamlined our team to sell in this new environment. We have received, and may continue to receive, government assistance from various relief packages available in countries where we operate. For example, inthe United States , the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was enacted onMarch 27, 2020 to provide broad-based economic relief to various sectors of theU.S. economy through a variety of means, including payroll and income tax deferrals and employee retention credits. In theAsia Pacific region, government assistance provided to us during 2020 was primarily in the form of employer payroll tax exemptions. We deferred payment of$4.6 million of our employer portion ofU.S. social security taxes accrued throughDecember 31, 2020 , half of which we paid as ofDecember 31, 2021 and the remainder of which we expect to pay byDecember 31, 2022 . Where taxes payable to government entities have been deferred to a later date, no reduction of expenses has been recorded. Effects of the COVID-19 pandemic that may negatively impact our business in future periods include, but are not limited to: limitations on the ability of our customers to conduct their business, purchase our products and services, and make timely payments; curtailed consumer spending; deferred purchasing decisions; delayed consulting services implementations; and decreases in product licenses revenues driven by channel partners. We will continue to actively monitor the nature and extent of the impact to our business, operating results, and financial condition. 42
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Operating Highlights
The following table sets forth certain operating highlights (in thousands) for
the years ended
Years Ended December 31,
2021 2020
Revenues
Product licenses $ 101,804 $ 86,743
Subscription services 43,069 33,082
Total product licenses and subscription services 144,873 119,825
Product support 281,209 284,434
Other services 84,680 76,476
Total revenues 510,762 480,735
Cost of revenues
Product licenses 1,721 2,293
Subscription services 16,901 14,833
Total product licenses and subscription services 18,622 17,126
Product support 19,254 23,977
Other services 54,033 49,952
Total cost of revenues 91,909 91,055
Gross profit 418,853 389,680
Operating expenses
Sales and marketing 160,141 148,910
Research and development 117,117 103,561
General and administrative 95,501 80,136
Digital asset impairment losses 830,621 70,698
Total operating expenses 1,203,380 403,305
Loss from operations $ (784,527 ) $ (13,625 )
We have incurred and may continue to incur significant impairment losses on our
digital assets and we may recognize gains upon sale of our digital assets in the
future, which would be presented net of any impairment losses within operating
expenses. In addition, we base our internal operating expense forecasts on
expected revenue trends and strategic objectives in our enterprise analytics
software business. Many of our expenses, such as office leases and certain
personnel costs, are relatively fixed. Accordingly, any decrease in the price of
bitcoin during any quarter, any sales by us of our bitcoin at prices above their
then current carrying costs or any shortfall in revenue in our software business
may cause significant variation in our operating results. We therefore believe
that quarter-to-quarter comparisons of our operating results may not be a good
indication of our future performance.
Share-based Compensation Expense
As discussed in Note 11, Share-based Compensation, to the Consolidated Financial
Statements, we have outstanding stock options to purchase shares of our class A
common stock, restricted stock units, and certain other stock-based awards under
our 2013 Equity Plan, as well as opportunities for eligible employees to
purchase shares of our class A common stock under our 2021 Employee Stock
Purchase Plan (the "2021 ESPP"). Share-based compensation expense (in thousands)
from these awards was recognized in the following cost of revenues and operating
expense line items in our Consolidated Statements of Operations for the periods
indicated:
Years Ended December 31,
2021 2020
Cost of subscription services revenues
1,176 155
Cost of consulting revenues 799 23
Cost of education revenues 112 202
Sales and marketing 12,875 1,609
Research and development 10,757 2,740
General and administrative 18,125 6,349
Total share-based compensation expense
43
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The $33.0 million increase in share-based compensation expense during 2021, as
compared to the prior year, is primarily due to the continued expansion of our
equity award programs worldwide and an overall increase in the fair value of new
awards during 2021, driven primarily by the increase in the market value of our
class A common stock. As of December 31, 2021 , we estimated that an aggregate of
approximately $143.8 million of additional share-based compensation expense
associated with the 2013 Equity Plan and the 2021 ESPP will be recognized over a
remaining weighted average period of 3.1 years.
Non-GAAP Financial Measures
We are providing supplemental financial measures for (i) non-GAAP loss from
operations that excludes the impact of our share-based compensation expense,
(ii) non-GAAP net loss and non-GAAP diluted loss per share that exclude the
impact of our share-based compensation expense, interest expense arising from
the amortization of debt issuance costs and (in 2020, before 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")) the debt discount on our
long-term debt, and related income tax effects, and (iii) certain non-GAAP
constant currency revenues, cost of revenues, and operating expenses that
exclude foreign currency exchange rate fluctuations. These supplemental
financial measures are not measurements of financial performance under generally
accepted accounting principles in the United States ("GAAP") and, as a result,
these supplemental financial measures may not be comparable to similarly titled
measures of other companies. Management uses these non-GAAP financial measures
internally to help understand, manage, and evaluate our business performance and
to help make operating decisions.
We believe that these non-GAAP financial measures are also useful to investors
and analysts in comparing our performance across reporting periods on a
consistent basis. The first supplemental financial measure excludes a
significant non-cash expense that we believe is not reflective of our general
business performance, and for which the accounting requires management judgment
and the resulting share-based compensation expense could vary significantly in
comparison to other companies. The second set of supplemental financial measures
excludes the impact of (i) share-based compensation expense, (ii) non-cash
interest expense arising from the amortization of debt issuance costs and (in
2020, before the adoption of ASU 2020-06) the debt discount related to our
long-term debt, and (iii) related income tax effects. The third set of
supplemental financial measures excludes changes resulting from fluctuations in
foreign currency exchange rates so that results may be compared to the same
period in the prior year on a non-GAAP constant currency basis. We believe the
use of these non-GAAP financial measures can also facilitate comparison of our
operating results to those of our competitors.
Non-GAAP financial measures are subject to material limitations as they are not
in accordance with, or a substitute for, measurements prepared in accordance
with GAAP. For example, we expect that share-based compensation expense, which
is excluded from the first two non-GAAP financial measures, will continue to be
a significant recurring expense over the coming years and is an important part
of the compensation provided to certain employees, officers, and
directors. Similarly, we expect that interest expense arising from the
amortization of debt issuance costs will continue to be a recurring expense over
the term of the long-term debt. Our non-GAAP financial measures are not meant to
be considered in isolation and should be read only in conjunction with our
Consolidated Financial Statements, which have been prepared in accordance with
GAAP. We rely primarily on such Consolidated Financial Statements to understand,
manage, and evaluate our business performance and use the non-GAAP financial
measures only supplementally.
The following is a reconciliation of our non-GAAP loss from operations, which
excludes the impact of share-based compensation expense, to its most directly
comparable GAAP measures (in thousands) for the periods indicated:
Years Ended December 31,
2021 2020
Reconciliation of non-GAAP loss from operations: Loss from operations$ (784,527 ) $ (13,625 ) Share-based compensation expense 44,126 11,153 Non-GAAP loss from operations$ (740,401 ) $ (2,472 ) The following are reconciliations of our non-GAAP net loss and non-GAAP diluted loss per share, in each case excluding the impact of (i) share-based compensation expense, (ii) interest expense arising from the amortization of debt issuance costs and (in 2020, before the 44 --------------------------------------------------------------------------------
adoption of ASU 2020-06) the debt discount on our long-term debt, and (iii) related income tax effects to their most directly comparable GAAP measures (in thousands, except per share data) for the periods indicated:
Years Ended
2021 2020
Reconciliation of non-GAAP net loss: Net loss$ (535,480 ) $ (7,524 ) Share-based compensation expense 44,126
11,153
Interest expense arising from amortization of debt issuance costs and debt discount
7,201 1,543
Income tax effects (1) (47,976 ) (5,656 )
Non-GAAP net loss $ (532,129 ) $ (484 ) Reconciliation of non-GAAP diluted loss per share (2): Diluted loss per share
$ (53.44 ) $ (0.78 ) Share-based compensation expense (per diluted share) 4.40
1.15
Interest expense arising from amortization of debt issuance costs and debt discount (per diluted share)
0.72 0.16
Income tax effects (per diluted share) (4.79 ) (0.58 ) Non-GAAP diluted loss per share$ (53.11 ) $ (0.05 )
(1) Income tax effects reflect the net tax effects of share-based compensation
expense, which includes tax benefits on exercises of stock options and
vesting of share-settled restricted stock units, and interest expense for
amortization of debt issuance costs and debt discount.
(2) For reconciliation purposes, the non-GAAP diluted earnings (loss) per
share calculations use the same weighted average shares outstanding as
that used in the GAAP diluted earnings (loss) per share calculations for
the same period. For example, in periods of GAAP net loss, otherwise
dilutive potential shares of common stock from our share-based
compensation arrangements and Convertible Notes are excluded from the GAAP
diluted loss per share calculation as they would be antidilutive, and
therefore are also excluded from the non-GAAP diluted earnings or loss per
share calculation.
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The following are reconciliations of certain non-GAAP constant currency revenues, cost of revenues, and operating expenses to their most directly comparable GAAP measures (in thousands) for the periods indicated.
Years Ended
December 31,
Non-GAAP
Foreign Currency Non-GAAP Constant
Exchange Rate Constant GAAP % Currency %
GAAP Impact (1) Currency (2) GAAP Change Change (3)
2021 2021 2021 2020 2021 2021
Product licenses $ 101,804 $ (858 ) $ 102,662 $ 86,743 17.4 % 18.4 %
revenues
Subscription services 43,069 519 42,550 33,082 30.2 % 28.6 %
revenues
Product support 281,209 3,816 277,393 284,434 -1.1 % -2.5 %
revenues
Other services revenues 84,680 1,118 83,562 76,476 10.7 % 9.3 %
Cost of product support 19,254 33 19,221 23,977 -19.7 % -19.8 %
revenues
Cost of other services 54,033 341 53,692 49,952 8.2 % 7.5 %
revenues
Sales and marketing 160,141 323 159,818 148,910 7.5 % 7.3 %
expenses
Research and 117,117 1,586 115,531 103,561 13.1 % 11.6 %
development expenses
General and 95,501 276 95,225 80,136 19.2 % 18.8 %
administrative expenses
Non-GAAP
Foreign Currency Non-GAAP Constant
Exchange Rate Constant GAAP % Currency %
GAAP Impact (1) Currency (2) GAAP Change Change (3)
2020 2020 2020 2019 2020 2020
Product licenses $ 86,743 $ (1,227 ) $ 87,970 $ 87,471 -0.8 % 0.6 %
revenues
Subscription services 33,082 121 32,961 29,394 12.5 % 12.1 %
revenues
Product support 284,434 (358 ) 284,792 292,035 -2.6 % -2.5 %
revenues
Other services revenues 76,476 304 76,172 77,427 -1.2 % -1.6 %
Cost of product support 23,977 (142 ) 24,119 28,317 -15.3 % -14.8 %
revenues
Cost of other services 49,952 (347 ) 50,299 54,365 -8.1 % -7.5 %
revenues
Sales and marketing 148,910 (2,184 ) 151,094 191,235 -22.1 % -21.0 %
expenses
Research and 103,561 42 103,519 109,423 -5.4 % -5.4 %
development expenses
General and 80,136 (444 ) 80,580 86,697 -7.6 % -7.1 %
administrative expenses
(1) The "Foreign Currency Exchange Rate Impact" reflects the estimated impact of
fluctuations in foreign currency exchange rates on international components
of our Consolidated Statements of Operations. It shows the increase
(decrease) in material international revenues or expenses, as applicable,
from the same period in the prior year, based on comparisons to the prior
year quarterly average foreign currency exchange rates. The term
"international" refers to operations outside of
(2) The "Non-GAAP Constant Currency" reflects the current period GAAP amount,
less the Foreign Currency Exchange Rate Impact.
(3) The "Non-GAAP Constant Currency % Change" reflects the percentage change
between the current period Non-GAAP Constant Currency amount and the GAAP
amount for the same period in the prior year.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations
are based on our Consolidated Financial Statements, which have been prepared in
accordance with GAAP. See Note 2, Summary of Significant Accounting Policies, to
the Consolidated Financial Statements for a description of our significant
accounting policies. As described in Note 2, the preparation of our Consolidated
Financial Statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, and equity, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting
period. Actual results and outcomes could differ from these estimates and
assumptions.
Critical accounting estimates involve a significant level of estimation
uncertainty and are estimates that have had or are reasonably likely to have a
material impact on our financial condition or results of operations. We consider
certain estimates and judgments related to revenue recognition to be critical
accounting estimates for us, as discussed further below.
46
--------------------------------------------------------------------------------Revenue Recognition
See Note 2(n), Summary of Significant Accounting Policies - Revenue Recognition, to the Consolidated Financial Statements for information regarding our significant accounting policies over revenue recognition.
Many of our contracts with customers include multiple performance obligations,
and we make estimates and judgments to allocate the transaction price to each
performance obligation based on an observable or estimated standalone selling
price ("SSP"). The SSP is the price, or estimated price, of the software or
service when sold on a standalone basis at contract inception. We consider our
evaluation of SSP to be a critical accounting estimate.
An observable price of a good or service sold separately provides the best
evidence of SSP. However, in many situations, SSP will not be readily
observable, but must still be estimated using reasonably available
information. We have observable standalone selling prices of our product
support, consulting services, and education services, and therefore use
historical transaction data on a standalone basis, along with our judgment, to
establish SSP ranges for each of these services, as described in Note 2(n).
However, SSP is not directly observable for product licenses (product licenses
are not sold on a standalone basis and pricing is highly variable) and
subscription services (the selling price of subscription services is highly
variable), and we use a residual approach to establish SSP for these revenue
streams. As such, the establishment of SSP of our product support, consulting
services, and education services directly impacts the amount of product licenses
and subscription services revenues recognized, and therefore also impacts the
overall timing of revenue recognition.
We review and analyze the SSP ranges we have established for product support,
consulting services, and education services semi-annually, and these SSP ranges
have not changed significantly since adopting Accounting Standards Update No.
2014-09, Revenue from Contracts with Customers (Topic 606) and its subsequent
amendments ("ASU 2014-09") effective January 1, 2018 . We also perform analyses
on a semi-annual basis using historical pricing data for both product license
and subscription services transactions to assess whether the selling price is
highly variable in order to support our conclusion that the residual method to
estimate SSP of our product licenses and subscription services is a fair
allocation of the transaction price. We have maintained our conclusion that the
residual method is appropriate for our product licenses and subscription
services since adopting ASU 2014-09.
In the future, SSP for our software and services could be impacted by various
factors, including potential changes in our pricing practices, customer demand
for our products and services, and various market or economic conditions.
However, we consider the risk of significant volatility in our established SSP
to be small given our historical transaction experience and internal processes
to monitor SSP ranges on an ongoing basis and work with management in the event
a trend that could impact the future ranges is detected.
Results of Operations
Comparison of the Years Ended
Revenues
Except as otherwise indicated herein, the term "domestic" refers to operations
in
Product licenses and subscription services revenues. The following table sets
forth product licenses and subscription services revenues (in thousands) and
related percentage changes for the periods indicated:
Years Ended December 31,
2021 2020 % Change
Product Licenses and Subscription Services
Revenues:
Product Licenses
Domestic $ 54,107 $ 51,504 5.1 %
International 47,697 35,239 35.4 %
Total product licenses revenues 101,804 86,743 17.4 %
Subscription Services
Domestic 31,306 24,684 26.8 %
International 11,763 8,398 40.1 %
Total subscription services revenues 43,069 33,082 30.2 %
Total product licenses and subscription
services revenues $ 144,873 $ 119,825 20.9 %
47--------------------------------------------------------------------------------
The following table sets forth a summary, grouped by size, of the number of recognized product licenses transactions for the periods indicated:
Years Ended
2021 2020
Product Licenses Transactions with Recognized Licenses Revenue in the Applicable Period: More than$1.0 million in licenses revenue recognized 13 10 Between$0.5 million and$1.0 million in licenses revenue recognized 19 18 Total 32 28 Domestic: More than$1.0 million in licenses revenue recognized 10 8 Between$0.5 million and$1.0 million in licenses revenue recognized 11 10 Total 21 18 International: More than$1.0 million in licenses revenue recognized 3 2 Between$0.5 million and$1.0 million in licenses revenue recognized 8 8 Total 11 10
The following table sets forth the recognized revenue (in thousands) attributable to product licenses transactions, grouped by size, and related percentage changes for the periods indicated:
Years Ended December 31,
2021 2020 % Change
Product Licenses Revenue Recognized in the
Applicable Period:
More than $1.0 million in licenses revenue
recognized $ 26,838 $ 25,599 4.8 %
Between $0.5 million and $1.0 million in
licenses revenue recognized 12,809 12,096 5.9 %
Less than $0.5 million in licenses revenue
recognized 62,157 49,048 26.7 %
Total 101,804 86,743 17.4 %
Domestic:
More than $1.0 million in licenses revenue
recognized 18,391 20,108 -8.5 %
Between $0.5 million and $1.0 million in
licenses revenue recognized 7,364 6,568 12.1 %
Less than $0.5 million in licenses revenue
recognized 28,352 24,828 14.2 %
Total 54,107 51,504 5.1 %
International:
More than $1.0 million in licenses revenue
recognized 8,447 5,491 53.8 %
Between $0.5 million and $1.0 million in
licenses revenue recognized 5,445 5,528 -1.5 %
Less than $0.5 million in licenses revenue
recognized 33,805 24,220 39.6 %
Total $ 47,697 $ 35,239 35.4 %
Product licenses revenues increased $15.1 million during 2021, as compared to
the prior year. For the years ended December 31, 2021 and 2020, product licenses
transactions with more than $0.5 million in recognized revenue represented 38.9%
and 43.5%, respectively, of our product licenses revenues. During 2021, our top
three product licenses transactions totaled $12.6 million in recognized revenue,
or 12.4% of total product licenses revenues, compared to $15.3 million , or 17.6%
of total product licenses revenues, during 2020.
Domestic product licenses revenues. Domestic product licenses revenues increased
$2.6 million during 2021, as compared to the prior year, primarily due to an
increase in the average deal size of transactions with less than $0.5 million in
recognized revenue and an increase in the number of transactions with recognized
revenue between $0.5 million and $1.0 million , partially offset by a decrease in
the average deal size of transactions with more than $1.0 million in recognized
revenue.
International product licenses revenues. International product licenses revenues
increased $12.5 million during 2021, as compared to the prior year, primarily
due to an increase in the number of transactions with less than $0.5 million in
recognized revenue and an increase in the number of transactions with more than
$1.0 million in recognized revenue, partially offset by $0.9 million unfavorable
foreign currency exchange impact.
48
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Subscription services revenues. Subscription services revenues are derived from
MCE, a cloud subscription service, that are recognized ratably over the service
period in the contract. Subscription services revenues increased $10.0 million
during 2021, as compared to the prior year, primarily due to conversions to
cloud-based subscriptions from existing on-premises customers, an increase in
the use of subscription services by existing customers, sales contracts with new
customers, and a $0.5 million favorable foreign currency exchange impact. We
expect our subscription services revenues to continue to grow in future periods
as we continue to promote our cloud offering to new and existing customers.
Product support revenues. The following table sets forth product support
revenues (in thousands) and related percentage changes for the periods
indicated:
Years Ended December 31,
2021 2020 % Change
Product Support Revenues:
Domestic $ 161,288 $ 167,266 -3.6 %
International 119,921 117,168
2.3 %
Total product support revenues
Product support revenues are derived from providing technical software support and software updates and upgrades to customers. Product support revenues are recognized ratably over the term of the contract, which is generally one year. Product support revenues decreased$3.2 million during 2021, as compared to the prior year, primarily due to certain existing customers converting from perpetual product licenses with separate support contracts to our subscription services or term product licenses offerings, partially offset by a$3.8 million favorable foreign currency exchange impact.
Other services revenues. The following table sets forth other services revenues (in thousands) and related percentage changes for the periods indicated:
Years Ended December 31,
2021 2020 % Change
Other Services Revenues:
Consulting
Domestic $ 36,814 $ 33,021 11.5 %
International 42,918 38,324 12.0 %
Total consulting revenues 79,732 71,345 11.8 %
Education 4,948 5,131 -3.6 %
Total other services revenues $ 84,680 $ 76,476 10.7 %
Consulting revenues. Consulting revenues are derived from helping customers plan
and execute the deployment of our software. Consulting revenues increased $8.4
million during 2021, as compared to the prior year, primarily due to an increase
in billable hours worldwide and a $1.0 million favorable foreign currency
exchange impact, partially offset by a decrease in average bill rates and a
decrease in billable travel and entertainment expenditures.
Education revenues. Education revenues are derived from the education and
training that we provide to our customers to enhance their ability to fully
utilize the features and functionality of our software. These offerings include
self-tutorials, custom course development, joint training with customers'
internal staff, and standard course offerings, with pricing dependent on the
specific offering delivered. Education revenues did not materially change during
2021, as compared to the prior year.
49
--------------------------------------------------------------------------------Costs and Expenses
Cost of revenues. The following table sets forth cost of revenues (in thousands) and related percentage changes for the periods indicated:
Years Ended December 31,
2021 2020 % Change
Cost of Revenues:
Product licenses and subscription services:
Product licenses $ 1,721 $ 2,293 -24.9 %
Subscription services 16,901 14,833 13.9 %
Total product licenses and subscription services 18,622 17,126 8.7 %
Product support 19,254 23,977 -19.7 %
Other services:
Consulting 48,773 42,923 13.6 %
Education 5,260 7,029 -25.2 %
Total other services 54,033 49,952 8.2 %
Total cost of revenues $ 91,909 $ 91,055 0.9 %
Cost of product licenses revenues. Cost of product licenses revenues consists of
referral fees paid to channel partners, the costs of product manuals and media,
and royalties paid to third-party software vendors. Cost of product licenses
revenues did not materially change during 2021, as compared to the prior year.
Cost of subscription services revenues. Cost of subscription services revenues
consists of equipment, facility and other related support costs, and personnel
and related overhead costs. Subscription services headcount increased 46.9% to
72 at December 31, 2021 from 49 at December 31, 2020 ; however, average headcount
for the respective periods did not materially change. Cost of subscription
services revenues increased $2.1 million during 2021, as compared to the prior
year, primarily due to a $2.8 million increase in cloud hosting infrastructure
costs, which is a result of the increased usage by new and existing cloud
subscription services customers, partially offset by a $0.6 million decrease in
salaries.
Cost of product support revenues. Cost of product support revenues consists of
personnel and related overhead costs, including those under our Enterprise
Support program. Our Enterprise Support program utilizes primarily consulting
personnel to provide product support to our customers at our
discretion. Compensation related to personnel providing Enterprise Support
services is reported as cost of product support revenues. Product support
headcount increased 13.0% to 174 at December 31, 2021 from 154 at December 31,
2020 . Cost of product support revenues decreased $4.7 million during 2021, as
compared to the prior year, primarily due to a $2.8 million decrease in
compensation and related costs due to a decrease in product support average
staffing levels and a shift in staffing levels to lower cost regions, a $2.4
million decrease in compensation and related costs attributable to non-product
support personnel providing a decreased level of Enterprise Support services,
and a $0.6 million decrease in facility and other related support costs,
partially offset by a $1.0 million net increase in share-based compensation
expense. The $1.0 million net increase in share-based compensation expense is
primarily due to the grant of additional awards under the 2013 Equity Plan and
an overall increase in the fair value of new awards during 2021.
Cost of consulting revenues. Cost of consulting revenues consists of personnel
and related overhead costs, excluding those under our Enterprise Support program
which are allocated to cost of product support revenues. Consulting headcount
increased 5.1% to 413 at December 31, 2021 from 393 at December 31, 2020 . Cost
of consulting revenues increased $5.9 million during 2021, as compared to the
prior year, primarily due to a $4.1 million increase in subcontractor costs, a
$2.1 million increase in compensation and related costs attributable to
consulting personnel providing a decreased level of Enterprise Support services,
and a $0.8 million net increase in share-based compensation expense, partially
offset by a $1.0 million decrease in travel and entertainment expenditures
primarily attributable to higher expenses during the first quarter of 2020 which
was not materially impacted by the COVID-19 pandemic. The $0.8 million net
increase in share-based compensation expense is primarily due to the grant of
additional awards under the 2013 Equity Plan and an overall increase in the fair
value of new awards during 2021.
Cost of education revenues. Cost of education revenues consists of personnel and
related overhead costs. Education headcount decreased 2.7% to 36 at December 31,
2021 from 37 at December 31, 2020 . Cost of education revenues decreased $1.8
million during 2021, as compared to the prior year, primarily due to a $0.8
million decrease in cloud hosting infrastructure costs associated with education
offerings that we made available at no charge for a limited time period during
the first half of 2020 in response to the COVID-19 pandemic and a $0.6 million
decrease in compensation and related costs due to a decrease in average staffing
levels.
50
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Sales and marketing expenses. Sales and marketing expenses consist of personnel
costs, commissions, office facilities, travel, advertising, public relations
programs, and promotional events, such as trade shows, seminars, and technical
conferences. Sales and marketing headcount decreased 1.9% to 470 at December 31,
2021 from 479 at December 31, 2020 . The following table sets forth sales and
marketing expenses (in thousands) and related percentage changes for the periods
indicated:
Years Ended December 31,
2021 2020 % Change
Sales and marketing expenses $ 160,141 $ 148,910 7.5 %
Sales and marketing expenses increased $11.2 million during 2021, as compared to
the prior year, primarily due to an $11.3 million net increase in share-based
compensation expense, a $10.3 million increase in variable compensation (of
which $2.1 million was due to the cancellation of a sales employee awards event
in 2020 as a result of the COVID-19 pandemic), and a $0.5 million increase in
recruiting costs, partially offset by a $5.5 million decrease in employee
salaries due to a decrease in average staffing levels, a $2.9 million decrease
in travel and entertainment expenditures primarily attributable to higher
expenses during the first quarter of 2020 which was not materially impacted by
the COVID-19 pandemic, a $1.4 million decrease in facility and other related
support costs, and a $0.5 million decrease in subcontractor costs. The $11.3
million net increase in share-based compensation expense is primarily due to the
grant of additional awards under the 2013 Equity Plan and the 2021 ESPP and an
overall increase in the fair value of new awards during 2021.
Research and development expenses. Research and development expenses consist of
the personnel costs for our software engineering personnel, depreciation of
equipment, and other related costs. Research and development headcount increased
8.9% to 699 at December 31, 2021 from 642 at December 31, 2020 . The following
table summarizes research and development expenses (in thousands) and related
percentage changes for the periods indicated:
Years Ended December 31,
2021 2020 % Change
Research and development expenses
Research and development expenses increased$13.6 million during 2021, as compared to the prior year, primarily due to an$8.0 million net increase in share-based compensation expense, a$3.1 million increase in variable compensation (of which$0.5 million was due to certain COVID-19-related employer payroll tax exemptions in theAsia Pacific region in 2020), a$1.7 million increase in employee salaries primarily due to periodic wage increases partially offset by a decrease in average staffing levels and a shift in staffing levels to lower cost regions, a$1.4 million gain on partial lease termination of our corporate headquarters lease recorded during the fourth quarter of 2020 and allocated to research and development expenses, and a$0.7 million increase in recruiting costs, partially offset by a$0.9 million decrease in facility and other related support costs. The$8.0 million net increase in share-based compensation expense is primarily due to the grant of additional awards under the 2013 Equity Plan and the 2021 ESPP and an overall increase in the fair value of new awards during 2021. Included in research and development expenses for 2021 is an aggregate$1.6 million unfavorable foreign currency exchange impact. General and administrative expenses. General and administrative expenses consist of personnel and related overhead costs, and other costs of our executive, finance, human resources, information systems, and administrative departments, as well as third-party consulting, legal, and other professional fees. General and administrative headcount increased 5.8% to 257 atDecember 31, 2021 from 243 atDecember 31, 2020 . The following table sets forth general and administrative expenses (in thousands) and related percentage changes for the periods indicated: Years Ended December 31, 2021 2020 % Change General and administrative expenses$ 95,501 $ 80,136 19.2 % General and administrative expenses increased$15.4 million during 2021, as compared to the prior year, primarily due to an$11.8 million net increase in share-based compensation expense, a$3.5 million increase in legal, consulting, and other advisory costs which includes costs from executing our new bitcoin acquisition strategy in 2021, a$3.1 million increase in custodial fees incurred on our bitcoin holdings, a$0.6 million gain on partial lease termination of our corporate headquarters lease recorded during the fourth quarter of 2020 and allocated to general and administrative expenses, and a$0.5 million increase in cloud hosting infrastructure costs, partially offset by a$3.2 million decrease in compensation and related costs due to a decrease in average staffing levels and a$1.2 million decrease in bad debt expense. The$11.8 million net increase in share-based compensation expense is primarily due to the grant of additional awards under the 2013 Equity Plan and an overall increase in the fair value of new awards during 2021, partially offset by certain awards becoming fully vested. 51 -------------------------------------------------------------------------------- Digital asset impairment losses. Digital asset impairment losses are recognized when the carrying value of our digital assets exceeds their lowest fair value at any time since their acquisition. Impaired digital assets are written down to fair value at the time of impairment, and such impairment loss cannot be recovered for any subsequent increases in fair value. The following table sets forth digital asset impairment losses (in thousands) and related percentage changes for the periods indicated: Years Ended December 31, 2021 2020 %
Change
Digital asset impairment losses
We did not sell any of our digital assets during the years endedDecember 31, 2021 and 2020. We may continue to incur significant digital asset impairment losses in the future. For example, we have incurred at least$163.3 million in digital asset impairment losses during the first quarter of 2022 on bitcoin we held as ofDecember 31, 2021 .
Interest (Expense) Income, Net
During 2021, interest expense, net, of$29.1 million was primarily related to the contractual interest expense related to our 2028 Secured Notes and 2025 Convertible Notes, the amortization of issuance costs related to our long-term debt arrangements, and contractual interest expense incurred on trade credits withCoinbase Credit, Inc. Refer to Note 8, Long-term Debt, and Note 4, Digital Assets, to the Consolidated Financial Statements for further information. During 2020, interest income, net, of$0.7 million was primarily related to interest earned on cash and cash equivalents balances and the amortization of the discount on our short-term investments, partially offset by the amortization of the debt discount, the contractual interest expense, and the amortization of issuance costs related to our 2025 Convertible Notes.
Other Income (Expense), Net
During 2021, other income, net, of
Benefit from Income Taxes
During 2021, we recorded a benefit from income taxes of$275.9 million on pre-tax losses of$811.4 million that resulted in an effective tax rate of 34.0%, as compared to a benefit from income taxes of$12.4 million on pre-tax losses of$20.0 million that resulted in an effective tax rate of 62.3% during 2020. The change in our effective tax rate in 2021, as compared to the prior year, was primarily due to certain discrete items, overall loss level, and the change in the proportion ofU.S. versus foreign (loss) income. The Tax Act imposed a mandatory deemed repatriation transition tax ("Transition Tax") on previously untaxed accumulated and current earnings and profits of certain of our foreign subsidiaries. As ofDecember 31, 2021 ,$25.1 million of the Transition Tax was unpaid, of which$22.1 million is included in "Other long-term liabilities" and$3.0 million is included in "Accounts payable, accrued expenses, and operating lease liabilities" in our Consolidated Balance Sheets. As ofDecember 31, 2021 , we had noU.S. federal net operating loss ("NOL") carryforwards and$4.1 million of foreign NOL carryforwards. As ofDecember 31, 2021 , digital asset impairment losses, other temporary differences and carryforwards, and credits resulted in deferred tax assets, net of valuation allowances and deferred tax liabilities, of$319.7 million . As ofDecember 31, 2021 , we had a valuation allowance of$1.0 million primarily related to certain foreign tax credit carryforward tax assets that, in our present estimation, more likely than not will not be realized. If the market value of bitcoin declines or we are unable to regain profitability in future periods, we may be required to increase the valuation allowance against our deferred tax assets, which could result in a charge that would materially adversely affect net (loss) income in the period in which the charge is incurred. We will continue to regularly assess the realizability of deferred tax assets. Beginning in the third quarter of 2020, we determined to no longer permanently reinvest our foreign earnings and profits. As ofDecember 31, 2021 , we recorded a deferred tax liability of$1.7 million on undistributed foreign earnings of$117.0 million related to foreign withholding tax andU.S. state income taxes. 52 --------------------------------------------------------------------------------
Deferred Revenue and Advance Payments
Deferred revenue and advance payments represent amounts received or due from our
customers in advance of our transferring our 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 following table summarizes deferred revenue and advance payments (in
thousands), as of:
December 31,
2021 2020
Current:
Deferred product licenses revenue $ 993 $ 1,495
Deferred subscription services revenue 35,589
26,258
Deferred product support revenue 166,477
156,216
Deferred other services revenue 6,801
7,281
Total current deferred revenue and advance payments
191,250
Non-current:
Deferred product licenses revenue $ 68 $
139
Deferred subscription services revenue 1,064
8,758
Deferred product support revenue 6,203
5,055
Deferred other services revenue 754
710
Total non-current deferred revenue and advance payments$ 8,089 $
14,662
Total current and non-current: Deferred product licenses revenue$ 1,061 $
1,634
Deferred subscription services revenue 36,653
35,016
Deferred product support revenue 172,680
161,271
Deferred other services revenue 7,555
7,991
Total current and non-current deferred revenue and advance payments$ 217,949 $ 205,912 Total deferred revenue and advance payments increased$12.0 million in 2021, as compared to the prior year, primarily due to the timing of product support, an increase in deferred revenue from new subscription services contracts, and an increase in conversions from on-premises to subscription services, partially offset by the presentation of multi-year contracts. The portions of such multi-year contracts that will be invoiced in the future are not presented on the balance sheet in "Accounts receivable, net" and "Deferred revenue and advance payments" and instead are included in the remaining performance obligation disclosure below. Included in our international deferred revenue balances atDecember 31, 2021 is a$5.9 million unfavorable foreign currency impact from the general strengthening of theU.S. dollar compared to the same period in the prior year. Our 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. As ofDecember 31, 2021 , we had an aggregate transaction price of$267.6 million allocated to the remaining performance obligation related primarily to subscription services, product support, and product licenses. We expect to recognize approximately$219.2 million of the remaining performance obligation over the next 12 months and the remainder thereafter. However, the timing and ultimate recognition of our deferred revenue and advance payments and other remaining performance obligations depend on our satisfaction of various performance obligations, and the amount of deferred revenue and advance payments and remaining performance obligations at any date should not be considered indicative of revenues for any succeeding period.
Liquidity and Capital Resources
Liquidity. Our principal sources of liquidity are cash and cash equivalents and on-going collection of our accounts receivable. Cash and cash equivalents may include holdings in bank demand deposits, money market instruments, certificates of deposit, andU.S. Treasury securities. Under our Treasury Reserve Policy and bitcoin acquisition strategy, we use a significant portion of our cash, including cash generated from capital raising activities, to acquire bitcoins. As discussed in Note 2(g) Summary of Significant Accounting Policies - Digital Assets, to our Consolidated Financial Statements, our bitcoin are classified as indefinite-lived intangible assets. As ofDecember 31, 2021 and 2020, the amount of cash and cash equivalents held by ourU.S. entities was$13.1 million and$13.7 million , respectively, and by our non-U.S. entities was$50.3 million and$46.0 million , respectively. We earn a significant amount of 53 -------------------------------------------------------------------------------- our revenues outsidethe United States and our accumulated undistributed foreign earnings and profits as ofDecember 31, 2021 and 2020 were$117.0 million and$136.3 million , respectively. We repatriated foreign earnings and profits of$57.5 million during 2021 and$186.6 million during 2020.
Our material contractual obligations (explained in further detail in the Notes to the Consolidated Financial Statements, as referenced below) and cash requirements consist of:
• principal and interest payments related to our long-term debt (Note 8,
Long-term Debt);
• rent payments under noncancellable operating leases (Note 7, Leases);
• payments related to the Transition Tax (Note 9, Commitments and
Contingencies);
• payments under various purchase agreements, primarily related to third-party
software supporting our products, marketing, and operations (Note 9,
Commitments and Contingencies); and
• ongoing personnel-related expenditures and vendor payments.
We believe that existing cash and cash equivalents held by us and cash and cash
equivalents anticipated to be generated by us are sufficient to meet working
capital requirements, anticipated capital expenditures, and contractual
obligations for at least the next 12 months. Beyond the next 12 months, our
long-term cash requirements are primarily for obligations related to our
long-term debt (principal due upon maturity of each debt instrument ($650
million in the case of the 2025 Convertible Notes, $1.050 billion in the case of
the 2027 Convertible Notes and $500 million in the case of the 2028 Secured
Notes), $2.4 million in coupon interest due each semi-annual period for the 2025
Convertible Notes, and $15.3 million in coupon interest due each semi-annual
period for the 2028 Secured Notes). We also have long-term cash requirements for
obligations related to our operating leases, the Transition Tax, and our various
purchase agreements. If cash and cash equivalents generated by future operating
activities are not sufficient to enable us to satisfy these obligations, we may
seek to generate cash and cash equivalents from other sources. The sources could
include the sale of bitcoins, as well as the issuance and sale of shares of our
class A common stock (as we have done through the Open Market Sale Agreement).
Furthermore, if certain conditions are met, we may have the right to elect to
settle the Convertible Notes upon a conversion of such Convertible Notes in
shares of our class A common stock, or a combination of cash and shares of class
A common stock, which may enable us to reduce the amount of our cash obligations
under the Convertible Notes.
As of December 31, 2021 , we held approximately 124,391 bitcoins. We do not
believe we will need to sell any of our bitcoins within the next twelve months
to meet our working capital requirements, although we may from time to time sell
bitcoins as part of treasury management operations, as noted above. The bitcoin
market historically has been characterized by significant volatility in its
price, limited liquidity and trading volumes compared to sovereign currencies
markets, relative anonymity, a developing regulatory landscape, susceptibility
to market abuse and manipulation, and various other risks inherent in its
entirely electronic, virtual form and decentralized network. During times of
instability in the bitcoin market, we may not be able to sell our bitcoins at
reasonable prices or at all. As a result, our bitcoins are less liquid than our
existing cash and cash equivalents and may not be able to serve as a source of
liquidity for us to the same extent as cash and cash equivalents. In addition,
upon sale of our bitcoin, we may incur additional taxes related to any realized
gains or we may incur capital losses as to which the tax deduction may be
limited.
The following table sets forth a summary of our cash flows (in thousands) and related percentage changes for the periods indicated:
Years Ended December 31,
2021 2020 % Change
Net cash provided by operating activities $ 93,833 $ 53,619 75.0 %
Net cash used in investing activities $ (2,629,235 ) $ (1,018,693 ) 158.1 %
Net cash provided by financing activities $ 2,541,685 $ 563,233 351.3 %
Net cash provided by operating activities. The primary source of our cash
provided by operating activities is cash collections of our accounts receivable
from customers following the sales and renewals of our product licenses and
product support, as well as consulting, education, and subscription services.
Our primary uses of cash in operating activities are for personnel-related
expenditures for software development, personnel-related expenditures for
providing consulting, education, and subscription services, and for sales and
marketing costs, general and administrative costs, and income taxes. Non-cash
items to further reconcile net (loss) to net cash provided by operating
activities consist primarily of depreciation and amortization, reduction in the
carrying amount of operating lease ROU assets, credit losses and sales
allowances, deferred taxes, release of liabilities for unrecognized tax
benefits, share-based compensation expense, digital asset impairment losses,
amortization of the issuance costs and debt discount on our long-term debt, and
gain on partial lease termination.
Net cash provided by operating activities increased $40.2 million during 2021,
as compared to the prior year, due to a $534.3 million increase from changes in
non-cash items (principally related to digital asset impairment losses offset by
deferred taxes) and a $33.9 million increase from changes in operating assets
and liabilities, partially offset by a $528.0 million increase in net loss.
54
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Net cash used in investing activities. The changes in net cash (used in)
provided by investing activities primarily relate to purchases of digital
assets, purchases and redemptions of short-term investments, and expenditures on
property and equipment. Net cash used in investing activities increased $1.611
billion during 2021, as compared to the prior year, due to a $1.502 billion
increase in purchases of bitcoins and a $119.9 million decrease in proceeds from
the redemption of short-term investments, partially offset by a $9.9 million
decrease in purchases of short-term investments and a $0.9 million decrease in
purchases of property and equipment. During 2021, we purchased bitcoin using the
net proceeds from the issuance of our 2027 Convertible Notes and 2028 Secured
Notes, the issuance and sale of class A common stock under the Open Market Sale
Agreement, and excess cash. During 2020, we purchased bitcoin using the net
proceeds from the issuance of our 2025 Convertible Notes and excess cash,
including cash from the liquidation of short-term investments.
Net cash provided by financing activities. The changes in net cash provided by
(used in) financing activities primarily relate to the issuance of our long-term
debt, the sale of class A common stock offered under the Open Market Sale
Agreement, the purchase of treasury stock, the exercise of stock options under
the 2013 Equity Plan, the issuance of class A common stock under the 2021 ESPP,
and the payment of withholding tax on vesting of restricted stock units. Net
cash provided by financing activities increased $1.978 billion during 2021, as
compared to the prior year, due to $1.050 billion in gross proceeds from our
2027 Convertible Notes, $1.000 billion in gross proceeds from the sale of class
A common stock offered under the Open Market Sale Agreement, $500.0 million in
gross proceeds from our 2028 Secured Notes, a $123.2 million decrease in
purchases of treasury stock, and $2.9 million in proceeds from the issuance of
class A common stock under the 2021 ESPP, partially offset by $650.0 million in
gross proceeds in 2020 from our 2025 Convertible Notes, $12.8 million of
issuance costs paid for our 2028 Secured Notes, a $10.4 million decrease in
proceeds from the exercise of stock options under the 2013 Equity Plan, a $10.2
million increase in issuance costs paid for our Convertible Notes, $9.5 million
of issuance costs paid related to the Open Market Sale Agreement, and $4.7
million of withholding tax paid on vesting of restricted stock units.
Convertible Senior Notes and 2028 Senior Secured Notes
InDecember 2020 , we issued$650.0 million aggregate principal amount of the 2025 Convertible Notes and inFebruary 2021 , we issued$1.050 billion aggregate principal amount of the 2027 Convertible Notes. We used the net proceeds from the issuance of the Convertible Notes to acquire bitcoin. The terms of the Convertible Notes are discussed more fully in Note 8, Long-term Debt, to the Consolidated Financial Statements. During 2021, we paid$4.9 million in interest to holders of the 2025 Convertible Notes. The 2027 Convertible Notes do not bear regular interest and we have not paid any special interest to holders of the 2027 Convertible Notes to date. InJune 2021 , we issued$500.0 million aggregate principal amount of the 2028 Secured Notes. We used the net proceeds from the issuance of the 2028 Secured Notes to acquire bitcoin. The terms of the 2028 Secured Notes are discussed more fully in Note 8, Long-term Debt, to the Consolidated Financial Statements. During 2021, we paid$15.4 million in interest to holders of the 2028 Secured Notes. Open Market Sale Agreement OnJune 14, 2021 , we entered into the Open Market Sale Agreement with Jefferies, pursuant to which we issued and sold shares of our class A common stock having an aggregate offering price of approximately$1.0 billion from time to time through Jefferies. The terms of the Open Market Sale Agreement are discussed more fully in Note 13, Open Market Sale Agreement, to the Consolidated Financial Statements. During 2021, we sold 1,413,767 shares of our class A common stock under the Open Market Sale Agreement, at an average gross price per share of approximately$707.33 , for aggregate net proceeds (less$9.5 million in sales commissions and expenses) of approximately$990.5 million . As ofDecember 31, 2021 , the cumulative aggregate offering price of the shares of class A common stock sold under the Open Market Sale Agreement was approximately$1.0 billion , inclusive of sales commissions, constituting the maximum program amount under the Open Market Sale Agreement. Share repurchases. During the year endedDecember 31, 2021 , we did not repurchase any shares of our class A common stock. During the year endedDecember 31, 2020 , we repurchased an aggregate of 444,769 shares of our class A common stock at an average price per share of$139.12 and an aggregate cost of$61.9 million pursuant to the Share Repurchase Program. During the year endedDecember 31, 2020 , we also repurchased an aggregate of 432,313 shares of our class A common stock through a modified Dutch Auction tender offer at a price of$140.00 per share for an aggregate cost of$61.3 million , inclusive of$0.8 million in certain fees and expenses related to such tender offer. See "Part II. Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities " of this Annual Report and Note 14, Treasury Stock, to the Consolidated Financial Statements for further information. 55
-------------------------------------------------------------------------------- Unrecognized tax benefits. As ofDecember 31, 2021 , we had$6.2 million of total gross unrecognized tax benefits, including accrued interest, of which$2.1 million was recorded in "Other long-term liabilities" and$4.1 million was recorded in "Deferred tax assets, net." The timing of any payments that could result from these unrecognized tax benefits will depend on a number of factors, and accordingly the amount and period of any future payments cannot be estimated. We do not expect any significant tax payments related to these obligations during 2022.
Recent Accounting Standards
See Note 3, Recent Accounting Standards, to the Consolidated Financial Statements for further information.
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