Original link: "MicroStrategy Financial Health Study: Will it go bankrupt? When do you need to sell your coins? What is the break-even price of Bitcoin?"
Wu Says Author: Joey Wu
Editor of this issue: Colin Wu
1. Bitcoin Purchase Process
On December 9, 2020, MicroStrategy purchased 29,646 bitcoins for approximately $650 million in cash at an average price of approximately $21,925. So far, MicroStrategy holds a total of 70,470 bitcoins, with a total cost of approximately $1.125 billion and an average purchase price of approximately $15,964.
On February 17, 2021, MicroStrategy purchased 19,452 bitcoins for approximately $1.026 billion in cash, at an average price of approximately $52,765. So far, MicroStrategy holds a total of 90,531 bitcoins, with a total cost of approximately $2.171 billion and an average purchase price of approximately $23,985.
On June 8, 2021, MicroStrategy purchased 13,005 bitcoins for approximately $489 million in cash, at an average price of approximately $37,617. So far, MicroStrategy holds a total of 105,085 bitcoins, with a total cost of approximately $2.741 billion and an average purchase price of approximately $26,080.
On June 14, 2021, MicroStrategy entered into an open market sales agreement with agent Jefferies LLC to issue common stock with a total price of no more than $1 billion from time to time through Jefferies. So far, MicroStrategy holds a total of 114,042 bitcoins, with a total cost of approximately $3.16 billion and an average purchase price of approximately $27,713.
On December 9, 2021, MicroStrategy announced that it had purchased an additional 8,436 bitcoins in the fourth quarter, with a total cost of $496 million and an average price of approximately $58,748. So far, MicroStrategy holds a total of 122,478 bitcoins, with a total cost of approximately $3.66 billion and an average purchase price of approximately $29,861.
On December 30, 2021, MicroStrategy announced that it had purchased an additional 1,914 bitcoins for approximately $94.2 million in cash at an average price of $49,229. So far, MicroStrategy holds a total of 124,391 bitcoins, with a total cost of approximately $3.75 billion and an average price of $30,159.
From December 31, 2021 to January 31, 2022, MicroStrategy purchased 660 bitcoins for US$25 million last year at an average price of US$37,865. The company currently holds 125,051 bitcoins at an average price of US$30,200.
On June 29, 2022, MicroStrategy announced that it had purchased an additional 480 bitcoins for approximately $10 million at an average price of $20,817. MicroStrategy now holds 129,699 bitcoins worth $3.98 billion at an average price of $30,664.
MicroStrategy announced that it had acquired approximately 301 bitcoins for approximately $6 million in cash between August 2 and September 19, at an average price of $19,851. So far, MicroStrateg has a total of 130,000 bitcoins, with an average purchase price of $30,639, and a total cost of $3.98 billion.
Between November 1, 2022 and December 24, 2022, MicroStrategy purchased 2,500 bitcoins, bringing its total holdings to 132,500 bitcoins, with a total purchase price of approximately US$4.03 billion, or an average of approximately US$30,397 per bitcoin.
Between February 16, 2023 and March 23, 2023, MicroStrategy purchased 6,455 bitcoins for approximately $150 million in cash at an average price of approximately $23,238. MicroStrategy now holds approximately 138,955 bitcoins at an average purchase price of approximately $29,817.
On April 4, 2023, MicroStrategy purchased another 1,045 bitcoins at an average price of $28,016, totaling $29.3 million. So far, MicroStrategy holds 140,000 bitcoins, with an average purchase price of $29,803, or about $4.17 billion.
2. Current Debt Status
As of March 2023, Microstrategy has approximately $2.2 billion in long-term debt, broken down as follows:
2025 Convertible Notes
On December 9, 2020, MicroStrategy announced the issuance of $650 million in convertible senior notes, including $550 million in convertible bonds and $100 million in options, with conversion dates of December 15, 2025. Among them, the convertible bonds have a coupon rate of 0.75% and are paid semi-annually. The conversion price is approximately $397.99 per share, which is a premium of approximately 37.5% over the closing price of the common stock of $289.45 on December 8. Unless the company undergoes a "fundamental change" as defined in the indenture, the notes cannot be converted into stock before June 15, 2025. A fundamental change means that the company is no longer listed on the Nasdaq or New York Stock Exchange, is merged, acquired, or has a majority stake change. If any of the above events occur, Microstrategy may be required to repay the loan in full. Given that CEO Michael Saylor holds more than 2/3 of the voting rights, this is unlikely.
2027 Convertible Notes
On February 17, 2021, MicroStrategy announced again that it would issue convertible senior notes with a total principal amount of $1.05 billion, including $900 million interest-free convertible bonds and $150 million options, with conversion dates of December 15, 2027. The conversion price is approximately $1,432.46 per share, which is a premium of approximately 50% over the closing price of common stock of $955.0 on December 8. These notes cannot be redeemed before August 15, 2026, unless the company undergoes a "fundamental change" as described in the indenture, which is the same as above.
2028 Senior Secured Notes
On June 8, 2021, MicroStrategy announced the issuance of junk bonds with a total principal amount of US$500 million due in 2028. The coupon rate is 6.125%, and interest is paid semi-annually. Therefore, interest of US$15.3125 million must be paid on June 15 and December 15 each year.
2025 mortgage (partially repaid)
On March 29, 2022, MacroStrategy, a subsidiary of MicroStrategy, announced that it had reached a $205 million Bitcoin mortgage loan with Silvergate Bank to purchase Bitcoin, with a maintenance margin ratio of 200%, which means that $410 million needs to be maintained as collateral, so the price will only be liquidated if it falls below $4,000.
Debt repayment status
According to documents submitted by MicroStrategy to the SEC, since reaching an agreement with underwriter Cowen and Company in September 2022 to sell up to $500 million of common stock, 218,575 Class A common shares have been sold with total proceeds of approximately $46.6 million. The net proceeds from this offering are planned to be used for general corporate purposes, including the acquisition of Bitcoin and working capital, and, depending on market conditions, to repurchase 0.750% convertible senior notes due in 2025 and 0% convertible senior notes due in 2027, and to repay debts between and Silvergate Bank.
On March 24, 2023, MacroStrategy and Silvergate signed an agreement for MicroStrategy to repay its $205 million loan at a 22% discount, prepay approximately $161 million, and retrieve the pledged 34,619 bitcoins.
3. Financial health
In summary, Microstrategy currently holds 140,000 bitcoins with an average cost of $29,803; long-term debt is approximately $2.2 billion, with annual interest of less than $50 million (the total interest in 2022 is $53 million, and since part of it has been repaid, this year's interest expenditure will be less than last year).
Of the four debts, only about $46.6 million of convertible notes due in 2025 and 2027 (a total of $1.7 billion) have been repaid, at least $161 million of mortgage loans due in 2025 (a total of $205 million) have been repaid, and the junk bonds due in 2028 have not yet been repaid.
MicroStrategy's 2022 annual report shows that the full-year earnings before interest and taxes (EBIT) is -$1.276 billion, including an impairment loss of digital assets (excluding sales proceeds), which is $1.286 billion. If this part of the floating loss is deducted, the EBIT is $10.54 million (including $3.91 million in the fourth quarter), a significant decrease from $46.09 million in 2021. It can be seen that relying solely on main operating income is not enough to cover the annual interest, but the company currently holds nearly $43.84 million in cash and cash equivalents, so there will be no debt crisis at least in 2023.
In addition, even if the company cannot pay the interest, it can sell a small amount of Bitcoin or company equity. On December 22, 2022, MacroStrategy sold about 704 Bitcoins at an average price of about $16,776, and received about $11.8 million in cash. This is the first time it has sold Bitcoin since it was included in its balance sheet, which may generate tax benefits. It can be seen that selling a small amount of Bitcoin to pay interest is not necessarily impossible. Assuming that Bitcoin remains at $15,500 for the next two years, only 3,400 Bitcoins will need to be sold in 2024 to pay the interest. Therefore, Microstrategy has almost no possibility of bankruptcy before the debt matures. As long as the price of Bitcoin reaches around 30,000 before March 2025, Microstrategy can basically break even (it is currently in a break-even state).
Note: Recently, the Financial Accounting Standards Board (FASB) proposed new standards for crypto assets, proposing that crypto assets be measured at fair value. The current accounting standards follow the US General Accounting Standards (GAAP), which regard crypto assets as "infinite-use intangible assets". When the price falls, an impairment provision must be made, and the loss is recorded in the income statement, and subsequent reversal of impairment losses is prohibited. In other words, companies can only report a decrease in the value of their crypto assets and cannot report an increase until the crypto assets are sold. This is based on the principle of conservatism, but cannot reflect the true value of crypto assets.
If FASB's proposal is passed, crypto assets will be measured at market prices, and the price increase can significantly increase MacroStrategy's book net profit. This article also deducts the impairment loss of crypto assets when calculating EBIT.