UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2023

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 000-24435

MICROSTRATEGY INCORPORATED

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

51-0323571

(I.R.S. Employer

Identification Number)

1850 Towers Crescent Plaza, Tysons Corner, VA

(Address of Principal Executive Offices)

22182

(Zip Code)

(703) 848-8600

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Trading Symbol	Name of Each Exchange on which Registered
Class A common stock, par value $0.001 per share	MSTR	The Nasdaq Global Select Market

Indicate by check mark whether the registrant,: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of October 24, 2023, the registrant had 12,554,159 and 1,964,025 shares of class A common stock and class B common stock outstanding, respectively.

MICROSTRATEGY INCORPORATED

FORM 10-Q

TABLE OF CONTENTS

		Page
PART I.	FINANCIAL INFORMATION	1
Item 1.	Financial Statements (unaudited)	1
	Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022	1
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2023 and 2022	2
	Consolidated Statements of Comprehensive (Loss) Income for the Three and Nine Months Ended September 30, 2023 and 2022	3
	Consolidated Statements of Stockholders’ Equity (Deficit) as of September 30, 2023	4
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	45
PART II.	OTHER INFORMATION	47
Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	47
Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities	75
Item 5.	Other Information	75
Item 6.	Exhibits	75

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

MICROSTRATEGY INCORPORATED

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

	September 30,			December 31,
	2023			2022
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	45,009		$	43,835
Restricted cash		1,865			7,033
Accounts receivable, net		128,650			189,280
Prepaid expenses and other current assets		24,041			24,418
Total current assets		199,565			264,566
Digital assets		2,451,374			1,840,028
Property and equipment, net		30,192			32,311
Right-of-use assets		54,542			61,299
Deposits and other assets		24,156			23,916
Deferred tax assets, net		614,112			188,152
Total assets	$	3,373,941		$	2,410,272
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable, accrued expenses, and operating lease liabilities	$	34,306		$	42,976
Accrued compensation and employee benefits		43,405			53,716
Accrued interest		10,368			2,829
Current portion of long-term debt, net		475			454
Deferred revenue and advance payments		179,167			217,428
Total current liabilities		267,721			317,403
Long-term debt, net		2,180,038			2,378,560
Deferred revenue and advance payments		7,638			12,763
Operating lease liabilities		59,720			67,344
Other long-term liabilities		18,231			17,124
Deferred tax liabilities		198			198
Total liabilities		2,533,546			2,793,392
Commitments and Contingencies
Stockholders’ Equity (Deficit)
Preferred stock undesignated, $0.001 par value; 5,000 shares authorized; no shares issued or outstanding		0			0
Class A common stock, $0.001 par value; 330,000 shares authorized; 21,227 shares issued and 12,543 shares outstanding, and 18,269 shares issued and 9,585 shares outstanding, respectively		21			18
Class B convertible common stock, $0.001 par value; 165,000 shares authorized; 1,964 shares issued and outstanding, and 1,964 shares issued and outstanding, respectively		2			2
Additional paid-in capital		2,726,191			1,841,120
Treasury stock, at cost; 8,684 shares and 8,684 shares, respectively		(782,104	)		(782,104	)
Accumulated other comprehensive loss		(15,355	)		(13,801	)
Accumulated deficit		(1,088,360	)		(1,428,355	)
Total stockholders’ equity (deficit)		840,395			(383,120	)
Total liabilities and stockholders’ equity (deficit)	$	3,373,941		$	2,410,272

The accompanying notes are an integral part of these Consolidated Financial Statements.

1

MICROSTRATEGY INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2023			2022			2023			2022
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Revenues:
Product licenses	$	24,045		$	22,286		$	56,979		$	58,928
Subscription services		20,974			16,414			59,662			43,276
Total product licenses and subscription services		45,019			38,700			116,641			102,204
Product support		66,860			66,010			198,422			199,682
Other services		17,583			20,650			56,714			64,824
Total revenues		129,462			125,360			371,777			366,710
Cost of revenues:
Product licenses		342			406			1,320			1,314
Subscription services		8,028			6,395			23,100			17,303
Total product licenses and subscription services		8,370			6,801			24,420			18,617
Product support		5,531			5,224			17,115			15,542
Other services		12,760			13,360			40,188			42,107
Total cost of revenues		26,661			25,385			81,723			76,266
Gross profit		102,801			99,975			290,054			290,444
Operating expenses:
Sales and marketing		35,606			35,409			109,372			105,511
Research and development		29,660			30,498			90,372			95,811
General and administrative		29,223			27,283			85,959			82,491
Digital asset impairment losses		33,559			727			76,613			1,088,656
Total operating expenses		128,048			93,917			362,316			1,372,469
(Loss) income from operations		(25,247	)		6,058			(72,262	)		(1,082,025	)
Interest expense, net		(11,006	)		(14,073	)		(37,031	)		(38,299	)
Gain on debt extinguishment		0			0			44,686			0
Other income, net		2,419			4,897			726			12,242
Loss before income taxes		(33,834	)		(3,118	)		(63,881	)		(1,108,082	)
Provision for (benefit from) income taxes		109,607			23,961			(403,876	)		112,046
Net (loss) income	$	(143,441	)	$	(27,079	)	$	339,995		$	(1,220,128	)
Basic (loss) earnings per share (1)	$	(10.09	)	$	(2.39	)	$	29.15		$	(107.99	)
Weighted average shares outstanding used in computing basic (loss) earnings per share		14,221			11,308			11,665			11,299
Diluted (loss) earnings per share (1)	$	(10.09	)	$	(2.39	)	$	23.87		$	(107.99	)
Weighted average shares outstanding used in computing diluted (loss) earnings per share		14,221			11,308			14,512			11,299

(1) Basic and fully diluted (loss) earnings per share for class A and class B common stock are the same.

The accompanying notes are an integral part of these Consolidated Financial Statements.

2

MICROSTRATEGY INCORPORATED

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(in thousands)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2023			2022			2023			2022
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Net (loss) income	$	(143,441	)	$	(27,079	)	$	339,995		$	(1,220,128	)
Other comprehensive loss, net of applicable taxes:
Foreign currency translation adjustment		(2,205	)		(4,514	)		(1,554	)		(10,636	)
Total other comprehensive loss		(2,205	)		(4,514	)		(1,554	)		(10,636	)
Comprehensive (loss) income	$	(145,646	)	$	(31,593	)	$	338,441		$	(1,230,764	)

The accompanying notes are an integral part of these Consolidated Financial Statements.

3

MICROSTRATEGY INCORPORATED

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(in thousands, unaudited)

				Class A				Class B Convertible				Additional									Accumulated Other			(Accumulated Deficit)
				Common Stock				Common Stock				Paid-in			Treasury Stock						Comprehensive			Retained
	Total			Shares		Amount		Shares		Amount		Capital			Shares			Amount			Loss			Earnings
Balance at January 1, 2022	$	978,958			18,006	$	18		1,964	$	2	$	1,727,143			(8,684	)	$	(782,104	)	$	(7,543	)	$	41,442
Net loss		(130,751	)		0		0		0		0		0			0			0			0			(130,751	)
Other comprehensive loss		(2,009	)		0		0		0		0		0			0			0			(2,009	)		0
Issuance of class A common stock upon exercise of stock options		288			2		0		0		0		288			0			0			0			0
Issuance of class A common stock under employee stock purchase plan		2,805			7		0		0		0		2,805			0			0			0			0
Issuance of class A common stock upon vesting of restricted stock units, net of withholding taxes		(501	)		3		0		0		0		(501	)		0			0			0			0
Share-based compensation expense		14,209			0		0		0		0		14,209			0			0			0			0
Balance at March 31, 2022	$	862,999			18,018	$	18		1,964	$	2	$	1,743,944			(8,684	)	$	(782,104	)	$	(9,552	)	$	(89,309	)
Net loss		(1,062,298	)		0		0		0		0		0			0			0			0			(1,062,298	)
Other comprehensive loss		(4,113	)		0		0		0		0		0			0			0			(4,113	)		0
Issuance of class A common stock upon exercise of stock options		423			3		0		0		0		423			0			0			0			0
Issuance of class A common stock upon vesting of restricted stock units, net of withholding taxes		(49	)		0		0		0		0		(49	)		0			0			0			0
Share-based compensation expense		15,970			0		0		0		0		15,970			0			0			0			0
Balance at June 30, 2022	$	(187,068	)		18,021	$	18		1,964	$	2	$	1,760,288			(8,684	)	$	(782,104	)	$	(13,665	)	$	(1,151,607	)
Net loss		(27,079	)		0		0		0		0		0			0			0			0			(27,079	)
Other comprehensive loss		(4,514	)		0		0		0		0		0			0			0			(4,514	)		0
Issuance of class A common stock upon exercise of stock options		621			4		0		0		0		621			0			0			0			0
Issuance of class A common stock under employee stock purchase plan		1,668			9		0		0		0		1,668			0			0			0			0
Issuance of class A common stock upon vesting of restricted stock units, net of withholding taxes		(642	)		4		0		0		0		(642	)		0			0			0			0
Share-based compensation expense		16,725			0		0		0		0		16,725			0			0			0			0
Balance at September 30, 2022	$	(200,289	)		18,038	$	18		1,964	$	2	$	1,778,660			(8,684	)	$	(782,104	)	$	(18,179	)	$	(1,178,686	)
Net loss		(249,669	)		0		0		0		0		0			0			0			0			(249,669	)
Other comprehensive income		4,378			0		0		0		0		0			0			0			4,378			0
Issuance of class A common stock upon exercise of stock options		61			0		0		0		0		61			0			0			0			0
Issuance of class A common stock upon vesting of restricted stock units, net of withholding taxes		(1,021	)		12		0		0		0		(1,021	)		0			0			0			0
Issuance of class A common stock under public offerings, net of issuance costs		46,219			219		0		0		0		46,219			0			0			0			0
Share-based compensation expense		17,201			0		0		0		0		17,201			0			0			0			0
Balance at December 31, 2022	$	(383,120	)		18,269	$	18		1,964	$	2	$	1,841,120			(8,684	)	$	(782,104	)	$	(13,801	)	$	(1,428,355	)
Net income		461,193			0		0		0		0		0			0			0			0			461,193
Other comprehensive income		738			0		0		0		0		0			0			0			738			0
Issuance of class A common stock upon exercise of stock options		6,750			44		0		0		0		6,750			0			0			0			0
Issuance of class A common stock under employee stock purchase plan		2,380			13		0		0		0		2,380			0			0			0			0
Issuance of class A common stock upon vesting of restricted stock units, net of withholding taxes		(514	)		4		0		0		0		(514	)		0			0			0			0
Issuance of class A common stock under public offerings, net of issuance costs		338,962			1,349		2		0		0		338,960			0			0			0			0
Share-based compensation expense		16,822			0		0		0		0		16,822			0			0			0			0
Balance at March 31, 2023	$	443,211			19,679	$	20		1,964	$	2	$	2,205,518			(8,684	)	$	(782,104	)	$	(13,063	)	$	(967,162	)
Net income		22,243			0		0		0		0		0			0			0			0			22,243
Other comprehensive loss		(87	)		0		0		0		0		0			0			0			(87	)		0
Issuance of class A common stock upon exercise of stock options		5,354			39		0		0		0		5,354			0			0			0			0
Issuance of class A common stock upon vesting of restricted stock units, net of withholding taxes		(242	)		6		0		0		0		(242	)		0			0			0			0
Issuance of class A common stock under public offerings, net of issuance costs		333,494			1,079		1		0		0		333,493			0			0			0			0
Share-based compensation expense		15,145			0		0		0		0		15,145			0			0			0			0
Balance at June 30, 2023	$	819,118			20,803	$	21		1,964	$	2	$	2,559,268			(8,684	)	$	(782,104	)	$	(13,150	)	$	(944,919	)
Net loss		(143,441	)		0		0		0		0		0			0			0			0			(143,441	)
Other comprehensive loss		(2,205	)		0		0		0		0		0			0			0			(2,205	)		0
Issuance of class A common stock upon exercise of stock options		2,113			10		0		0		0		2,113			0			0			0			0
Issuance of class A common stock under employee stock purchase plan		1,575			7		0		0		0		1,575			0			0			0			0
Issuance of class A common stock upon vesting of restricted stock units, net of withholding taxes		(747	)		4		0		0		0		(747	)		0			0			0			0
Issuance of class A common stock under public offerings, net of issuance costs		147,218			403		0		0		0		147,218			0			0			0			0
Share-based compensation expense		16,764			0		0		0		0		16,764			0			0			0			0
Balance at September 30, 2023	$	840,395			21,227	$	21		1,964	$	2	$	2,726,191			(8,684	)	$	(782,104	)	$	(15,355	)	$	(1,088,360	)

The accompanying notes are an integral part of these Consolidated Financial Statements.

4

MICROSTRATEGY INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Nine Months Ended
	September 30,
	2023			2022
	(unaudited)			(unaudited)
Operating activities:
Net income (loss)	$	339,995		$	(1,220,128	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		9,405			6,917
Reduction in carrying amount of right-of-use assets		6,438			6,020
Credit losses and sales allowances		752			1,189
Deferred taxes		(425,986	)		90,166
Release of liabilities for unrecognized tax benefits		(162	)		0
Share-based compensation expense		49,855			46,587
Digital asset impairment losses		76,613			1,088,656
Amortization of issuance costs on long-term debt		6,599			6,490
Gain on debt extinguishment		(44,686	)		0
Changes in operating assets and liabilities:
Accounts receivable		6,627			5,586
Prepaid expenses and other current assets		(99	)		(7,837	)
Deposits and other assets		(321	)		(8,314	)
Accounts payable and accrued expenses		(8,005	)		(8,880	)
Accrued compensation and employee benefits		(15,186	)		(13,105	)
Accrued interest		7,539			9,901
Deferred revenue and advance payments		9,901			25,401
Operating lease liabilities		(7,954	)		(7,390	)
Other long-term liabilities		203			150
Net cash provided by operating activities		11,528			21,409
Investing activities:
Purchases of digital assets		(687,959	)		(231,478	)
Purchases of property and equipment		(2,591	)		(1,851	)
Net cash used in investing activities		(690,550	)		(233,329	)
Financing activities:
Proceeds from secured term loan, net of lender fees		0			204,693
Issuance costs paid for secured term loan, excluding lender fees		0			(107	)
Repayments of secured term loan and third-party extinguishment costs		(160,033	)		0
Proceeds from other long-term secured debt		0			11,100
Issuance costs paid for other long-term secured debt		0			(214	)
Repayments of other long-term secured debt		(382	)		(121	)
Proceeds from sale of common stock under public offerings		823,945			0
Issuance costs paid related to sale of common stock under public offerings		(4,286	)		0
Proceeds from exercise of stock options		14,217			1,332
Proceeds from sales under employee stock purchase plan		3,955			4,473
Payment of withholding tax on vesting of restricted stock units		(1,391	)		(1,105	)
Net cash provided by financing activities		676,025			220,051
Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash		(997	)		(5,597	)
Net (decrease) increase in cash, cash equivalents, and restricted cash		(3,994	)		2,534
Cash, cash equivalents, and restricted cash, beginning of period		50,868			64,434
Cash, cash equivalents, and restricted cash, end of period	$	46,874		$	66,968

The accompanying notes are an integral part of these Consolidated Financial Statements.

5

MICROSTRATEGY INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(1) Summary of Significant Accounting Policies

(a) Basis of Presentation

The accompanying Consolidated Financial Statements of MicroStrategy Incorporated (“MicroStrategy” or the “Company”) are unaudited. In the opinion of management, all adjustments necessary for a fair statement of financial position and results of operations have been included. All such adjustments are of a normal recurring nature, unless otherwise disclosed. Interim results are not necessarily indicative of results for a full year.

The Consolidated Financial Statements and Notes to Consolidated Financial Statements are presented as required by the United States Securities and Exchange Commission (“SEC”) and do not contain certain information included in the Company’s annual financial statements and notes. These financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto filed with the SEC in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. There have been no significant changes in the Company’s accounting policies since December 31, 2022, except for those related to the Company’s new share-settled performance stock unit awards as described further in Note 8, Share-based Compensation, to the Consolidated Financial Statements.

The accompanying Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

(2) Digital Assets

The Company accounts for its digital assets, which are comprised solely of bitcoin, as indefinite-lived intangible assets in accordance with Accounting Standards Codification (“ASC”) 350, Intangibles—Goodwill and Other. The Company’s digital assets are initially recorded at cost. Subsequently, they are measured at cost, net of any impairment losses incurred since acquisition. Impairment losses are recognized as “Digital asset impairment losses” in the Company’s Consolidated Statement of Operations in the period in which the impairment occurs. Gains (if any) are not recorded until realized upon sale, at which point they are presented net of any impairment losses in the Company’s Consolidated Statements of Operations. In determining the gain to be recognized upon sale, the Company calculates the difference between the sales price and carrying value of the specific bitcoins sold immediately prior to sale.

The following table summarizes the Company’s digital asset holdings (in thousands, except number of bitcoins), as of:

	September 30,		December 31,
	2023		2022
Approximate number of bitcoins held		158,245		132,500
Digital assets carrying value	$	2,451,374	$	1,840,028
Cumulative digital asset impairment losses	$	2,229,775	$	2,153,162

The carrying value on the Company’s Consolidated Balance Sheet at each period-end represents the lowest fair value (based on Level 1 inputs in the fair value hierarchy) of the bitcoins at any time since their acquisition. Therefore, these fair value measurements were made during the period from their acquisition through September 30, 2023 or December 31, 2022, respectively, and not as of September 30, 2023 or December 31, 2022, respectively.

The following table summarizes the Company’s digital asset purchases and digital asset impairment losses (in thousands, except number of bitcoins) for the periods indicated. The Company did not sell any of its bitcoins during the three and nine months ended September 30, 2023 or 2022, respectively.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Approximate number of bitcoins purchased		5,912		301		25,745		5,609
Digital asset purchases	$	161,681	$	5,978	$	687,959	$	231,478
Digital asset impairment losses	$	33,559	$	727	$	76,613	$	1,088,656

6

From time to time, the Company may be extended short-term credits from Coinbase or other execution partners to purchase bitcoin in advance of using cash funds in the Company’s trading account. The trade credits are due and payable in cash within days after they are extended. As of September 30, 2023, the Company had no outstanding trade credits payable.

As of September 30, 2023, approximately 15,731 of the bitcoins held by the Company, which had a carrying value of approximately $251.1 million on the Company’s Consolidated Balance Sheet as of September 30, 2023, serve as part of the collateral for the Company’s 6.125% Senior Secured Notes due 2028 (the “2028 Secured Notes”), as further described in Note 4, Long-term Debt, to the Consolidated Financial Statements. All of the Company’s bitcoins previously serving as collateral for a $205.0 million term loan (the “2025 Secured Term Loan”) issued to MacroStrategy LLC (“MacroStrategy”), a wholly-owned subsidiary of the Company, by Silvergate Bank (“Silvergate”) were released from collateral upon the repayment of the 2025 Secured Term Loan during the first quarter of 2023. Refer to Note 4, Long-term Debt, to the Consolidated Financial Statements for further details of the 2025 Secured Term Loan and its repayment.

(3) Contract Balances

The Company invoices its customers in accordance with billing schedules established in each contract. The Company’s rights to consideration from customers are presented separately in the Company’s Consolidated Balance Sheets depending on whether those rights are conditional or unconditional.

The Company presents unconditional rights to consideration from customers within “Accounts receivable, net” in its Consolidated Balance Sheets. All of the Company’s contracts are generally non-cancelable and/or non-refundable, and therefore an unconditional right generally exists when the customer is billed or amounts are billable per the contract.

Accounts receivable (in thousands) consisted of the following, as of:

	September 30,			December 31,
	2023			2022
Billed and billable	$	131,494		$	191,844
Less: allowance for credit losses		(2,844	)		(2,564	)
Accounts receivable, net	$	128,650		$	189,280

Changes in the allowance for credit losses were not material for the three and nine months ended September 30, 2023.

Rights to consideration that are subject to a condition other than the passage of time are considered contract assets until they are expected to become unconditional and transfer to accounts receivable. Current contract assets included in “Prepaid expenses and other current assets” in the Consolidated Balance Sheets consist of $1.3 million and $0.6 million, as of September 30, 2023 and December 31, 2022, respectively, related to accrued sales and usage-based royalty revenue and performance obligations or services being rendered in advance of future invoicing associated with multi-year contracts. In royalty-based arrangements, consideration is not billed or billable until the royalty reporting is received, generally in the subsequent quarter, at which time the contract asset transfers to accounts receivable and a true-up adjustment is recorded to revenue. These true-up adjustments are generally not material. Non-current contract assets included in “Deposits and other assets” in the Consolidated Balance Sheets consisted of $1.1 million and $0.7 million, as of September 30, 2023 and December 31, 2022, respectively, related to performance obligations or services being rendered in advance of future invoicing associated with multi-year contracts. During the three and nine months ended September 30, 2023 and 2022, there were no significant impairments to the Company’s contract assets, nor were there any significant changes in the timing of the Company’s contract assets being reclassified to accounts receivable.

Contract liabilities are amounts received or due from customers in advance of the Company transferring the software or services to the customer. In the case of multi-year service contract arrangements, the Company generally does not invoice more than one year in advance of services and does not record deferred revenue for amounts that have not been invoiced. Revenue is subsequently recognized in the period(s) in which control of the software or services is transferred to the customer. The Company’s contract liabilities are presented as either current or non-current “Deferred revenue and advance payments” in the Consolidated Balance Sheets, depending on whether the software or services are expected to be transferred to the customer within the next year.

The Company’s “Accounts receivable, net” and “Deferred revenue and advance payments” balances in the Consolidated Balance Sheets include unpaid amounts related to contracts under which the Company has an enforceable right to invoice the customer for non-cancelable and/or non-refundable software and services. Changes in accounts receivable and changes in deferred revenue and advance payments are presented net of these unpaid amounts in “Operating activities” in the Consolidated Statements of Cash Flows.

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Deferred revenue and advance payments (in thousands) from customers consisted of the following, as of:

	September 30,		December 31,
	2023		2022
Current:
Deferred product licenses revenue	$	2,814	$	2,825
Deferred subscription services revenue		45,737		51,861
Deferred product support revenue		126,087		155,366
Deferred other services revenue		4,529		7,376
Total current deferred revenue and advance payments	$	179,167	$	217,428
Non-current:
Deferred product licenses revenue	$	9	$	2,742
Deferred subscription services revenue		2,845		3,030
Deferred product support revenue		4,304		6,387
Deferred other services revenue		480		604
Total non-current deferred revenue and advance payments	$	7,638	$	12,763

During the three and nine months ended September 30, 2023, the Company recognized revenues of $44.6 million and $187.6 million, respectively, from amounts included in the total deferred revenue and advance payments balances at the beginning of 2023. During the three and nine months ended September 30, 2022, the Company recognized revenues of $42.5 million and $176.3 million, respectively, from amounts included in the total deferred revenue and advance payments balances at the beginning of 2022. For the three and nine months ended September 30, 2023 and 2022, there were no significant changes in the timing of revenue recognition on the Company’s deferred balances.

The Company’s remaining performance obligation represents all future revenue under contract and includes deferred revenue and advance payments and billable non-cancelable amounts that will be invoiced and recognized as revenue in future periods. The remaining performance obligation excludes contracts that are billed in arrears, such as certain time and materials contracts. The portions of multi-year contracts that will be invoiced in the future are not presented on the balance sheet within accounts receivable and deferred revenues and are instead included in the following remaining performance obligation disclosure. As of September 30, 2023, the Company had an aggregate transaction price of $282.3 million allocated to the remaining performance obligation related to product support, subscription services, product licenses, and other services contracts. The Company expects to recognize $217.7 million within the next 12 months and the remainder thereafter.

(4) Long-term Debt

The net carrying value of the Company’s long-term debt (in thousands) consisted of the following, as of:

	September 30, 2023		December 31, 2022
2025 Convertible Notes	$	643,167	$	640,888
2027 Convertible Notes		1,036,298		1,033,277
2028 Secured Notes		490,771		489,547
2025 Secured Term Loan		0		204,688
Other long-term secured debt		9,802		10,160
Total	$	2,180,038	$	2,378,560

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.

In February 2021, the Company issued $1.050 billion aggregate principal amount of 0% Convertible Senior Notes due 2027 (the “2027 Convertible Notes”) in a private offering. The 2027 Convertible Notes are senior unsecured obligations of the Company and do not bear regular interest. However, holders of the 2027 Convertible Notes may receive special interest under specified circumstances as outlined

8

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 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, 2022.

There have been no adjustments to the initial conversion rates for each of the Convertible Notes as of September 30, 2023. As of September 30, 2023, 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, 2023, the 2025 Convertible Notes were not convertible at any time. 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, 2023 and 2022, the 2027 Convertible Notes were not convertible at any time. No conversions of the Convertible Notes occurred during the nine months ended September 30, 2023 or 2022. 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, 2023 and December 31, 2022, 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, 2023 (in thousands):

	September 30, 2023
	Outstanding		Unamortized			Net Carrying		Fair Value
	Principal Amount		Issuance Costs			Value		Amount		Leveling
2025 Convertible Notes	$	650,000	$	(6,833	)	$	643,167	$	695,500	Level 2
2027 Convertible Notes		1,050,000		(13,702	)		1,036,298		737,789	Level 2
Total	$	1,700,000	$	(20,535	)	$	1,679,465	$	1,433,289

The following is a summary of the Company’s convertible debt instruments as of December 31, 2022 (in thousands):

	December 31, 2022
	Outstanding		Unamortized			Net Carrying		Fair Value
	Principal Amount		Issuance Costs			Value		Amount		Leveling
2025 Convertible Notes	$	650,000	$	(9,112	)	$	640,888	$	364,000	Level 2
2027 Convertible Notes		1,050,000		(16,723	)		1,033,277		394,800	Level 2
Total	$	1,700,000	$	(25,835	)	$	1,674,165	$	758,800

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, 2023 and 2022, interest expense related to the Convertible Notes was as follows (in thousands):

	Three Months Ended September 30, 2023						Three Months Ended September 30, 2022
	Contractual		Amortization of				Contractual		Amortization of
	Interest Expense		Issuance Costs		Total		Interest Expense		Issuance Costs		Total
2025 Convertible Notes	$	1,218	$	762	$	1,980	$	1,218	$	753	$	1,971
2027 Convertible Notes		0		1,008		1,008		0		1,004		1,004
Total	$	1,218	$	1,770	$	2,988	$	1,218	$	1,757	$	2,975

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For the nine months ended September 30, 2023 and 2022, interest expense related to the Convertible Notes was as follows (in thousands):

	Nine Months Ended September 30, 2023						Nine Months Ended September 30, 2022
	Contractual		Amortization of				Contractual		Amortization of
	Interest Expense		Issuance Costs		Total		Interest Expense		Issuance Costs		Total
2025 Convertible Notes	$	3,656	$	2,279	$	5,935	$	3,656	$	2,251	$	5,907
2027 Convertible Notes		0		3,021		3,021		0		3,009		3,009
Total	$	3,656	$	5,300	$	8,956	$	3,656	$	5,260	$	8,916

The Company did not pay any interest related to the 2025 Convertible Notes during the three months ended September 30, 2023 and 2022. For each of the nine months ended September 30, 2023 and 2022, the Company paid $2.4 million in interest related to the 2025 Convertible Notes. The Company has not paid any additional interest or special interest related to the 2025 Convertible Notes or the 2027 Convertible Notes, respectively, 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 as discussed further below.

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 future convertible debt that we may issue that is then outstanding (the “FCCR Convertible Indebtedness”), 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. “Liquidity” is defined in the 2028 Secured Notes Indenture and includes the Digital Asset Market Value (as defined in the 2028 Secured Notes Indenture) of the bitcoin owned by the Company and its Restricted Subsidiaries (as defined in the 2028 Secured Notes Indenture) immediately prior to the issuance of the 2028 Secured Notes (which are referred to as “Existing Digital Assets”). As of September 30, 2023, for purposes of calculating Liquidity, the Company and its Restricted Subsidiaries owned approximately 92,079 Existing Digital Assets, all of which were unencumbered.

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, 2022.

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, 2023.

As of September 30, 2023 and December 31, 2022, 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, 2023 (in thousands):

	September 30, 2023
	Outstanding		Unamortized			Net Carrying		Fair Value
	Principal Amount		Issuance Costs			Value		Amount		Leveling
2028 Secured Notes	$	500,000	$	(9,229	)	$	490,771	$	444,850	Level 2

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The following is a summary of the 2028 Secured Notes as of December 31, 2022 (in thousands):

	December 31, 2022
	Outstanding		Unamortized			Net Carrying		Fair Value
	Principal Amount		Issuance Costs			Value		Amount		Leveling
2028 Secured Notes	$	500,000	$	(10,453	)	$	489,547	$	369,800	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, 2023 and 2022, interest expense related to the 2028 Secured Notes was as follows (in thousands):

	Three Months Ended September 30, 2023						Three Months Ended September 30, 2022
	Contractual		Amortization of				Contractual		Amortization of
	Interest Expense		Issuance Costs		Total		Interest Expense		Issuance Costs		Total
2028 Secured Notes	$	7,657	$	415	$	8,072	$	7,657	$	388	$	8,045

For the nine months ended September 30, 2023 and 2022, interest expense related to the 2028 Secured Notes was as follows (in thousands):

	Nine Months Ended September 30, 2023						Nine Months Ended September 30, 2022
	Contractual		Amortization of				Contractual		Amortization of
	Interest Expense		Issuance Costs		Total		Interest Expense		Issuance Costs		Total
2028 Secured Notes	$	22,969	$	1,224	$	24,193	$	22,969	$	1,146	$	24,115

The Company did not pay any interest related to the 2028 Secured Notes during the three months ended September 30, 2023 and 2022. For each of the nine months ended September 30, 2023 and 2022, the Company paid $15.3 million in interest related to the 2028 Secured Notes.

Secured Term Loan

On March 23, 2022, MacroStrategy, 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 terms of the 2025 Secured Term Loan 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, 2022. On March 24, 2023, MacroStrategy and Silvergate entered into a Prepayment, Waiver and Payoff to Credit and Security Agreement, pursuant to which MacroStrategy voluntarily prepaid Silvergate approximately $161.0 million (the “Payoff Amount”), in full repayment, satisfaction, and discharge of the 2025 Secured Term Loan and all other obligations under the Credit and Security Agreement. Upon Silvergate’s receipt of the Payoff Amount on March 24, 2023, the Credit and Security Agreement was terminated and Silvergate released its security interest in all of MacroStrategy’s assets collateralizing the 2025 Secured Term Loan, including the bitcoin that was serving as collateral.

The Payoff Amount consisted of a $159.9 million payment to repay the full $205.0 million outstanding principal amount of the 2025 Secured Term Loan as of March 24, 2023 and a $1.1 million payment for accrued unpaid interest on the 2025 Secured Term Loan as of March 24, 2023. The Company also incurred $0.1 million in third party fees in connection with the repayment of the 2025 Secured Term Loan. The net carrying value of the 2025 Secured Term Loan as of March 24, 2023, immediately prior to the loan’s repayment, was $204.7 million, which resulted in a $44.7 million gain on debt extinguishment recognized in the Company’s Consolidated Statement of Operations in the first quarter of 2023.

MacroStrategy previously maintained a $5.0 million cash reserve account (the “Reserve Account”) with Silvergate to serve as additional collateral for the 2025 Secured Term Loan. On March 24, 2023, the $5.0 million then held in the Reserve Account was applied against the Payoff Amount, reducing the amount of additional funds that were required to be paid by MacroStrategy to Silvergate in connection with the payoff of the 2025 Secured Term Loan.

As of December 31, 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 Sheet.

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The following is a summary of the 2025 Secured Term Loan as of December 31, 2022 (in thousands):

	December 31, 2022
	Outstanding		Unamortized			Net Carrying		Fair Value
	Principal Amount		Issuance Costs			Value		Amount		Leveling
2025 Secured Term Loan	$	205,000	$	(312	)	$	204,688	$	205,000	Level 3

The outstanding principal amount of the 2025 Secured Term Loan approximated its fair value as of December 31, 2022 as the 2025 Secured Term Loan bore interest at a floating rate and was over-collateralized (the Company was required to maintain an LTV ratio of less than 50%). Additionally, the Company had approximately 82,991 unencumbered bitcoins that were available to be pledged as additional collateral at December 31, 2022.

No interest expense related to the 2025 Secured Term Loan was recognized after the debt was repaid in full during the first quarter of 2023. For the nine months ended September 30, 2023, interest expense related to the 2025 Secured Term Loan was as follows (in thousands):

	Nine Months Ended September 30, 2023
	Contractual		Amortization of
	Interest Expense		Issuance Costs		Total
2025 Secured Term Loan	$	3,781	$	31	$	3,812

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 a final $5.1 million in interest related to the 2025 Secured Term Loan during the first quarter of 2023, $1.1 million of which was included in the Payoff Amount. The Company paid $2.7 million and $4.3 million in interest 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, 2023, the loan had a net carrying value of $10.3 million and an outstanding principal balance of $10.5 million, after monthly payments made under the terms of the agreement. As of September 30, 2023, $0.5 million of the net carrying value is short-term and is presented in “Current portion of long-term debt, net” in the Consolidated Balance Sheet.

Maturities

The following table shows the maturities of the Company’s debt instruments as of September 30, 2023 (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. As of September 30, 2023, the Company expects to be able to satisfy the requirements in the 2028 Secured Notes Indenture to avoid triggering the springing maturity feature of the 2028 Secured Notes.

Payments due by period ended September 30,	2025 Convertible Notes		2027 Convertible Notes		2028 Secured Notes		Other long-term secured debt		Total
2024	$	0	$	0	$	0	$	532	$	532
2025		0		0		500,000		562		500,562
2026		650,000		0		0		592		650,592
2027		0		1,050,000		0		8,787		1,058,787
2028		0		0		0		0		0
Thereafter		0		0		0		0		0
Total	$	650,000	$	1,050,000	$	500,000	$	10,473	$	2,210,473

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(5) Commitments and Contingencies

(a) Commitments

From time to time, the Company enters into certain types of contracts that require it to indemnify parties against third-party claims. These contracts primarily relate to agreements under which the Company assumes indemnity obligations for intellectual property infringement, as well as other obligations from time to time depending on arrangements negotiated with customers and other third parties. The conditions of these obligations vary. Thus, the overall maximum amount of the Company’s indemnification obligations cannot be reasonably estimated. Historically, the Company has not been obligated to make significant payments for these obligations and does not currently expect to incur any material obligations in the future. Accordingly, the Company has not recorded an indemnification liability on its Consolidated Balance Sheets as of September 30, 2023 or December 31, 2022.

(b) Contingencies

Following an internal review initiated in 2018, the Company believes that its Brazilian subsidiary failed or likely failed to comply with local procurement regulations in conducting business with certain Brazilian government entities.

On February 6, 2020, the Company learned that a Brazilian court authorized the Brazilian Federal Police to use certain investigative measures in its investigation into alleged corruption and procurement fraud involving certain government officials, pertaining to a particular transaction. The transaction at issue is part of the basis of the previously reported failure or likely failure of the Company’s Brazilian subsidiary to comply with local procurement regulations. The Company is not aware of any allegations that any former employee or the Company made any payments to Brazilian government officials. The Brazilian Federal Police expanded the investigation to include other possible cases of procurement fraud involving Brazilian government entities. Criminal penalties may be imposed against individuals; however, neither employees of the Company’s Brazilian subsidiary nor the subsidiary itself have been targets of the Federal Police investigation.

The Company has also learned that Brazil’s Federal Comptroller General filed an administrative action against the Company’s Brazilian subsidiary with respect to the alleged procurement violations. These matters remain the subject of investigation by Brazilian authorities. The Company is taking measures to attempt to resolve these matters.

On January 18, 2023, Brazil’s General Superintendence of the Administrative Council for Economic Defense (“SG/CADE”) launched an administrative proceeding to investigate potentially anticompetitive conduct, naming various individuals and companies as defendants including the Company’s Brazilian subsidiary. The proceeding involves conduct relating to transactions with certain Brazilian public and private entities that is part of the basis of the foregoing failure or likely failure of the Brazilian subsidiary to comply with local procurement regulations. The proceeding was precipitated by the Company’s Brazilian subsidiary’s voluntary disclosure of information to SG/CADE that arose out of the internal review initiated in 2018, and the Company’s Brazilian subsidiary has secured a leniency agreement with SG/CADE. If at the end of the proceeding, CADE’s Tribunal confirms that the leniency agreement obligations have been fulfilled, the Company’s Brazilian subsidiary will receive full immunity from fines.

The Company believes that a loss is probable in connection with these Brazilian matters. The Company has previously estimated a minimum loss of $1.2 million in respect of these matters. Given the stage of these matters, as of September 30, 2023, the Company remains unable to reasonably estimate a range of loss beyond such minimum loss. The aggregate accrued amount for these matters is included as a component of “Accounts payable, accrued expenses, and operating lease liabilities” in the Consolidated Balance Sheet as of September 30, 2023. The final outcome of these matters may result in a loss that is significantly greater than this accrued amount. Any loss associated with the final outcome of these matters may result in a material impact on the Company’s earnings and financial results for the period in which any such additional liability is accrued. However, the Company believes that any loss associated with the final outcome of these matters will not have a material effect on the Company’s financial position.

On November 4, 2020, a complaint was filed against the Company in the U.S. District Court for the Eastern District of Virginia by a patent assertion entity called Daedalus Blue, LLC (“Daedalus”). In its complaint, Daedalus alleges that the Company has infringed U.S. Patent Nos. 8,341,172 (the “’172 Patent”) and 9,032,076 (the “’076 Patent”) based on specific functionality in the MicroStrategy platform. The ’172 Patent relates to a method for providing aggregate data access in response to a query, whereas the ’076 Patent relates to a role-based access control system.

On March 1, 2021, Daedalus provided its formal infringement contentions which included additional accused functionality as part of its infringement allegations from the complaint, materially expanding the scope of its case. The Company has filed a motion to dismiss the complaint with prejudice, asking the court to rule that the asserted claims are invalid as being directed to patent ineligible matter. The

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court conducted a claim construction hearing on July 15, 2021. The court appointed a special master on October 28, 2021 and directed the special master to submit a Report and Recommendation as to the issue of claim construction and the pending motion to dismiss by February 1, 2022. On January 21, 2022, the special master issued two separate Reports and Recommendations. The first Report and Recommendation recommended constructions of certain patent claim terms and the second Report and Recommendation recommended, without reaching the merits, dismissing the Company’s motion to dismiss without prejudice to re-filing after discovery ends. The parties filed their respective objections to the special master’s Reports and Recommendations on February 4, 2022, and their oppositions to the other party’s objections on February 18, 2022. On March 9, 2022, the court issued an order overruling all parties’ objections and adopting the special master’s Reports and Recommendations in full. As per court order, the parties submitted a joint proposed schedule, which the court adopted on April 7, 2022, providing new deadlines for the close of fact discovery, expert reports, expert discovery, and dispositive motions. Fact discovery reopened on April 18, 2022 and closed on June 1, 2022. In July 2022, the case proceeded to expert discovery and the parties exchanged their opening expert reports on issues for which they bear the burden of proof on July 1, 2022, their rebuttal reports on July 29, 2022, and their reply reports on August 12, 2022. The parties engaged in expert depositions the weeks of August 22 and August 29, 2022. On September 21, 2022, the parties filed their respective motions for summary judgment, and on October 12, 2022 and October 19, 2022, the parties filed their opposition and reply briefs. The court also re-appointed the special master to assist in addressing the parties’ motions for summary judgment and other pending pre-trial motions. The special master has provided his Reports and Recommendations for the parties’ evidentiary motions and summary judgment motions and the court has ruled on all of the special master’s Reports and Recommendations, including denying the contested portions of Daedalus’s motion for summary judgment and denying MicroStrategy’s motion for summary judgment. The court also ordered two mediation sessions, the first of which the Company attended in August 2023, with the second scheduled for November 2023. The court also set a trial date of January 8, 2024. The outcome of this matter is not presently determinable.

On August 31, 2022, the District of Columbia (the “District”), through its Office of the Attorney General, filed a civil complaint in the Superior Court of the District of Columbia naming as defendants (i) Michael J. Saylor, the Chairman of the Company’s Board of Directors and the Company’s Executive Chairman, in his personal capacity, and (ii) the Company. The District sought, among other relief, monetary damages under the District’s False Claims Act for the alleged failure of Mr. Saylor to pay personal income taxes to the District over a number of years together with penalties, interest, and treble damages. The complaint alleged that the amount of personal income taxes purportedly involved was more than $25 million. The complaint also alleged in the sole claim against the Company that it violated the District’s False Claims Act by conspiring to assist Mr. Saylor’s alleged failure to pay personal income taxes. On October 26, 2022, the Company filed a motion to dismiss the District’s complaint. On February 28, 2023, the court ruled on the motion to dismiss, dismissing the sole claim against the Company as well as a claim against Mr. Saylor alleging that Mr. Saylor violated the District’s False Claims Act. The court did not dismiss claims against Mr. Saylor alleging that Mr. Saylor failed to pay personal income taxes, interest and penalties due. On April 13, 2023, the District, through its Office of the Attorney General, filed a motion to amend its complaint to attempt to restore claims under the False Claims Act against both Mr. Saylor and the Company. On May 10, 2023, the court granted the District’s motion to amend its complaint, reinstating the Company as a defendant in the case. The amended complaint alleges that the Company violated the District’s False Claims Act by making and using false records and statements in the form of false withholding filings with the District Office of Tax and Revenue. The amended complaint also alleges that Mr. Saylor violated the District’s False Claims Act by making and using false records and statements and by causing the Company to make and use false records and statements. On June 7, 2023, Mr. Saylor and the Company filed a motion to dismiss the District’s amended complaint with prejudice. On July 5, 2023, the District filed an opposition to the motion to dismiss made by Mr. Saylor and the Company. On July 19, 2023, Mr. Saylor and the Company filed a reply in support of their motion to dismiss. On July 31, 2023, the court denied Mr. Saylor’s and the Company’s motion to dismiss the amended complaint. On August 22, 2023, the Company and Mr. Saylor filed a motion asking the court to reconsider its July 31 decision or, in the alternative, to certify for interlocutory review two case-dispositive issues relating to the validity of tax-related amendments to the District’s False Claims Act and authority of the Office of the Attorney General to sue for allegedly unpaid taxes. On October 31, 2023, the court denied Mr. Saylor’s and the Company’s motion for reconsideration or, in the alternative, certification for interlocutory review. The final outcome of this matter is not presently determinable.

The Company is also involved in various legal proceedings arising in the normal course of business. Although the outcomes of these legal proceedings are inherently difficult to predict, management does not expect the resolution of these legal proceedings to have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

The Company has contingent liabilities that, in management’s judgment, are not probable of assertion. If such unasserted contingent liabilities were to be asserted, or become probable of assertion, the Company may be required to record significant expenses and liabilities in the period in which these liabilities are asserted or become probable of assertion.

(6) Treasury Stock

The Board of Directors previously authorized the Company’s repurchase of up to an aggregate of $800.0 million of its class A common stock from time to time on the open market through April 29, 2023 (the “Share Repurchase Program”). The Share Repurchase Program expired by its own terms on April 29, 2023, and no shares of the Company’s class A common stock remain available for repurchase under the Share Repurchase Program. At the time of expiration, the Company had repurchased an aggregate of 5,674,226 shares of its

14

class A common stock at an average price per share of $104.13 and an aggregate cost of $590.9 million pursuant to the Share Repurchase Program. The average price per share and aggregate cost amounts disclosed above include broker commissions. During 2023 and 2022, the Company did not repurchase any shares of its class A common stock pursuant to the Share Repurchase Program.

(7) Income Taxes

The Company computes its year-to-date provision for (benefit from) income taxes by applying the estimated annual effective tax rate to year-to-date pretax income or loss and adjusts the provision for (benefit from) income taxes for discrete tax items recorded in the period. The estimated effective tax rate is subject to fluctuation based on the level and mix of earnings and losses by tax jurisdiction, foreign tax rate differentials, and the relative impact of permanent book to tax differences. Each quarter, a cumulative adjustment is recorded for any fluctuations in the estimated annual effective tax rate as compared to the prior quarter. As a result of these factors, and due to potential changes in the Company’s period-to-period results, fluctuations in the Company’s effective tax rate and respective tax provisions or benefits may occur. For the nine months ended September 30, 2023, the Company recorded a benefit from income taxes of $403.9 million on a pretax loss of $63.9 million, which resulted in an effective tax rate of 632.2%. For the nine months ended September 30, 2022, the Company recorded a provision for income taxes of $112.0 million on a pretax loss of $1.108 billion, which resulted in an effective tax rate of (10.1)%. The change in the effective tax rate, as compared to the same period in the prior year, is primarily due to (i) the release of a portion of the valuation allowance during the nine months ended September 30, 2023 on the Company's deferred tax asset related to the impairment on its bitcoin holdings, attributable to the increase in market value of bitcoin as of September 30, 2023 compared to December 31, 2022, compared to (ii) the establishment of a valuation allowance during the nine months ended September 30, 2022 on the Company’s deferred tax asset related to the impairment on its bitcoin holdings, attributable to the decrease in market value of bitcoin as of September 30, 2022 compared to December 31, 2021.

As of September 30, 2023, the Company had a valuation allowance of $118.4 million primarily related to the Company’s deferred tax asset related to the impairment on its bitcoin holdings that, in the Company’s present estimation, more likely than not will not be realized. If the market value of bitcoin declines or the Company does not achieve profitability in future periods, the Company may be required to increase the valuation allowance against its deferred tax assets, which could result in a charge that would materially adversely affect net income (loss) in the period in which the charge is incurred. To the extent the market value of bitcoin rises, the Company may decrease the valuation allowance against its deferred tax asset. The Company will continue to regularly assess the realizability of deferred tax assets.

The Company records liabilities related to its uncertain tax positions. As of September 30, 2023 and December 31, 2022, the Company had total gross unrecognized tax benefits, including accrued interest, of $6.3 million and $6.1 million, respectively, all of which were recorded in “Other long-term liabilities” in the Company’s Consolidated Balance Sheets.

(8) Share-based Compensation

Stock Incentive Plans

On May 24, 2023, the Company’s stockholders approved the Company’s 2023 Equity Incentive Plan (the “2023 Equity Plan”) and the 2023 Equity Plan became effective as of such date. No awards may be granted under the 2023 Equity Plan more than 10 years after the 2023 Equity Plan’s effective date. No new awards will be granted under the Company’s 2013 Stock Incentive Plan (as amended, the “2013 Equity Plan”) following the date of such approval, though awards previously granted under the 2013 Equity Plan will remain outstanding in accordance with their terms. Under the 2023 Equity Plan and the 2013 Equity Plan (together, the “Stock Incentive Plans”), the Company’s employees, officers, directors, and other eligible participants may be (with respect to the 2023 Equity Plan) and have been (with respect to both the 2023 Equity Plan and the 2013 Equity Plan) awarded various types of share-based compensation, including options to purchase shares of the Company’s class A common stock, restricted stock units, and other stock-based awards. Under the 2023 Equity Plan, awards may also be granted that are subject to the achievement of one or more performance measures established by the Company’s Board of Directors or a duly authorized committee thereof. Any shares issued under the Stock Incentive Plans may consist in whole or in part of authorized but unissued shares or treasury shares.

With the exception of awards granted subject to the achievement of a performance measure (as discussed further below), the accounting policies in place for awards granted under the 2023 Equity Plan are the same as those for the awards previously granted under the 2013 Equity Plan. With the exception of awards to non-employee members of the Company’s Board of Directors which vest in full after one year, and awards whose vesting is subject to the achievement of a performance measure (as discussed further below), awards granted under the 2023 Equity Plan generally vest over four years.

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An aggregate of up to 1,932,703 shares of the Company’s class A common stock were initially authorized for issuance under the 2023 Equity Plan, comprised of (i) 200,000 shares of the Company’s class A common stock authorized under the 2023 Equity Plan and (ii) up to an aggregate of 1,732,703 shares of the Company’s class A common stock consisting of: (a) the shares of class A common stock reserved for issuance under the 2013 Equity Plan that remained available for grant as of May 23, 2023, and (b) shares of class A common stock subject to awards granted under the 2013 Equity Plan that were outstanding as of May 23, 2023 and which subsequently expire, terminate or are otherwise surrendered, cancelled or forfeited or repurchased by the Company at their original issuance price pursuant to a contractual repurchase right, including shares subject to awards granted under the 2013 Equity Plan that are delivered (either by actual delivery, attestation or net exercise) to the Company by a participant to (x) purchase shares upon the exercise of such award or (y) satisfy tax withholding obligations with respect to such awards, including shares retained from the award creating the tax obligation, subject, in the case of incentive stock options, to any limitations under the Internal Revenue Code of 1986, as amended. As of September 30, 2023, there were 232,327 shares of class A common stock reserved and available for future issuance under the 2023 Equity Plan.

Stock option awards

As of September 30, 2023, there were options to purchase 1,380,741 shares of class A common stock outstanding under the Stock Incentive Plans.

The following table summarizes the Company’s stock option activity (in thousands, except per share data and years) for the nine months ended September 30, 2023:

	Stock Options Outstanding
				Weighted Average		Aggregate		Weighted Average
				Exercise Price		Intrinsic		Remaining Contractual
	Shares			Per Share		Value		Term (Years)
Balance as of January 1, 2023		1,577		$	288.30
Granted		36		$	284.06
Exercised		(93	)	$	153.10	$	13,254
Forfeited/Expired		(139	)	$	431.62
Balance as of September 30, 2023		1,381		$	282.86
Exercisable as of September 30, 2023		875		$	228.00	$	133,368		3.5
Expected to vest as of September 30, 2023		506		$	377.78	$	27,187		8.0
Total		1,381		$	282.86	$	160,555		5.2

Stock options outstanding as of September 30, 2023 are comprised of the following range of exercise prices per share (in thousands, except per share data and years):

	Stock Options Outstanding at September 30, 2023
			Weighted Average		Weighted Average
			Exercise Price		Remaining Contractual
Range of Exercise Prices per Share	Shares		Per Share		Term (Years)
$121.43 - $200.00		795	$	137.02		3.1
$200.01 - $300.00		111	$	251.58		9.1
$300.01 - $400.00		3	$	301.63		9.7
$400.01 - $500.00		261	$	409.60		8.2
$600.01 - $691.23		211	$	691.23		7.2
Total		1,381	$	282.86		5.2

An aggregate of 189,125 stock options with an aggregate grant date fair value of $47.3 million vested during the nine months ended September 30, 2023. The weighted average grant date fair value of stock option awards using the Black-Scholes valuation model was $190.86 and $209.85 for each share subject to a stock option granted during the nine months ended September 30, 2023 and 2022, respectively, based on the following assumptions:

	Nine Months Ended
	September 30,
	2023	2022
Expected term of award in years	5.5 - 6.3	6.3
Expected volatility	71.8% - 74.1%	58.4% - 70.9%
Risk-free interest rate	3.7% - 3.9%	1.9% - 3.5%
Expected dividend yield	0.0%	0.0%

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For the three and nine months ended September 30, 2023, the Company recognized approximately $10.5 million and $33.9 million, respectively, in share-based compensation expense from stock options granted under the Stock Incentive Plans. For the three and nine months ended September 30, 2022, the Company recognized approximately $12.7 million and $35.4 million, respectively, in share-based compensation expense from stock options granted under the Stock Incentive Plans. As of September 30, 2023, there was approximately $81.4 million of total unrecognized share-based compensation expense related to unvested stock options, which the Company expects to recognize over a weighted average vesting period of approximately 2.2 years.

Share-settled restricted stock units

As of September 30, 2023, there were 198,993 share-settled restricted stock units outstanding under the Stock Incentive Plans. The following table summarizes the Company’s share-settled restricted stock unit activity (in thousands) for the periods indicated:

	Share-Settled Restricted Stock Units Outstanding
				Aggregate
	Units			Intrinsic Value
Balance as of January 1, 2023		120
Granted		115
Vested		(19	)	$	5,920
Forfeited		(17	)
Balance as of September 30, 2023		199
Expected to vest as of September 30, 2023		199		$	65,325

During the nine months ended September 30, 2023, 18,891 share-settled restricted stock units having an aggregate grant date fair value of $9.0 million vested, and 4,817 shares were withheld to satisfy tax obligations, resulting in 14,074 issued shares. The weighted average grant date fair value of share-settled restricted stock units granted during the nine months ended September 30, 2023 and 2022 was $280.09 and $269.14, respectively, based on the fair value of the Company’s class A common stock.

For the three and nine months ended September 30, 2023, the Company recognized approximately $4.9 million and $12.2 million, respectively, in share-based compensation expense from share-settled restricted stock units granted under the Stock Incentive Plans. For the three and nine months ended September 30, 2022, the Company recognized approximately $3.6 million and $10.0 million, respectively, in share-based compensation expense from share-settled restricted stock units granted under the Stock Incentive Plans. As of September 30, 2023, there was approximately $52.2 million of total unrecognized share-based compensation expense related to unvested share-settled restricted stock units, which the Company expects to recognize over a weighted average vesting period of approximately 2.9 years.

Share-settled performance stock units

During the second quarter of 2023, the Company granted performance stock units under the 2023 Equity Plan. Performance stock units entitle recipients to receive a number of shares of the Company’s class A common stock at a specified date in the future based on achievement of one or more performance measures, as specified in the applicable performance stock unit agreement. Although the Company may in its sole discretion elect to pay fully or partially in cash in lieu of settling solely in shares, it does not currently intend to do so.

The vesting of each performance stock unit granted is subject to the Company’s achievement of a relative total shareholder return (“TSR”) performance goal over a three-year performance period with the number of performance stock units granted representing the number of performance stock units that would vest based on target performance. As more fully specified in the applicable grant agreements, the number of performance stock units that will vest will be based on the percentile ranking of the Company’s TSR over the three-year performance period as compared to the TSR of the members of the Nasdaq Composite Index over the same period (the “TSR Goal”), with the payout factor ranging from 0% to 200% of the number of performance stock units granted. The performance stock units, to the extent vested, will vest on the date the Compensation Committee of the Company’s Board of Directors certifies the level of achievement of the TSR Goal.

Vesting of the performance stock units is also generally subject to the provision of service through the vesting date of the award (unless accelerated in connection with a termination following a change in control event as set forth in the applicable performance stock unit agreement or otherwise in accordance with provisions of the 2023 Equity Plan or applicable performance stock unit agreement).

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The TSR Goal is considered a “market condition” under ASC 718, Compensation—Stock Compensation. The Company uses a Monte Carlo simulation model to determine the grant date fair value of performance awards with a market condition. The Monte Carlo simulation takes into consideration the assumptions noted below, in addition to the probability that the market condition will be achieved based on predicted stock price paths compared to peer companies in the Nasdaq Composite Index. The Company did not grant any performance awards prior to June 2023. The weighted average grant date fair value of performance stock units using the Monte-Carlo simulation model was $486.18 for each performance stock unit granted during the nine months ended September 30, 2023 based on the following assumptions:

	Nine Months Ended
	September 30,
	2023
Expected term of award in years		3.0
Expected volatility		95.6	%
Risk-free interest rate		4.1	%
Expected dividend yield		0.0	%

Since the Company continues to account for forfeitures as they occur, as long as the performance stock unit recipient provides service to the Company during the requisite service period, share-based compensation expense associated with the grant date fair value of the performance stock units is recognized ratably over the performance period, regardless of the Company’s actual level of achievement against the TSR Goal.

As of September 30, 2023, there were 25,375 performance stock units outstanding under the 2023 Equity Plan. The following table summarizes the Company’s performance stock unit activity (in thousands) for the periods indicated:

	Share-Settled Performance Stock Units Outstanding
				Aggregate
	Units			Intrinsic Value
Balance as of January 1, 2023		0
Granted		27
Vested		0		$	0
Forfeited		(2	)
Balance as of September 30, 2023		25
Expected to vest as of September 30, 2023		25		$	16,660

No performance stock units vested during the three and nine months ended September 30, 2023. For the three and nine months ended September 30, 2023, the Company recognized approximately $1.0 million and $1.3 million, respectively, in share-based compensation expense from performance stock units granted under the 2023 Equity Plan. As of September 30, 2023, there was approximately $11.0 million of total unrecognized share-based compensation expense related to unvested performance stock units, which the Company expects to recognize over a weighted average vesting period of approximately 2.7 years.

Other stock-based awards and cash-settled restricted stock units

From time to time the Company has granted “other stock-based awards” and “cash-settled restricted stock units” under the 2013 Equity Plan. Other stock-based awards are similar to stock options, and cash-settled restricted stock units are similar to the Company’s share-settled restricted stock units, except in each case these awards are settled in cash only and not in shares of the Company’s class A common stock. Due to their required cash settlement feature, these awards are classified as liabilities in the Company’s Consolidated Balance Sheets and the fair value of the awards is remeasured each quarterly reporting period. For the three months ended September 30, 2023, the share-based compensation expense from other stock-based awards and cash-settled restricted stock units was not material. For the nine months ended September 30, 2023, the Company recognized approximately $1.1 million in share-based compensation expense from other stock-based awards and cash-settled restricted stock units. For the three and nine months ended September 30, 2022, the Company recognized approximately $0.2 million in share-based compensation expense and a reduction of $0.4 million in share-based compensation expense, respectively, from other stock-based awards and cash-settled restricted stock units. As of September 30, 2023, there was approximately $0.6 million of total unrecognized share-based compensation expense related to other stock-based awards and cash-settled restricted stock units, which the Company expects to recognize over a weighted average vesting period of approximately 1.4 years, subject to additional fair value adjustments through the earlier of settlement or expiration.

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2021 ESPP

The Company also maintains the 2021 Employee Stock Purchase Plan (the “2021 ESPP”). The purpose of the 2021 ESPP is to provide eligible employees of the Company and certain of its subsidiaries with opportunities to purchase shares of the Company’s class A common stock in 6-month offering periods commencing on each March 1 and September 1. An aggregate of 100,000 shares of the Company’s class A common stock has been authorized for issuance under the 2021 ESPP. During the nine months ended September 30, 2023, 19,856 shares of class A common stock were issued in connection with the 2021 ESPP. As of September 30, 2023, 59,607 shares of the Company’s class A common stock remained available for issuance under the 2021 ESPP.

For the three and nine months ended September 30, 2023, the Company recognized approximately $0.4 million and $1.4 million, respectively, in share-based compensation expense related to the 2021 ESPP. For the three and nine months ended September 30, 2022, the Company recognized approximately $0.5 million and $1.6 million, respectively, in share-based compensation expense related to the 2021 ESPP. As of September 30, 2023, there was approximately $0.9 million of total unrecognized share-based compensation expense related to the 2021 ESPP, which the Company expects to recognize over a period of approximately 0.4 years.

Tax Benefits Related to Equity Plans

The following table summarizes the tax (benefit) expense related to the Company’s equity plans (in thousands) for the three and nine months ended September 30, 2023 and 2022:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2023			2022			2023			2022
Tax (benefit) expense related to:
Share-based compensation expense	$	(3,417	)	$	(2,906	)	$	(9,396	)	$	(9,146	)
Exercises of stock options and vesting of share-settled restricted stock units		813			680			1,098			790
Total tax benefit related to the Company's equity plans	$	(2,604	)	$	(2,226	)	$	(8,298	)	$	(8,356	)

(9) Basic and Diluted (Loss) Earnings per Share

The Company has two classes of common stock: class A common stock and class B common stock. Holders of class A common stock generally have the same rights, including rights to dividends, as holders of class B common stock, except that holders of class A common stock have one vote per share while holders of class B common stock have ten votes per share. Each share of class B common stock is convertible at any time, at the option of the holder, into one share of class A common stock. As such, basic and fully diluted earnings per share for class A common stock and for class B common stock are the same. The Company has never declared or paid any cash dividends on either class A or class B common stock. As of September 30, 2023 and December 31, 2022, there were no shares of preferred stock issued or outstanding.

The impact from potential shares of common stock on the diluted earnings per share calculation are included when dilutive. Potential shares of class A common stock issuable upon the exercise of outstanding stock options, the vesting of restricted stock units and performance stock units considered probable of achievement, and in connection with the 2021 ESPP are computed using the treasury stock method. Potential shares of class A common stock issuable upon conversion of the Convertible Notes are computed using the if-converted method. In computing diluted earnings per share, the Company first calculates the earnings per incremental share (“EPIS”) for each class of potential shares of common stock and ranks the classes from the most dilutive (i.e., lowest EPIS) to the least dilutive (i.e., highest EPIS). Basic earnings per share is then adjusted for the effect of each class of shares, in sequence and cumulatively, until a particular class no longer produces further dilution.

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The following table sets forth the computation of basic and diluted (loss) earnings per share (in thousands, except per share data) for the periods indicated:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2023			2022			2023		2022
Numerator:
Net (loss) income - Basic	$	(143,441	)	$	(27,079	)	$	339,995	$	(1,220,128	)
Effect of dilutive shares on net (loss) income:
Interest expense on 2025 Convertible Notes, net of tax		0			0			4,255		0
Interest expense on 2027 Convertible Notes, net of tax		0			0			2,165		0
Net (loss) income - Diluted	$	(143,441	)	$	(27,079	)	$	346,415	$	(1,220,128	)
Denominator:
Weighted average common shares of class A common stock		12,257			9,344			9,701		9,335
Weighted average common shares of class B common stock		1,964			1,964			1,964		1,964
Total weighted average shares of common stock outstanding - Basic		14,221			11,308			11,665		11,299
Effect of dilutive shares on weighted average common shares outstanding:
Stock options		0			0			430		0
Restricted stock units		0			0			43		0
Performance stock units		0			0			8		0
Employee stock purchase plan		0			0			0		0
2025 Convertible Notes		0			0			1,633		0
2027 Convertible Notes		0			0			733		0
Total weighted average shares of common stock outstanding - Diluted		14,221			11,308			14,512		11,299
(Loss) earnings per share:
Basic (loss) earnings per share (1)	$	(10.09	)	$	(2.39	)	$	29.15	$	(107.99	)
Diluted (loss) earnings per share (1)	$	(10.09	)	$	(2.39	)	$	23.87	$	(107.99	)

(1) Basic and fully diluted (loss) earnings per share for class A and class B common stock are the same.

For the three and nine months ended September 30, 2023 and 2022, the following weighted average shares of potential class A common stock were excluded from the diluted (loss) earnings per share calculation because their impact would have been anti-dilutive (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Stock options		1,406		1,497		633		1,428
Restricted stock units		204		130		34		118
Performance stock units		52		0		0		0
Employee stock purchase plan		3		5		2		2
2025 Convertible Notes		1,633		1,633		0		1,633
2027 Convertible Notes		733		733		0		733
Total		4,031		3,998		669		3,914

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(10) At-the-Market Equity Offerings

During 2022 and 2023, the Company entered into sales agreements with agents pursuant to which the Company could issue and sell shares of its class A common stock through at-the-market equity offering programs. Pursuant to these agreements, the Company agreed to pay the sales agents commissions for their services in acting as agents with respect to the sale of shares through the at-the-market equity offering programs and also agreed to provide the sales agents with reimbursement for certain incurred expenses and customary indemnification and contribution rights. The following table summarizes the terms and provisions of each sales agreement, and sales activity pursuant to each at-the-market equity offering program that was active during the nine months ended September 30, 2023 or 2022. The maximum aggregate offering price and net proceeds (less sales commissions and expenses) for each at-the-market equity offering program in the following table are reported in thousands.

	2022 Sales Agreement			May 2023 Sales Agreement			August 2023 Sales Agreement
Agreement effective date	September 9, 2022			May 1, 2023			August 1, 2023
Sales agents	Cowen and Company, LLC and BTIG, LLC ("2022 Sales Agents")			Cowen and Company, LLC and Canaccord Genuity LLC ("May 2023 Sales Agents")			Cowen and Company, LLC, Canaccord Genuity LLC, and Berenberg Capital Markets LLC ("August 2023 Sales Agents")
Maximum aggregate offering price	$	500,000		$	625,000		$	750,000
Maximum commissions payable to sales agents on gross proceeds from the sale of shares		2.0	%		2.0	%		2.0	%
Date terminated	May 1, 2023			August 1, 2023			n/a
Shares sold under such sales agreement during the three months ended September 30, 2023	n/a				0			403,362
Net proceeds received from shares sold under such sales agreement during the three months ended September 30, 2023	n/a			$	0		$	147,218
Shares sold under such sales agreement during the nine months ended September 30, 2023		1,348,855			1,079,170			403,362
Net proceeds received from shares sold under such sales agreement during the nine months ended September 30, 2023	$	338,962		$	333,494		$	147,218
Cumulative shares sold under such sales agreement as of September 30, 2023		1,567,430			1,079,170			403,362
Cumulative net proceeds received from shares sold under such sales agreement as of September 30, 2023	$	385,181		$	333,494		$	147,218
Maximum aggregate offering price remaining under such sales agreement as of September 30, 2023	n/a			n/a			$	602,124

No shares of the Company’s class A common stock were sold pursuant to an at-the-market equity offering program during the three and nine months ended September 30, 2022. The sales commissions and expenses related to each of the above at-the-market equity offering programs are considered direct and incremental costs and are charged against “Additional paid-in capital” on the Consolidated Balance Sheet in the period in which the corresponding shares are issued and sold.

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(11) Segment Information

The Company manages its business in one reportable operating segment. The Company’s one reportable operating segment is engaged in the design, development, marketing, and sales of its software platform through licensing arrangements and cloud subscriptions and related services. The following table presents total revenues, gross profit, and long-lived assets (in thousands) according to geographic region. Long-lived assets are comprised of right-of-use assets and property and equipment, net.

Geographic regions:	U.S.		EMEA		Other Regions		Consolidated
Three months ended September 30, 2023
Total revenues	$	71,788	$	40,222	$	17,452	$	129,462
Gross profit	$	56,723	$	32,574	$	13,504	$	102,801
Three months ended September 30, 2022
Total revenues	$	76,720	$	36,065	$	12,575	$	125,360
Gross profit	$	62,545	$	28,798	$	8,632	$	99,975
Nine months ended September 30, 2023
Total revenues	$	212,892	$	115,351	$	43,534	$	371,777
Gross profit	$	167,692	$	91,080	$	31,282	$	290,054
Nine months ended September 30, 2022
Total revenues	$	218,358	$	110,931	$	37,421	$	366,710
Gross profit	$	177,982	$	86,835	$	25,627	$	290,444
As of September 30, 2023
Long-lived assets	$	77,040	$	4,561	$	3,133	$	84,734
As of December 31, 2022
Long-lived assets	$	83,279	$	6,466	$	3,865	$	93,610

The EMEA region includes operations in Europe, the Middle East, and Africa. The other regions include all other foreign countries, generally comprising Latin America, the Asia Pacific region, and Canada. For the three and nine months ended September 30, 2023 and 2022, no individual foreign country accounted for 10% or more of total consolidated revenues.

For the three and nine months ended September 30, 2023 and 2022, no individual customer accounted for 10% or more of total consolidated revenues.

As of September 30, 2023 and December 31, 2022, no individual foreign country accounted for 10% or more of total consolidated assets.

(12) Related Party Transactions

On June 24, 2022, concurrently with binding directors and officers (“D&Os”) liability insurance policies (the “Initial Commercial Policies”) with several third-party carriers, the Company and Michael J. Saylor, the Company’s Chairman of the Board of Directors and Executive Chairman, entered into (i) an indemnification agreement (the “Excess Agreement”) for Mr. Saylor to provide $10 million in excess indemnity coverage payable only after the exhaustion of the Initial Commercial Policies, and (ii) an indemnification agreement (the “Tail Agreement”) for Mr. Saylor to provide $40 million in indemnity coverage for claims made at any time based on actions or omissions occurring prior to the inception date of the Initial Commercial Policies. The Company paid Mr. Saylor $600,000 for a one-year term under the Excess Agreement, and $150,000 for a 90-day term under the Tail Agreement. At the option of the Company, the Company was permitted to extend the term under the Tail Agreement for up to a total of twenty-three additional 90-day periods, for $150,000 per additional 90-day term. The Company elected to extend the term of the Tail Agreement for three consecutive additional 90-day periods and paid Mr. Saylor $150,000 for each extension.

On August 30, 2022, the Company bound additional D&O liability insurance policies (the “Excess Commercial Policies”) with third-party carriers for excess coverage payable only after the exhaustion of the Initial Commercial Policies. Effective as of the same date, the Company and Mr. Saylor executed an amendment (the “Amendment”) to the Excess Agreement to limit Mr. Saylor’s obligation to provide indemnification under the Excess Agreement to claims made during the term of the Excess Agreement which arise from wrongful acts occurring upon or after the commencement of the Excess Agreement but prior to the effective date of the Amendment. In connection with the Amendment, Mr. Saylor refunded $489,863 to the Company, representing the pro rata portion of the $600,000 originally paid by the Company to Mr. Saylor under the Excess Agreement attributable to the period from the date of the Amendment through the end of the original term of the Excess Agreement.

On June 12, 2023, the Company bound new D&O liability insurance policies (the “2023 Commercial Policies”) with third-party carriers that provide coverage substantially equivalent to the aggregate coverage provided under the Initial Commercial Policies and the Excess Commercial Policies for a policy period running from June 12, 2023 through June 12, 2024 except that the 2023 Commercial Policies also provide coverage for claims made with respect to wrongful acts or omissions occurring prior to the binding of the Initial Commercial Policies subject to exclusions with respect to claims previously noticed to and accepted by an earlier D&O insurer, claims related to acts

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or omissions giving rise to such claims, and demands, investigations, suits or other proceedings entered against an insured prior to June 24, 2022, as well as future interrelated wrongful acts.

On June 12, 2023, the Company entered into a new indemnification agreement with Mr. Saylor (the “2023 Tail Agreement”) pursuant to which Mr. Saylor agreed to provide coverage that is similar to the coverage provided under the Tail Agreement, but only for matters excluded from coverage under the 2023 Commercial Policies for an initial one-year term for a payment of $157,000. The Company may elect, at its option, to extend the term under the 2023 Tail Agreement for up to a total of four additional one-year periods, for $157,000 per additional one-year term.

The Excess Agreement, Tail Agreement and other related party transactions between the Company and Mr. Saylor are described more fully in Note 17 to the Consolidated Financial Statements of the Company's Annual Report on Form 10-K for the year ended December 31, 2022.

(13) Subsequent Events

Since September 30, 2023 through the date immediately preceding the filing of this Quarterly Report, the Company has purchased approximately 155 bitcoins for $5.3 million, or approximately $34,495 per bitcoin. All of these approximately 155 bitcoins serve as part of the collateral for the 2028 Secured Notes. See Note 2, Digital Assets, to the Consolidated Financial Statements for further detail on accounting for digital assets.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information

This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (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 II. 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.

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 certain 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.

Our Bitcoin Acquisition Strategy

Our bitcoin acquisition strategy generally involves 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 or engaging in other capital raising transactions with the objective of using the proceeds to purchase bitcoin. We view our bitcoin holdings as long-term holdings and expect to continue to accumulate bitcoin. 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 engage in additional financings to purchase additional bitcoin. This overall strategy also contemplates that we may (i) periodically sell bitcoin for general corporate purposes, including to generate cash for treasury management or in connection with strategies that generate tax benefits in accordance with applicable law, (ii) enter into additional capital raising transactions that are collateralized by our bitcoin holdings, and (iii) consider pursuing additional strategies to create income streams or otherwise generate funds using our bitcoin holdings.

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. We also believe that, due to its limited supply, bitcoin offers the opportunity for appreciation in value if its adoption increases and has the potential to serve as a hedge against inflation in the long-term. In addition, we believe that our bitcoin acquisition strategy is complementary to our enterprise analytics software business, as we believe that our bitcoin and related activities in support of the bitcoin network enhance awareness of our brand. We are also exploring opportunities to integrate features into our software offerings that leverage the Lightning Network – a decentralized second-layer payment protocol built on top of the Bitcoin blockchain that is intended to enable fast and less costly transactions.

Under our Treasury Reserve Policy, our treasury reserve assets 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.

During 2022 and 2023, we used proceeds from various capital raising transactions to purchase bitcoin. As of September 30, 2023, we held an aggregate of approximately 158,245 bitcoins, with 15,731 bitcoins held directly by MicroStrategy Incorporated and 142,514 bitcoins held by MacroStrategy LLC (“MacroStrategy”), a wholly-owned subsidiary of MicroStrategy. As of September 30, 2023, all of the approximately 15,731 bitcoins held directly by MicroStrategy Incorporated, which had a market value of $425.2 million based on the $27,030.47 market price of one bitcoin on the Coinbase exchange at 4:00 p.m. Eastern Time on September 30, 2023, are held in a separate custodial account from those held by MacroStrategy and serve as part of the collateral securing our 2028 Secured Notes. See below for further disclosure surrounding market value calculations of our bitcoin.

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The following table presents a roll-forward of our bitcoin holdings, including additional information related to our bitcoin purchases, sales, and digital asset impairment losses within the respective periods:

	Source of Capital Used to Purchase Bitcoin	Digital Asset Original Cost Basis (in thousands)			Digital Asset Impairment Losses (in thousands)			Digital Asset Carrying Value (in thousands)			Approximate Number of Bitcoins Held (Disposed)			Approximate Average Purchase or Sale Price Per Bitcoin
Balance at December 31, 2021		$	3,751,529		$	(901,319	)	$	2,850,210			124,391		$	30,159
Digital asset purchases	(a)		215,500						215,500			4,827			44,645
Digital asset impairment losses						(170,091	)		(170,091	)
Balance at March 31, 2022		$	3,967,029		$	(1,071,410	)	$	2,895,619			129,218		$	30,700
Digital asset purchases	(b)		10,000						10,000			481			20,790
Digital asset impairment losses						(917,838	)		(917,838	)
Balance at June 30, 2022		$	3,977,029		$	(1,989,248	)	$	1,987,781			129,699		$	30,664
Digital asset purchases	(c)		5,978						5,978			301			19,860
Digital asset impairment losses						(727	)		(727	)
Balance at September 30, 2022		$	3,983,007		$	(1,989,975	)	$	1,993,032			130,000		$	30,639
Digital asset purchases	(d)		56,443						56,443			3,204			17,616
Digital asset impairment losses						(198,557	)		(198,557	)
Digital asset sales *			(46,260	)		35,370			(10,890	)		(704	)		16,786
Balance at December 31, 2022		$	3,993,190		$	(2,153,162	)	$	1,840,028			132,500		$	30,137
Digital asset purchases	(e)		179,275						179,275			7,500			23,903
Digital asset impairment losses						(18,911	)		(18,911	)
Balance at March 31, 2023		$	4,172,465		$	(2,172,073	)	$	2,000,392			140,000		$	29,803
Digital asset purchases	(f)		347,003						347,003			12,333			28,136
Digital asset impairment losses						(24,143	)		(24,143	)
Balance at June 30, 2023		$	4,519,468		$	(2,196,216	)	$	2,323,252			152,333		$	29,668
Digital asset purchases	(g)		161,681						161,681			5,912			27,348
Digital asset impairment losses						(33,559	)		(33,559	)
Balance at September 30, 2023		$	4,681,149		$	(2,229,775	)	$	2,451,374			158,245		$	29,582

* During the fourth quarter of 2022, we sold approximately 704 bitcoins having an original cost basis of $46.3 million and cumulative digital asset impairment losses of $35.4 million, resulting in a carrying value of $10.9 million at the time of sale. The approximately 704 bitcoins were sold for cash proceeds of $11.8 million, net of fees and expenses, resulting in gains on sale of $0.9 million.

(a)In the first quarter of 2022, we purchased bitcoin using $190.5 million of the net proceeds from the issuance of the 2025 Secured Term Loan and Excess Cash.

(b)In the second quarter of 2022, we purchased bitcoin using Excess Cash.

(c)In the third quarter of 2022, we purchased bitcoin using Excess Cash.

(d)In the fourth quarter of 2022, we purchased bitcoin using $44.6 million of the net proceeds from our sale of class A common stock under our at-the-market offering program and $11.8 million in proceeds from sales of bitcoin.

(e)In the first quarter of 2023, we purchased bitcoin using $179.3 million of the net proceeds from our sale of class A common stock under our at-the-market offering program.

(f)In the second quarter of 2023, we purchased bitcoin using $336.9 million of the net proceeds from our sale of class A common stock under our at-the-market offering program, and Excess Cash.

(g)In the third quarter of 2023, we purchased bitcoin using $147.3 million of the net proceeds from our sale of class A common stock under our at-the-market offering program, and Excess Cash.

Excess Cash refers to cash in excess of the minimum Cash Assets that we are required to hold under our Treasury Reserve Policy, which may include cash generated by operating activities and cash from the proceeds of financing activities.

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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 quarter, as further defined below:

	Approximate Number of Bitcoins Held at End of Quarter		Lowest Market Price Per Bitcoin During Quarter (a)		Market Value of Bitcoin Held at End of Quarter Using Lowest Market Price (in thousands) (b)		Highest Market Price Per Bitcoin During Quarter (c)		Market Value of Bitcoin Held at End of Quarter Using Highest Market Price (in thousands) (d)		Market Price Per Bitcoin at End of Quarter (e)		Market Value of Bitcoin Held at End of Quarter Using Ending Market Price (in thousands) (f)
December 31, 2021		124,391	$	42,333.00	$	5,265,844	$	69,000.00	$	8,582,979	$	45,879.97	$	5,707,055
March 31, 2022		129,218	$	32,933.33	$	4,255,579	$	48,240.00	$	6,233,476	$	45,602.79	$	5,892,701
June 30, 2022		129,699	$	17,567.45	$	2,278,481	$	47,469.40	$	6,156,734	$	18,895.02	$	2,450,665
September 30, 2022		130,000	$	18,153.13	$	2,359,907	$	25,214.57	$	3,277,894	$	19,480.51	$	2,532,466
December 31, 2022		132,500	$	15,460.00	$	2,048,450	$	21,478.80	$	2,845,941	$	16,556.32	$	2,193,712
March 31, 2023		140,000	$	16,490.00	$	2,308,600	$	29,190.04	$	4,086,606	$	28,468.44	$	3,985,582
June 30, 2023		152,333	$	24,750.00	$	3,770,242	$	31,443.67	$	4,789,909	$	30,361.51	$	4,625,060
September 30, 2023		158,245	$	24,900.00	$	3,940,301	$	31,862.21	$	5,042,035	$	27,030.47	$	4,277,437

(a)The "Lowest Market Price Per Bitcoin During Quarter" represents the lowest market price for one bitcoin reported on the Coinbase exchange during the respective quarter, without regard to when we purchased any of our bitcoin.

(b)The "Market Value of Bitcoin Held at End of Quarter Using Lowest Market Price" represents a mathematical calculation consisting of the lowest market price for one bitcoin reported on the Coinbase exchange during the respective quarter multiplied by the number of bitcoins we held at the end of the applicable period.

(c)The "Highest Market Price Per Bitcoin During Quarter" represents the highest market price for one bitcoin reported on the Coinbase exchange during the respective quarter, without regard to when we purchased any of our bitcoin.

(d)The "Market Value of Bitcoin Held at End of Quarter Using Highest Market Price" represents a mathematical calculation consisting of the highest market price for one bitcoin reported on the Coinbase exchange during the respective quarter multiplied by the number of bitcoins we held at the end of the applicable period.

(e)The "Market Price Per Bitcoin at End of Quarter" represents the market price of one bitcoin on the Coinbase exchange at 4:00 p.m. Eastern Time on the last day of the respective quarter.

(f)The "Market Value of Bitcoin Held at End of Quarter Using Ending Market Price" represents a mathematical calculation consisting of the market price of one bitcoin on the Coinbase exchange at 4:00 p.m. Eastern Time on the last day of the respective quarter multiplied by the number of bitcoins we held at the end of the applicable period.

The amounts reported as “Market Value” in the above table represent only a mathematical calculation consisting of the price for one bitcoin reported on the Coinbase exchange (our principal market) in each scenario defined above multiplied by the number of bitcoins held by us at the end of the applicable period. 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, compliance and internal control failures at exchanges, 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 the Coinbase exchange (our principal market) on the date of sale, or at all.

Our digital asset impairment losses have significantly contributed to our operating expenses. During the three months ended September 30, 2023, digital asset impairment losses of $33.6 million represented 26.2% of our operating expenses, compared to digital asset impairment losses of $0.7 million, representing 0.8% of our operating expenses, during the three months ended September 30, 2022. During the nine months ended September 30, 2023, digital asset impairment losses of $76.6 million represented 21.1% of our operating expenses, compared to digital asset impairment losses of $1.089 billion, representing 79.3% of our operating expenses, during the nine months ended September 30, 2022.

As of October 31, 2023, we held approximately 158,400 bitcoins that were acquired at an aggregate purchase price of $4.686 billion and an average purchase price of approximately $29,586 per bitcoin, inclusive of fees and expenses. As of October 31, 2023, at 4:00 p.m. Eastern Time, the market price of one bitcoin reported on the Coinbase exchange was $34,555.58.

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Our Enterprise Analytics Software Strategy

MicroStrategy is a global leader in enterprise analytics software and services. We provide software and services that turn data into actionable insights for organizations. Our vision is to enable Intelligence Everywhere™.

Our analytics platform, MicroStrategy ONE, is a comprehensive and highly versatile analytics solution. It is used by many of the world’s most admired Fortune 500 brands. Our customers span a wide range of industries, including retail, banking, technology, consulting, manufacturing, insurance, healthcare, telecommunications, and the public sector.

As we continue to transition our business strategy and product offerings to a cloud-native model, we are enhancing our go-to-market and sales strategies with the goal of focusing on acquiring new customers, driving revenue growth, increasing margins, and streamlining our operations. As part of this strategic transformation, we have taken and will continue to take measures to reorganize and optimize efficiency across our business functions, including sales, marketing, consulting, product, engineering, as well as other corporate functions.

AI/BI Application Development

MicroStrategy ONE facilitates the development and deployment of secure, compliant, and efficient applications at scale. Its support for over 200 data connectors enhances adaptability, reinforcing interoperability with diverse data ecosystems. With MicroStrategy ONE, organizations can build and deploy ad-hoc analytics, operational reporting, front-end applications, and embedded analytics easily and quickly. The platform actively promotes data use, offering visualizations, application customization, and analytics integration into workflows. Accessibility is available via web, mobile, and desktop applications.

MicroStrategy ONE enables organizations to develop artificial intelligence (AI) powered applications built on a foundation of trusted data through the integration of generative AI capabilities, backed by Azure OpenAI, into our established Business Intelligence (BI) framework.

MicroStrategy ONE also includes HyperIntelligence, an innovative and powerful functionality that provides zero-click insights. It enables key information to be readily available to every user in an organization without requiring them to actively search for it.

AI-Powered Analytics

Integral to the MicroStrategy ONE platform are AI-powered services that facilitate data-driven decision-making. These AI capabilities are integrated into the platform's fabric, enhancing anomaly detection, pattern recognition, and AI-driven content creation. The AI functionalities enable real-time predictive insights and automated data discovery, further amplifying our vision of Intelligence Everywhere.

The quality of AI-powered services depends on the data fueling it. Our AI capabilities leverage our years of experience in data governance and BI to enable our clients to receive actionable insights. We believe the fusion of AI and BI will provide us with a competitive advantage and reinforce our standing as an industry leader in enterprise analytics.

Open, Multi-Cloud Architecture

MicroStrategy ONE is designed with cloud optimization at its core, offering flexibility and scalability for organizations seeking to deploy analytics solutions in a cloud environment. Engineered to be platform-agnostic, MicroStrategy ONE supports deployment across leading cloud service providers.

Built on an organically grown and open architecture, MicroStrategy ONE demonstrates our commitment to seamless scalability and exceptional integration capabilities. Organizations can leverage our extensive application programming interface (API) library to incorporate the platform into their existing applications and workflows.

MicroStrategy ONE provides advanced security measures and rigorous data governance to enable the effective management and protection of sensitive data.

Competitive Factors

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The analytics market is highly competitive. Our 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. We 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.

Operating Highlights

The following table sets forth certain operating highlights (in thousands) for the three and nine months ended September 30, 2023 and 2022:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2023			2022		2023			2022
Revenues
Product licenses	$	24,045		$	22,286	$	56,979		$	58,928
Subscription services		20,974			16,414		59,662			43,276
Total product licenses and subscription services		45,019			38,700		116,641			102,204
Product support		66,860			66,010		198,422			199,682
Other services		17,583			20,650		56,714			64,824
Total revenues		129,462			125,360		371,777			366,710
Cost of revenues
Product licenses		342			406		1,320			1,314
Subscription services		8,028			6,395		23,100			17,303
Total product licenses and subscription services		8,370			6,801		24,420			18,617
Product support		5,531			5,224		17,115			15,542
Other services		12,760			13,360		40,188			42,107
Total cost of revenues		26,661			25,385		81,723			76,266
Gross profit		102,801			99,975		290,054			290,444
Operating expenses
Sales and marketing		35,606			35,409		109,372			105,511
Research and development		29,660			30,498		90,372			95,811
General and administrative		29,223			27,283		85,959			82,491
Digital asset impairment losses		33,559			727		76,613			1,088,656
Total operating expenses		128,048			93,917		362,316			1,372,469
(Loss) income from operations	$	(25,247	)	$	6,058	$	(72,262	)	$	(1,082,025	)

We have incurred and may continue to incur significant impairment losses on our digital assets, and we have recognized and may continue to recognize gains upon sale of our digital assets in the future, which are 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.

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Employees

As of September 30, 2023, we had a total of 1,984 employees, of whom 643 were based in the United States and 1,341 were based internationally. The following table summarizes employee headcount as of the dates indicated:

	September 30,		December 31,		September 30,
	2023		2022		2022
Subscription services		105		110		95
Product support		161		183		171
Consulting		411		447		453
Education		12		16		22
Sales and marketing		398		434		452
Research and development		645		688		712
General and administrative		252		274		267
Total headcount		1,984		2,152		2,172

Share-based Compensation Expense

As discussed in Note 8, 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, performance stock units, and certain other stock-based awards under our Stock Incentive Plans. Each restricted stock unit and performance stock unit represents a contingent right to receive a share of our class A common stock upon the satisfaction of applicable vesting requirements. We also provide opportunities for eligible employees to purchase shares of our class A common stock under our 2021 ESPP. Share-based compensation expense (in thousands) from these awards was recognized in the following cost of revenues and operating expense line items for the periods indicated:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Cost of subscription services revenues	$	101	$	80	$	254	$	221
Cost of product support revenues		565		541		1,597		1,513
Cost of consulting revenues		535		463		1,423		1,278
Cost of education revenues		28		37		72		143
Sales and marketing		3,221		4,935		12,532		13,662
Research and development		3,269		3,795		9,426		10,235
General and administrative		9,087		7,048		24,551		19,535
Total share-based compensation expense	$	16,806	$	16,899	$	49,855	$	46,587

Share-based compensation expense did not materially change during the three months ended September 30, 2023 as compared to the same period in the prior year, primarily due to the forfeiture of certain stock awards being substantially offset by the grant of additional awards under the Stock Incentive Plans as part of the expansion of our equity award program worldwide. The $3.3 million increase in share-based compensation expense during the nine months ended September 30, 2023, as compared to the same period in the prior year, was primarily due to the grant of additional awards under the Stock Incentive Plans as part of the expansion of our equity award program worldwide and the revaluation of certain liability-classified stock-based awards, partially offset by the forfeiture of certain stock awards and certain awards that became fully vested. As of September 30, 2023, we estimated that an aggregate of approximately $146.1 million of additional share-based compensation expense associated with the Stock Incentive Plans and the 2021 ESPP will be recognized over a remaining weighted average period of 2.5 years.

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. 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 under “Item 7. Management’s Discussion and Analysis of

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Financial Condition and Results of Operations—Critical Accounting Estimates” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. There have been no significant changes in such estimates and judgments since December 31, 2022.

Results of Operations

Comparison of the three and nine months ended September 30, 2023 and 2022

Revenues

Except as otherwise indicated herein, the term “domestic” refers to operations in the United States and Canada and the term “international” refers to operations outside of the United States and Canada.

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:

	Three Months Ended							Nine Months Ended
	September 30,				%			September 30,				%
	2023		2022		Change			2023		2022		Change
Product Licenses and Subscription Services Revenues:
Product Licenses
Domestic	$	10,338	$	15,526		-33.4	%	$	29,404	$	40,535		-27.5	%
International		13,707		6,760		102.8	%		27,575		18,393		49.9	%
Total product licenses revenues		24,045		22,286		7.9	%		56,979		58,928		-3.3	%
Subscription Services
Domestic		13,515		11,381		18.8	%		38,718		30,540		26.8	%
International		7,459		5,033		48.2	%		20,944		12,736		64.4	%
Total subscription services revenues		20,974		16,414		27.8	%		59,662		43,276		37.9	%
Total product licenses and subscription services revenues	$	45,019	$	38,700		16.3	%	$	116,641	$	102,204		14.1	%

The following table sets forth a summary, grouped by size, of the number of recognized product licenses transactions for the periods indicated:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Product Licenses Transactions with Recognized Licenses Revenue in the Applicable Period:
More than $1.0 million in licenses revenue recognized		4		3		8		6
Between $0.5 million and $1.0 million in licenses revenue recognized		4		3		11		10
Total		8		6		19		16
Domestic:
More than $1.0 million in licenses revenue recognized		2		3		5		6
Between $0.5 million and $1.0 million in licenses revenue recognized		2		1		7		7
Total		4		4		12		13
International:
More than $1.0 million in licenses revenue recognized		2		0		3		0
Between $0.5 million and $1.0 million in licenses revenue recognized		2		2		4		3
Total		4		2		7		3

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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:

	Three Months Ended							Nine Months Ended
	September 30,				%			September 30,				%
	2023		2022		Change			2023		2022		Change
Product Licenses Revenue Recognized in the Applicable Period:
More than $1.0 million in licenses revenue recognized	$	9,450	$	7,291		29.6	%	$	14,923	$	15,848		-5.8	%
Between $0.5 million and $1.0 million in licenses revenue recognized		2,537		2,039		24.4	%		7,954		7,177		10.8	%
Less than $0.5 million in licenses revenue recognized		12,058		12,956		-6.9	%		34,102		35,903		-5.0	%
Total		24,045		22,286		7.9	%		56,979		58,928		-3.3	%
Domestic:
More than $1.0 million in licenses revenue recognized		2,521		7,291		-65.4	%		6,499		15,848		-59.0	%
Between $0.5 million and $1.0 million in licenses revenue recognized		1,260		791		59.3	%		5,346		5,419		-1.3	%
Less than $0.5 million in licenses revenue recognized		6,557		7,444		-11.9	%		17,559		19,268		-8.9	%
Total		10,338		15,526		-33.4	%		29,404		40,535		-27.5	%
International:
More than $1.0 million in licenses revenue recognized		6,929		0	n/a				8,424		0	n/a
Between $0.5 million and $1.0 million in licenses revenue recognized		1,277		1,248		2.3	%		2,608		1,758		48.4	%
Less than $0.5 million in licenses revenue recognized		5,501		5,512		-0.2	%		16,543		16,635		-0.6	%
Total	$	13,707	$	6,760		102.8	%	$	27,575	$	18,393		49.9	%

Product licenses revenues increased $1.8 million and decreased $1.9 million for the three and nine months ended September 30, 2023, respectively, as compared to the same periods in the prior year. For the three months ended September 30, 2023 and 2022, product licenses transactions with more than $0.5 million in recognized revenue represented 49.9% and 41.9%, respectively, of our product licenses revenues. For the nine months ended September 30, 2023, our top three product licenses transactions totaled $8.7 million in recognized revenue, or 15.3% of total product licenses revenues, compared to $12.1 million, or 20.5% of total product licenses revenues, for the nine months ended September 30, 2022. Our product licenses revenues may experience declines in future periods as we continue to promote our cloud offering to new and existing customers.

Domestic product licenses revenues. Domestic product licenses revenues decreased $5.2 million for the three months ended September 30, 2023, as compared to the same period in the prior year, primarily due to a decrease in the number of transactions and average deal size of transactions with more than $1.0 million in recognized revenue, a decrease in the number of transactions with less than $0.5 million in recognized revenue, and a decrease in the average deal size of transactions with more than $0.5 million and less than $1.0 million in recognized revenue, partially offset by 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 more than $0.5 million and less than $1.0 million in recognized revenue. Domestic product licenses revenues decreased $11.1 million for the nine months ended September 30, 2023, as compared to the same period in the prior year, primarily due to a decrease in the average deal size and number of transactions with more than $1.0 million in recognized revenue and a decrease in the number of transactions with less than $0.5 million in recognized revenue, partially offset by an increase in the average deal size of transactions with less than $0.5 million in recognized revenue.

International product licenses revenues. International product licenses revenues increased $6.9 million for the three months ended September 30, 2023, as compared to the same period in the prior year, primarily due to an increase in the number of transactions with more than $1.0 million in recognized revenue. International product licenses revenues increased $9.2 million for the nine months ended September 30, 2023, as compared to the same period in the prior year, primarily due to an increase in the number of transactions with more than $0.5 million in recognized revenue.

Subscription services revenues. Subscription services revenues are derived from our MCE cloud subscription service and are recognized ratably over the service period in the contract. Subscription services revenues increased $4.6 million for the three months ended

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September 30, 2023, as compared to the same period in 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, and sales contracts with new customers, partially offset by certain non-renewing customers. Subscription services revenues increased $16.4 million for the nine months ended September 30, 2023, as compared to the same period in 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, and sales contracts with new customers, partially offset by certain non-renewing customers. 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:

	Three Months Ended							Nine Months Ended
	September 30,				%			September 30,				%
	2023		2022		Change			2023		2022		Change
Product Support Revenues:
Domestic	$	39,510	$	40,375		-2.1	%	$	119,064	$	118,861		0.2	%
International		27,350		25,635		6.7	%		79,358		80,821		-1.8	%
Total product support revenues	$	66,860	$	66,010		1.3	%	$	198,422	$	199,682		-0.6	%

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 increased $0.9 million for the three months ended September 30, 2023, as compared to the same period in the prior year, primarily due to a $1.5 million favorable foreign currency exchange impact and the timing of product support renewals, partially offset by certain existing customers converting from perpetual product licenses with separate support contracts to our subscription services or term product licenses offerings. Product support revenues decreased $1.3 million for the nine months ended September 30, 2023, as compared to the same period in 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. Our product support revenues may experience declines in future periods as we continue to promote our cloud offering to new and existing customers.

Other services revenues. The following table sets forth other services revenues (in thousands) and related percentage changes for the periods indicated:

	Three Months Ended							Nine Months Ended
	September 30,				%			September 30,				%
	2023		2022		Change			2023		2022		Change
Other Services Revenues:
Consulting
Domestic	$	8,392	$	9,658		-13.1	%	$	26,639	$	28,982		-8.1	%
International		8,284		9,887		-16.2	%		27,354		32,271		-15.2	%
Total consulting revenues		16,676		19,545		-14.7	%		53,993		61,253		-11.9	%
Education		907		1,105		-17.9	%		2,721		3,571		-23.8	%
Total other services revenues	$	17,583	$	20,650		-14.9	%	$	56,714	$	64,824		-12.5	%

Consulting revenues. Consulting revenues are derived from helping customers plan and execute the deployment of our software. Consulting revenues decreased $2.9 million for the three months ended September 30, 2023, as compared to the same period in the prior year, primarily due to a decrease in billable hours worldwide, partially offset by an increase in average bill rates. Consulting revenues decreased $7.3 million for the nine months ended September 30, 2023, as compared to the same period in the prior year, primarily due to a decrease in billable hours worldwide, partially offset by an increase in average bill rates.

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 for the three months ended September 30, 2023, as compared to the same period in the prior year. Education revenues decreased $0.9 million for the nine months ended September 30, 2023, as compared to the same period in the prior year, primarily due to lower sales in prior quarters of annual subscriptions to training courses.

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Costs and Expenses

Cost of revenues. The following table sets forth cost of revenues (in thousands) and related percentage changes for the periods indicated:

	Three Months Ended							Nine Months Ended
	September 30,				%			September 30,				%
	2023		2022		Change			2023		2022		Change
Cost of Revenues:
Product licenses and subscription services:
Product licenses	$	342	$	406		-15.8	%	$	1,320	$	1,314		0.5	%
Subscription services		8,028		6,395		25.5	%		23,100		17,303		33.5	%
Total product licenses and subscription services		8,370		6,801		23.1	%		24,420		18,617		31.2	%
Product support		5,531		5,224		5.9	%		17,115		15,542		10.1	%
Other services:
Consulting		12,134		12,267		-1.1	%		38,326		38,404		-0.2	%
Education		626		1,093		-42.7	%		1,862		3,703		-49.7	%
Total other services		12,760		13,360		-4.5	%		40,188		42,107		-4.6	%
Total cost of revenues	$	26,661	$	25,385		5.0	%	$	81,723	$	76,266		7.2	%

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 for the three and nine months ended September 30, 2023, as compared to the same periods in the prior year.

Cost of subscription services revenues. Cost of subscription services revenues consists of equipment, facility and other related support costs (including cloud hosting infrastructure costs), and personnel and related overhead costs. Subscription services headcount increased 10.5% to 105 at September 30, 2023 from 95 at September 30, 2022. Cost of subscription services revenues increased $1.6 million for the three months ended September 30, 2023, as compared to the same period in the prior year, primarily due to a $1.4 million increase in cloud hosting infrastructure costs, which is a result of the increased usage by new and existing cloud subscription services customers. Cost of subscription services revenues increased $5.8 million for the nine months ended September 30, 2023, as compared to the same period in the prior year, primarily due to (i) a $4.4 million increase in cloud hosting infrastructure costs, which is a result of the increased usage by new and existing cloud subscription services customers, (ii) a $0.6 million increase in employee salaries primarily attributable to an increase in average staffing levels, and (iii) a $0.4 million increase in variable compensation.

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 decreased 5.8% to 161 at September 30, 2023 from 171 at September 30, 2022. Cost of product support revenues did not materially change for the three months ended September 30, 2023, as compared to the same period in the prior year. Cost of product support revenues increased $1.6 million for the nine months ended September 30, 2023, as compared to the same period in the prior year, primarily due to a $1.9 million increase in compensation and related costs attributable to non-product support personnel providing an increased level of Enterprise Support services.

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 decreased 9.3% to 411 at September 30, 2023 from 453 at September 30, 2022. Cost of consulting revenues did not materially change for the three months ended September 30, 2023, as compared to the same period in the prior year, primarily due to (i) a $0.5 million decrease in compensation and related costs attributable to consulting personnel providing an increased level of Enterprise Support services and (ii) a $0.5 million decrease in subcontractor costs, being substantially offset by (iii) a $0.7 million increase in variable compensation. Included in cost of consulting revenues for the three months ended September 30, 2023 is an aggregate $0.5 million unfavorable foreign currency exchange impact. Cost of consulting revenues did not materially change for the nine months ended September 30, 2023, as compared to the same period in the prior year, primarily due to (i) a $1.9 million decrease in compensation and related costs attributable to consulting personnel providing an increased level of Enterprise Support services and (ii) a $1.8 million decrease in subcontractor costs, being substantially offset by (iii) a $1.7 million increase in variable compensation, (iv) a $0.8 million increase in employee salaries primarily attributable to wage increases, partially offset by a shift in staffing levels to lower cost regions, (v) a $0.6 million increase in severance costs associated with streamlining our organization, and (vi) a $0.5 million increase in facility and other related support costs.

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Cost of education revenues. Cost of education revenues consists of personnel and related overhead costs. Education headcount decreased 45.5% to 12 at September 30, 2023 from 22 at September 30, 2022. Cost of education revenues decreased $0.5 million for the three months ended September 30, 2023, as compared to the same period in the prior year, primarily due to a $0.3 million decrease in employee salaries primarily attributable to a decrease in average staffing levels. Cost of education revenues decreased $1.8 million for the nine months ended September 30, 2023, as compared to the same period in the prior year, primarily due to (i) a $1.1 million decrease in employee salaries primarily attributable to a decrease in average staffing levels and (ii) a $0.5 million decrease in variable compensation.

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 11.9% to 398 at September 30, 2023 from 452 at September 30, 2022. The following table sets forth sales and marketing expenses (in thousands) and related percentage changes for the periods indicated:

	Three Months Ended							Nine Months Ended
	September 30,				%			September 30,				%
	2023		2022		Change			2023		2022		Change
Sales and marketing expenses	$	35,606	$	35,409		0.6	%	$	109,372	$	105,511		3.7	%

Sales and marketing expenses did not materially change for the three months ended September 30, 2023, as compared to the same period in the prior year, primarily due to (i) a $1.4 million increase in severance costs associated with streamlining our organization, (ii) a $0.6 million increase in variable compensation primarily attributable to a decrease in net capitalized commissions and an increase in other personnel costs, partially offset by a decrease in commissions earned, and (iii) a $0.4 million increase in marketing costs, being substantially offset by (iv) a $1.7 million net decrease in share-based compensation expense primarily attributable to the forfeiture of certain awards, partially offset by the grant of additional awards under the Stock Incentive Plans and (v) a $1.1 million decrease in employee salaries primarily attributable to a decrease in average staffing levels, partially offset by wage increases. Included in sales and marketing expenses for the three months ended September 30, 2023 is an aggregate $0.6 million unfavorable foreign currency exchange impact.

Sales and marketing expenses increased $3.9 million for the nine months ended September 30, 2023, as compared to the same period in the prior year, primarily due to (i) a $2.3 million increase in travel and entertainment expenditures due to the return of in-person events and meetings, (ii) a $1.9 million increase in severance costs associated with streamlining our organization, (iii) a $1.6 million increase in marketing costs due to the return of in-person events and meetings, (iv) a $0.9 million increase in variable compensation primarily attributable to a decrease in net capitalized commissions and increases in employee relations expenses and other personnel costs, partially offset by a decrease in commissions earned, and (v) a $0.6 million increase in facility and other related support costs, partially offset by (vi) a $2.6 million decrease in employee salaries primarily attributable to a decrease in average staffing levels, partially offset by wage increases and (vii) a $1.1 million net decrease in share-based compensation expense primarily attributable to the forfeiture of certain awards, partially offset by the grant of additional awards under the Stock Incentive Plans and the fair value remeasurement of certain liability-classified awards at the end of the reporting period.

Research and development expenses. Research and development expenses consist of the personnel costs for our software engineering personnel and related overhead costs. Research and development headcount decreased 9.4% to 645 at September 30, 2023 from 712 at September 30, 2022. The following table summarizes research and development expenses (in thousands) and related percentage changes for the periods indicated:

	Three Months Ended							Nine Months Ended
	September 30,				%			September 30,				%
	2023		2022		Change			2023		2022		Change
Research and development expenses	$	29,660	$	30,498		-2.7	%	$	90,372	$	95,811		-5.7	%

Research and development expenses decreased $0.8 million for the three months ended September 30, 2023, as compared to the same period in the prior year, primarily due to (i) a $1.2 million decrease in employee salaries primarily attributable to a decrease in average staffing levels, partially offset by wage increases and (ii) a $0.5 million net decrease in share-based compensation expense primarily attributable to the forfeiture of certain awards, partially offset by the grant of additional awards under the Stock Incentive Plans, partially offset by (iii) a $0.8 million increase in severance costs associated with streamlining our organization.

Research and development expenses decreased $5.4 million for the nine months ended September 30, 2023, as compared to the same period in the prior year, primarily due to (i) a $3.1 million decrease in employee salaries primarily attributable to a decrease in average staffing levels, partially offset by wage increases, (ii) a $0.8 million net decrease in share-based compensation expense primarily attributable to the forfeiture of certain awards, partially offset by the grant of additional awards under the Stock Incentive Plans and the fair value remeasurement of certain liability-classified awards at the end of the reporting period, (iii) a $0.8 million decrease in variable

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compensation, (iv) a $0.6 million decrease in recruiting costs, (v) a $0.5 million decrease in facility and other related support costs, and (vi) a $0.4 million decrease in subcontractor costs, partially offset by (vii) a $0.9 million increase in severance costs associated with streamlining our organization. Included in research and development expenses for the nine months ended September 30, 2023 is an aggregate $1.3 million favorable 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 decreased 5.6% to 252 at September 30, 2023 from 267 at September 30, 2022. The following table sets forth general and administrative expenses (in thousands) and related percentage changes for the periods indicated:

	Three Months Ended							Nine Months Ended
	September 30,				%			September 30,				%
	2023		2022		Change			2023		2022		Change
General and administrative expenses	$	29,223	$	27,283		7.1	%	$	85,959	$	82,491		4.2	%

General and administrative expenses increased $1.9 million for the three months ended September 30, 2023, as compared to the same period in the prior year, primarily due to a $2.0 million net increase in share-based compensation expense primarily attributable to the grant of additional awards under the Stock Incentive Plans.

General and administrative expenses increased $3.5 million for the nine months ended September 30, 2023, as compared to the same period in the prior year, primarily due to (i) a $5.0 million net increase in share-based compensation expense primarily attributable to the grant of additional awards under the Stock Incentive Plans, partially offset by certain awards that became fully vested, (ii) a $1.2 million increase in the estimated minimum loss with respect to the Brazilian matters noted in Note 5, Commitments and Contingencies, to the Consolidated Financial Statements, and (iii) a $0.6 million increase in directors and officers liability insurance expense, partially offset by (iv) a $2.1 million decrease in costs related to the maintenance and operations of our corporate aircraft, (v) a $0.7 million decrease in recruiting costs, (vi) a $0.6 million decrease in custodial fees incurred on our bitcoin holdings, and (vii) a $0.4 million decrease in bad debt expense.

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. Gains (if any) are not recorded until realized upon sale. The following table sets forth digital asset impairment losses (in thousands) and related percentage changes for the periods indicated:

	Three Months Ended							Nine Months Ended
	September 30,				%			September 30,				%
	2023		2022		Change			2023		2022		Change
Digital asset impairment losses	$	33,559	$	727		4516.1	%	$	76,613	$	1,088,656		-93.0	%

We did not sell any of our digital assets during the three and nine months ended September 30, 2023 and 2022. We may continue to incur significant digital asset impairment losses in the future.

Interest Expense, Net

For the three and nine months ended September 30, 2023, interest expense, net, of $11.0 million and $37.0 million were primarily related to the contractual interest expense and amortization of issuance costs related to our long-term debt arrangements. For the three and nine months ended September 30, 2022, interest expense, net, of $14.1 million and $38.3 million, respectively, were primarily related to the contractual interest expense and amortization of issuance costs related to our long-term debt arrangements. Interest expense for the fourth quarter of 2023 is expected to continue to decrease compared to the same period in 2022 as a result of the repayment of the 2025 Secured Term Loan in March 2023. Refer to Note 4, Long-term Debt, to the Consolidated Financial Statements for further information.

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Gain on Debt Extinguishment

For the nine months ended September 30, 2023, the $44.7 million gain on debt extinguishment resulted from the repayment of the 2025 Secured Term Loan. Refer to Note 4, Long-term Debt, to the Consolidated Financial Statements for further information.

Other Income, Net

For the three and nine months ended September 30, 2023, other income, net, of $2.4 million and $0.7 million, were comprised primarily of foreign currency transaction net gains. For the three and nine months ended September 30, 2022, other income, net, of $4.9 million and $12.2 million, respectively, were comprised primarily of foreign currency transaction net gains.

Income Taxes

We recorded a benefit from income taxes of $403.9 million on a pretax loss of $63.9 million that resulted in an effective tax rate of 632.2% for the nine months ended September 30, 2023, as compared to a provision for income taxes of $112.0 million on a pretax loss of $1.108 billion that resulted in an effective tax rate of (10.1)% for the nine months ended September 30, 2022. Our benefit from income taxes increased from the same period in the prior year primarily due to (i) the release of a portion of the valuation allowance during the nine months ended September 30, 2023 on our deferred tax asset related to the impairment on our bitcoin holdings, attributable to the increase in market value of bitcoin as of September 30, 2023 compared to December 31, 2022, compared to (ii) the establishment of a valuation allowance during the nine months ended September 30, 2022 on our deferred tax asset related to the impairment on our bitcoin holdings, attributable to the decrease in market value of bitcoin as of September 30, 2022 compared to December 31, 2021.

As of September 30, 2023, we had a valuation allowance of $118.4 million primarily related to our deferred tax asset related to the impairment on our bitcoin holdings that, in our present estimation, more likely than not will not be realized. If the market value of bitcoin declines or we do not achieve 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 income (loss) in the period in which the charge is incurred. To the extent the market value of bitcoin rises, we may decrease the valuation allowance against our deferred tax asset. We will continue to regularly assess the realizability of deferred tax assets.

Our effective tax rate may fluctuate due to changes in our domestic and foreign earnings and losses, material discrete tax items, or a combination of these factors resulting from transactions or events.

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, we generally do not invoice more than one year in advance of services and do 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.

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The following table summarizes deferred revenue and advance payments (in thousands), as of:

	September 30,		December 31,		September 30,
	2023		2022		2022
Current:
Deferred product licenses revenue	$	2,814	$	2,825	$	442
Deferred subscription services revenue		45,737		51,861		38,272
Deferred product support revenue		126,087		155,366		123,203
Deferred other services revenue		4,529		7,376		4,017
Total current deferred revenue and advance payments	$	179,167	$	217,428	$	165,934
Non-current:
Deferred product licenses revenue	$	9	$	2,742	$	70
Deferred subscription services revenue		2,845		3,030		2,943
Deferred product support revenue		4,304		6,387		5,172
Deferred other services revenue		480		604		569
Total non-current deferred revenue and advance payments	$	7,638	$	12,763	$	8,754
Total current and non-current:
Deferred product licenses revenue	$	2,823	$	5,567	$	512
Deferred subscription services revenue		48,582		54,891		41,215
Deferred product support revenue		130,391		161,753		128,375
Deferred other services revenue		5,009		7,980		4,586
Total current and non-current deferred revenue and advance payments	$	186,805	$	230,191	$	174,688

The portions of 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. Total deferred revenue and advance payments decreased $43.4 million as of September 30, 2023, as compared to December 31, 2022, primarily due to the timing of product support and subscription services renewals and an increase in revenue recognized from previously deferred subscription services, other services, and product licenses. Included in our international deferred revenue balances at September 30, 2023 is a $3.3 million unfavorable foreign currency impact from the general strengthening of the U.S. dollar compared to December 31, 2022. Total deferred revenue and advance payments increased $12.1 million as of September 30, 2023, as compared to September 30, 2022, primarily due to (i) an increase in deferred revenue from subscription services contracts, (ii) an increase in deferred product license revenue from the early renewal of a large multi-year term license deal in the fourth quarter of 2022, and (iii) an increase in deferred product support revenue from the timing of product support renewals, partially offset by a decrease in deferred product support revenue from an increase in conversions from on-premises to subscription services contracts. Included in our international deferred revenue balances at September 30, 2023 is a $1.3 million favorable foreign currency impact from the general weakening of the U.S. dollar compared to September 30, 2022.

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 of September 30, 2023, we had an aggregate transaction price of $282.3 million allocated to the remaining performance obligation related to product support, subscription services, product licenses, and other services contracts. We expect to recognize approximately $217.7 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, and U.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 transactions, to acquire bitcoins, which are classified as indefinite-lived intangible assets. In September 2022, we commenced an at-the-market equity offering under the 2022 Sales Agreement, pursuant to which we issued and sold 1,567,430 shares of our class A common stock for aggregate net proceeds (net of sales commissions and expenses) of $385.2 million through the first quarter of 2023. We terminated the 2022 Sales Agreement in May 2023 and commenced another at-the-market equity offering under the May 2023 Sales Agreement, pursuant to which we issued and sold 1,079,170 shares of our class A common stock for aggregate

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net proceeds (net of sales commissions and expenses) of $333.5 million through the second quarter of 2023. We terminated the May 2023 Sales Agreement in August 2023 and commenced a new at-the-market equity offering under the August 2023 Sales Agreement, pursuant to which we may from time to time issue and sell shares of our class A common stock having an aggregate offering price of up to $750.0 million. As of September 30, 2023, we had issued and sold 403,362 shares of our class A common stock under the August 2023 Sales Agreement for aggregate net proceeds (net of sales commissions and expenses) of $147.2 million and approximately $602.1 million of our class A common stock remained available for issuance and sale pursuant to the August 2023 Sales Agreement. For additional information, see “—At-the-Market Equity Offerings” below.

As of September 30, 2023 and December 31, 2022, the amount of cash and cash equivalents held by our U.S. entities was $14.9 million and $14.8 million, respectively, and by our non-U.S. entities was $30.1 million and $29.0 million, respectively. We earn a significant amount of our revenues outside the United States. We repatriated foreign earnings and profits of $44.7 million during 2022 and $10.0 million during the nine months ended September 30, 2023.

Our material contractual obligations and cash requirements consist of:

•principal and interest payments related to our long-term debt;

•rent payments under noncancellable operating leases;

•payments related to the mandatory deemed repatriation transition tax (the “Transition Tax”) under the U.S. Tax Cuts and Jobs Act (the “Tax Act”);

•payments under various purchase agreements, primarily related to third-party software supporting our products, marketing, and operations; and

•ongoing personnel-related expenditures and vendor payments.

The above items are explained in further detail in Note 4, Long-term Debt, to the Consolidated Financial Statements included in this Quarterly Report as well as under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and in the Notes to the Consolidated Financial Statements included therein. Other than the payoff of the 2025 Secured Term Loan described more fully below and in Note 4, Long-term Debt, to the Consolidated Financial Statements included in this Quarterly Report, and new purchase commitments for third-party cloud hosting services totaling $135.0 million to be spent over the next four years, there have been no changes to our material contractual obligations and cash requirements since December 31, 2022.

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. We have principal due upon maturity of our long-term debt instruments in the aggregate of $2.208 billion in addition to $2.4 million in coupon interest due each semi-annual period for the 2025 Convertible Notes, $15.3 million in coupon interest due each semi-annual period for the 2028 Secured Notes, and $0.1 million due monthly in principal and interest related to our other long-term secured debt. We also have long-term cash requirements for obligations related to our operating leases, the Transition Tax, and our various purchase agreements. As of September 30, 2023, we do not expect cash and cash equivalents generated by our enterprise analytics software business to be sufficient to satisfy these obligations. As a result, we would seek to satisfy these obligations through various options that we expect to be available to us, such as refinancing our debt or generating cash from other sources, which may include the issuance and sale of shares of our class A common stock, borrowings collateralized by bitcoin, or the sale of our bitcoin. 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.

The 2028 Secured Notes have a stated maturity date of June 15, 2028, but include a springing maturity feature that will cause the stated maturity date to spring ahead to the date that is (i) 91 days prior to the existing maturity date of the 2025 Convertible Notes (which is September 15, 2025), (ii) 91 days prior to the existing maturity date of the 2027 Convertible Notes (which is November 16, 2026), or (iii) 91 days prior to the maturity date of any future convertible debt that we may issue that is then outstanding, unless on such dates we meet specified liquidity requirements or less than $100,000,000 of aggregate principal amount of the 2025 Convertible Notes, the 2027 Convertible Notes, or such future convertible debt, as applicable, remains outstanding.

As of September 30, 2023, we held approximately 158,245 bitcoins, of which approximately 142,514 are unencumbered. We do not believe we will need to sell or engage in other transactions with respect to any of our bitcoins within the next twelve months to meet our working capital requirements, although we may from time to time sell or engage in other transactions with respect to our 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

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landscape, susceptibility to market abuse and manipulation, compliance and internal control failures at exchanges, 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:

	Nine Months Ended September 30,						%
	2023			2022			Change
Net cash provided by operating activities	$	11,528		$	21,409			-46.2	%
Net cash used in investing activities	$	(690,550	)	$	(233,329	)		196.0	%
Net cash provided by financing activities	$	676,025		$	220,051			207.2	%

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, subscription services and product support, as well as consulting and education 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, interest expense related to our long-term debt arrangements, and income taxes. Non-cash items to further reconcile net income (loss) to net cash provided by operating activities consist primarily of depreciation and amortization, reduction in the carrying amount of operating lease right-of-use 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 on our long-term debt, and gain on extinguishment of debt.

Net cash provided by operating activities decreased $9.9 million for the nine months ended September 30, 2023, as compared to the same period in the prior year, due to a $1.567 billion decrease in non-cash items (principally related to changes in digital asset impairment losses, deferred taxes, and a gain on extinguishment of debt in the first quarter of 2023) and a $2.8 million decrease from changes in operating assets and liabilities, which was partially offset by a $1.560 billion increase in net income.

Net cash used in investing activities. The changes in net cash used in investing activities primarily relate to purchases of digital assets and expenditures on property and equipment. Net cash used in investing activities increased $457.2 million for the nine months ended September 30, 2023, as compared to the same period in the prior year, primarily due to a $456.5 million increase in purchases of bitcoins and a $0.7 million increase in purchases of property and equipment. During the nine months ended September 30, 2023, we purchased $688.0 million of bitcoin using net proceeds from the sale of class A common stock under our at-the-market equity offering programs and Excess Cash, while during the nine months ended September 30, 2022, we purchased $231.5 million of bitcoin using net proceeds from the issuance of the 2025 Secured Term Loan and Excess Cash.

Net cash provided by financing activities. The changes in net cash provided by (used in) financing activities primarily relate to the sale of class A common stock under our at-the-market equity offering program, the issuance and subsequent repayment of our long-term debt, the exercise or vesting of certain awards under the 2013 Equity Plan, and the sales of class A common stock under the 2021 ESPP. Net cash provided by financing activities increased $456.0 million for the nine months ended September 30, 2023, as compared to the same period in the prior year, primarily due to (i) $819.7 million in net proceeds from the sale of class A common stock under our at-the-market equity offering program during the nine months ended September 30, 2023, and (ii) a $12.9 million increase in proceeds from the exercise of stock options under the Equity Plans in the nine months ended September 30, 2023, as compared to the same period in the prior year, partially offset by (iii) a $215.5 million decrease in long-term debt proceeds, net of lender fees and issuance costs, during the nine months ended September 30, 2023 as compared to the same period in the prior year, and (iv) the $160.0 million repayment of the 2025 Secured Term Loan and related third-party extinguishment costs during the nine months ended September 30, 2023, which was repaid using proceeds from our sale of class A common stock offered under our at-the-market equity offering program.

Long-term Debt

The terms of each of the long-term debt instruments are discussed more fully in Note 4, Long-term Debt, to the Consolidated Financial Statements included in this Quarterly Report as well as Note 8, Long-term Debt, to the Consolidated Financial Statements of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

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In December 2020, we issued $650.0 million aggregate principal amount of the 2025 Convertible Notes and in February 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. We did not pay any interest to holders of the 2025 Convertible Notes during the three months ended September 30, 2023 and 2022. For each of the nine months ended September 30, 2023 and 2022, we paid $2.4 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.

In June 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. As of September 30, 2023, approximately 15,731 of the bitcoins held by the Company serve as part of the collateral for the 2028 Secured Notes. We did not pay any interest to holders of the 2028 Secured Notes during the three months ended September 30, 2023 and 2022. For each of the nine months ended September 30, 2023 and 2022, we paid $15.3 million in interest to holders of the 2028 Secured Notes.

In March 2022, MacroStrategy, our wholly-owned subsidiary, entered into a Credit and Security Agreement with Silvergate Bank, pursuant to which Silvergate Bank issued the $205.0 million 2025 Secured Term Loan to MacroStrategy. We used $190.5 million of the net proceeds from the issuance of the 2025 Secured Term Loan to acquire bitcoin, $5.0 million of the net proceeds to maintain a reserve account that served as collateral for the 2025 Secured Term Loan, and the remaining net proceeds to pay fees, interest, and expenses related to the 2025 Secured Term Loan. On March 24, 2023, MacroStrategy and Silvergate Bank entered into a Prepayment, Waiver and Payoff to Credit and Security Agreement, pursuant to which MacroStrategy voluntarily prepaid Silvergate approximately $161.0 million (the “Payoff Amount”), in full repayment, satisfaction, and discharge of the 2025 Secured Term Loan and all other obligations under the Credit and Security Agreement. Upon Silvergate’s receipt of the Payoff Amount on March 24, 2023, the Credit and Security Agreement was terminated, and Silvergate released its security interest in all of MacroStrategy’s assets collateralizing the 2025 Secured Term Loan, including the bitcoin that was serving as collateral. During the first quarter of 2023, we made a final $5.1 million interest payment to Silvergate, $1.1 million of which was included in the Payoff Amount. We paid $2.7 million and $4.3 million in interest to Silvergate during the three and nine months ended September 30, 2022, respectively.

In June 2022, we, through one of our wholly-owned subsidiaries, 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. During the three and nine months ended September 30, 2023, we paid $0.3 million and $0.8 million, respectively, in principal and interest to the lender. During each of the three and nine months ended September 30, 2022, we paid $0.3 million in principal and interest to the lender.

At-the-Market Equity Offerings

On September 9, 2022, we entered into the 2022 Sales Agreement with the 2022 Sales Agents, pursuant to which we could issue and sell shares of our class A common stock having an aggregate offering price of up to $500.0 million from time to time through the 2022 Sales Agents.

On May 1, 2023, we terminated the 2022 Sales Agreement and entered into the May 2023 Sales Agreement with the May 2023 Sales Agents, pursuant to which we could issue and sell shares of our class A common stock having an aggregate offering price of up to $625.0 million from time to time through the May 2023 Sales Agents.

On August 1, 2023, we terminated the May 2023 Sales Agreement and entered into the August 2023 Sales Agreement with the August 2023 Sales Agents, pursuant to which we may issue and sell shares of our class A common stock having an aggregate offering price of up to $750.0 million from time to time through the August 2023 Sales Agents.

The terms of the 2022 Sales Agreement, May 2023 Sales Agreement, and August 2023 Sales Agreement are discussed more fully in Note 10, At-the-Market Equity Offerings, to the Consolidated Financial Statements.

We did not sell any shares of our class A common stock under the 2022 Sales Agreement during the three months ended September 30, 2023. During the nine months ended September 30, 2023, we issued and sold 1,348,855 shares of class A common stock under the 2022 Sales Agreement for aggregate net proceeds (less sales commissions and expenses) of approximately $339.0 million. At termination of the 2022 Sales Agreement on May 1, 2023, we had issued and sold an aggregate of 1,567,430 shares under the 2022 Sales Agreement for aggregate net proceeds (less sales commissions and expenses) of approximately $385.2 million.

We did not sell any shares of our class A common stock under the May 2023 Sales Agreement during the three months ended September 30, 2023. During the nine months ended September 30, 2023, we issued and sold 1,079,170 shares of class A common stock under the May 2023 Sales Agreement for aggregate net proceeds (less sales commissions and expenses) of approximately $333.5 million. These amounts also constitute the aggregate shares sold and net proceeds under the May 2023 Sales Agreement at termination of the May 2023 Sales Agreement on August 1, 2023.

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During the three and nine months ended September 30, 2023, we issued and sold 403,362 shares of our class A common stock under the August 2023 Sales Agreement, for aggregate net proceeds (less sales commissions and expenses) of approximately $147.2 million. As of September 30, 2023, approximately $602.1 million of our class A common stock remained available for issuance and sale pursuant to the August 2023 Sales Agreement.

Debt Repurchases and Prepayments.

During the first quarter of 2023, MacroStrategy voluntarily prepaid Silvergate the Payoff Amount in full repayment, satisfaction, and discharge of the 2025 Secured Term Loan and all other obligations under the Credit and Security Agreement. During the nine months ended September 30, 2023 and 2022, we did not repurchase or prepay any of our other outstanding debt. We or our affiliates may, at any time and from time to time, seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity or debt, in open-market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. We may also prepay our outstanding indebtedness. The amounts involved in any such repurchase or prepayment may be material. We may effect debt repurchases or prepayments using proceeds from the sale of our class A common stock pursuant to the August 2023 Sales Agreement (under which approximately $602.1 million remains available for sale as of the date hereof).

Non-GAAP Financial Measures

We are providing supplemental non-GAAP financial measures below which management uses 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. We also believe the use of these non-GAAP financial measures can facilitate comparison of our operating results to those of our competitors. 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.

Non-GAAP financial measures are subject to material limitations as they are not measurements prepared in accordance with GAAP, and are not a substitute for such measurements. For example, we expect that share-based compensation expense, which is excluded from certain of the non-GAAP financial measures below, 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 on our long-term debt, which is excluded from certain of the non-GAAP financial measures below, will continue to be a recurring expense over the terms of our long-term debt arrangements. 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.

Non-GAAP (loss) income from operations

Non-GAAP (loss) income from operations excludes share-based compensation expense, which is a significant non-cash expense that we believe is not reflective of our general business performance, and for which the accounting requires management judgment. Consequently, our accounting for share-based compensation expense could vary significantly in comparison to other companies. The following is a reconciliation of our non-GAAP (loss) income from operations to (loss) income from operations, its most directly comparable GAAP measure, (in thousands) for the periods indicated:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2023			2022		2023			2022
Reconciliation of non-GAAP (loss) income from operations:
(Loss) income from operations	$	(25,247	)	$	6,058	$	(72,262	)	$	(1,082,025	)
Share-based compensation expense		16,806			16,899		49,855			46,587
Non-GAAP (loss) income from operations	$	(8,441	)	$	22,957	$	(22,407	)	$	(1,035,438	)

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Non-GAAP net (loss) income and non-GAAP diluted (loss) earnings per share

Non-GAAP net (loss) income and non-GAAP diluted (loss) earnings per share each exclude the impact of (i) share-based compensation expense, (ii) interest expense arising from the amortization of debt issuance costs on our long-term debt, (iii) gain on extinguishment of debt, and (iv) related income taxes. We believe non-GAAP net (loss) income and non-GAAP diluted (loss) earnings per share offer management and investors insight as they exclude significant non-cash expenses, gains on debt extinguishment, and their related income tax effects. The following are reconciliations of our non-GAAP net (loss) income and non-GAAP diluted (loss) earnings per share to net (loss) income and diluted (loss) earnings per share, respectively, their most directly comparable GAAP measures (in thousands, except per share data), for the periods indicated:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2023			2022			2023			2022
Reconciliation of non-GAAP net (loss) income:
Net (loss) income	$	(143,441	)	$	(27,079	)	$	339,995		$	(1,220,128	)
Share-based compensation expense		16,806			16,899			49,855			46,587
Interest expense arising from amortization of debt issuance costs		2,199			2,193			6,599			6,490
Gain on debt extinguishment		0			0			(44,686	)		0
Income tax effects (1)		(3,230	)		(2,844	)		2,538			(10,186	)
Non-GAAP net (loss) income	$	(127,666	)	$	(10,831	)	$	354,301		$	(1,177,237	)
Reconciliation of non-GAAP diluted (loss) earnings per share (2):
Diluted (loss) earnings per share	$	(10.09	)	$	(2.39	)	$	23.87		$	(107.99	)
Share-based compensation expense (per diluted share)		1.18			1.49			3.44			4.12
Interest expense arising from amortization of debt issuance costs (per diluted share) (3)		0.15			0.19			0.09			0.57
Gain on debt extinguishment (per diluted share)		0.00			0.00			(3.08	)		0.00
Income tax effects (per diluted share) (3)		(0.22	)		(0.25	)		0.27			(0.89	)
Non-GAAP diluted (loss) earnings per share	$	(8.98	)	$	(0.96	)	$	24.59		$	(104.19	)

(1)Income tax effects reflect the net tax effects of share-based compensation expense, which includes tax benefits and expenses on exercises of stock options and vesting of share-settled restricted stock units, interest expense for amortization of debt issuance costs, and gain on debt extinguishment.

(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.

(3)For the nine months ended September 30, 2023, interest expense from the amortization of issuance costs of the Convertible Notes has been added back to the numerator in the GAAP diluted earnings per share calculation (as disclosed in Note 9, Basic and Diluted (Loss) Earnings per Share, to the Consolidated Financial Statements), and therefore the per diluted share effects of the amortization of issuance costs of the Convertible Notes have been excluded from the “Interest expense arising from amortization of debt issuance costs (per diluted share)” and “Income tax effects (per diluted share)” lines in the above reconciliation for the nine months ended September 30, 2023.

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Non-GAAP Constant Currency Revenues, Cost of Revenues, and Operating Expenses

We present certain of our revenues, cost of revenues, and operating expenses on a non-GAAP constant currency basis, which excludes certain changes resulting from fluctuations in foreign currency exchange rates. These non-GAAP constant currency metrics allow our management and investors to compare operating results to the same period in the prior year without the effects of certain changes in foreign currency exchange rates, which are not reflective of our general business performance and may vary significantly between periods. The following are reconciliations our non-GAAP constant currency revenues, cost of revenues, and operating expenses to their most directly comparable GAAP measures (in thousands) for the periods indicated:

	Three Months Ended
	September 30,
	GAAP		Foreign Currency Exchange Rate Impact (1)			Non-GAAP Constant Currency (2)		GAAP		GAAP % Change			Non-GAAP Constant Currency % Change (3)
	2023		2023			2023		2022		2023			2023
Product licenses revenues	$	24,045	$	368		$	23,677	$	22,286		7.9	%		6.2	%
Subscription services revenues		20,974		410			20,564		16,414		27.8	%		25.3	%
Product support revenues		66,860		1,530			65,330		66,010		1.3	%		-1.0	%
Other services revenues		17,583		446			17,137		20,650		-14.9	%		-17.0	%
Cost of product support revenues		5,531		73			5,458		5,224		5.9	%		4.5	%
Cost of other services revenues		12,760		543			12,217		13,360		-4.5	%		-8.6	%
Sales and marketing expenses		35,606		643			34,963		35,409		0.6	%		-1.3	%
Research and development expenses		29,660		(197	)		29,857		30,498		-2.7	%		-2.1	%
General and administrative expenses		29,223		209			29,014		27,283		7.1	%		6.3	%
	GAAP		Foreign Currency Exchange Rate Impact (1)			Non-GAAP Constant Currency (2)		GAAP		GAAP % Change			Non-GAAP Constant Currency % Change (3)
	2022		2022			2022		2021		2022			2022
Product licenses revenues	$	22,286	$	(915	)	$	23,201	$	25,830		-13.7	%		-10.2	%
Subscription services revenues		16,414		(790	)		17,204		10,853		51.2	%		58.5	%
Product support revenues		66,010		(3,760	)		69,770		70,387		-6.2	%		-0.9	%
Other services revenues		20,650		(1,710	)		22,360		20,924		-1.3	%		6.9	%
Cost of product support revenues		5,224		(236	)		5,460		4,679		11.6	%		16.7	%
Cost of other services revenues		13,360		(1,284	)		14,644		12,975		3.0	%		12.9	%
Sales and marketing expenses		35,409		(1,601	)		37,010		38,209		-7.3	%		-3.1	%
Research and development expenses		30,498		(740	)		31,238		28,211		8.1	%		10.7	%
General and administrative expenses		27,283		(467	)		27,750		23,751		14.9	%		16.8	%

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	Nine Months Ended
	September 30,
	GAAP		Foreign Currency Exchange Rate Impact (1)			Non-GAAP Constant Currency (2)		GAAP		GAAP % Change			Non-GAAP Constant Currency % Change (3)
	2023		2023			2023		2022		2023			2023
Product licenses revenues	$	56,979	$	(127	)	$	57,106	$	58,928		-3.3	%		-3.1	%
Subscription services revenues		59,662		(7	)		59,669		43,276		37.9	%		37.9	%
Product support revenues		198,422		377			198,045		199,682		-0.6	%		-0.8	%
Other services revenues		56,714		(202	)		56,916		64,824		-12.5	%		-12.2	%
Cost of product support revenues		17,115		(43	)		17,158		15,542		10.1	%		10.4	%
Cost of other services revenues		40,188		165			40,023		42,107		-4.6	%		-4.9	%
Sales and marketing expenses		109,372		26			109,346		105,511