Strategy Inc 10-Q

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® considers itself the world’s first Bitcoin development company. We are a publicly-traded operating company committed to the continued development of the Bitcoin network through our activities in the financial markets, advocacy and technology innovation. As an operating business, we are able to use cash flows as well as proceeds from equity and debt financings to accumulate bitcoin, which serves as our primary treasury reserve asset. We also develop and provide industry-leading AI-powered enterprise analytics software that promotes our vision of Intelligence Everywhere™, and are using our software development capabilities to develop bitcoin applications. Our software business, which we have operated for over 30 years, is our predominant operational focus, providing cash flows and enabling us to pursue our bitcoin strategy. We believe that the combination of our operating structure, bitcoin strategy and focus on technology innovation differentiates us in the digital assets industry. Bitcoin Strategy Our bitcoin strategy includes (i) acquiring bitcoin using cash flows from operations and proceeds from equity and debt financings, (ii) developing product innovations that leverage Bitcoin blockchain technology, and (iii) periodically engaging in advocacy and educational activities regarding the continued acceptance and value of bitcoin as an open, secure protocol for an internet-native digital asset. 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 (which may include debt repayment), 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 strategies to create income streams or otherwise generate funds using our bitcoin holdings. 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 2023 and 2024, we used proceeds from various capital raising transactions to purchase bitcoin. As of June 30, 2024, we held an aggregate of approximately 226,331 bitcoins, with 50,610 bitcoins held directly by MicroStrategy and 175,721 bitcoins held by MacroStrategy, a wholly-owned subsidiary of MicroStrategy. As of June 30, 2024, all of the approximately 50,610 bitcoins held directly by MicroStrategy Incorporated, which had a market value of $3.134 billion based on the $61,926.69 market price of one bitcoin on the Coinbase exchange at 4:00 p.m. Eastern Time on June 30, 2024, 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. 27 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 Approximate Average Purchase Price Per Bitcoin Balance at December 31, 2022 $ 3,993,190 $ (2,153,162 ) $ 1,840,028 132,500 $ 30,137 Digital asset purchases (a) 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 (b) 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 (c) 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 Digital asset purchases (d) 1,214,340 1,214,340 30,905 39,293 Digital asset impairment losses (39,238 ) (39,238 ) Balance at December 31, 2023 $ 5,895,489 $ (2,269,013 ) $ 3,626,476 189,150 $ 31,168 Digital asset purchases (e) 1,639,309 1,639,309 25,128 65,238 Digital asset impairment losses (191,633 ) (191,633 ) Balance at March 31, 2024 $ 7,534,798 $ (2,460,646 ) $ 5,074,152 214,278 $ 35,164 Digital asset purchases (f) 793,828 793,828 12,053 65,861 Digital asset impairment losses (180,090 ) (180,090 ) Balance at June 30, 2024 $ 8,328,626 $ (2,640,736 ) $ 5,687,890 226,331 $ 36,798 (a) 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. (b) 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. (c) 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. (d) In the fourth quarter of 2023, we purchased bitcoin using $1.201 billion of the net proceeds from our sale of class A common stock under our at-the-market equity offering program, and Excess Cash. (e) In the first quarter of 2024, we purchased bitcoin using $782.0 million of the net proceeds from our issuance of the 2030 Convertible Notes, $592.3 million of the net proceeds from our issuance of the 2031 Convertible Notes, $137.3 million of the net proceeds from our sale of class A common stock under our at-the-market equity offering program, and Excess Cash. (f) In the second quarter of 2024, we purchased $793.8 million of bitcoin using net proceeds from our issuance of the 2032 Convertible Notes 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. 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, 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 December 31, 2023 189,150 $ 26,521.32 $ 5,016,508 $ 45,000.00 $ 8,511,750 $ 42,531.41 $ 8,044,816 March 31, 2024 214,278 $ 38,501.00 $ 8,249,917 $ 73,835.57 $ 15,821,338 $ 71,028.14 $ 15,219,768 June 30, 2024 226,331 $ 56,500.00 $ 12,787,702 $ 72,777.00 $ 16,471,691 $ 61,926.69 $ 14,015,930 28 (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. Bitcoin and bitcoin markets may be subject to manipulation and the spot price of bitcoin may be subject to fraud and manipulation. 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 June 30, 2024, digital asset impairment losses of $180.1 million represented 64.1% of our operating expenses, compared to digital asset impairment losses of $24.1 million, representing 20.1% of our operating expenses, during the three months ended June 30, 2023. During the six months ended June 30, 2024, digital asset impairment losses of $371.7 million represented 65.2% of our operating expenses, compared to digital asset impairment losses of $43.1 million, representing 18.4% of our operating expenses, during the six months ended June 30, 2023. As of August 5, 2024, we held approximately 226,500 bitcoins that were acquired at an aggregate purchase price of $8.340 billion and an average purchase price of approximately $36,821 per bitcoin, inclusive of fees and expenses. As of August 5, 2024, at 4:00 p.m. Eastern Time, the market price of one bitcoin reported on the Coinbase exchange was $53,469.63. Enterprise Analytics Software Strategy MicroStrategy is a pioneer in AI-powered business intelligence (BI), and a global leader in enterprise analytics solutions. We provide software and services designed to turn complex, chaotic data environments into rich, reliable, and convenient information feeds for our customers. Our vision is to make every worker a domain expert by delivering Intelligence Everywhere™. Our cloud-native flagship, MicroStrategy ONE™, powers some of the largest analytics deployments in the world for customers spanning a wide range of industries, including retail, banking, technology, manufacturing, insurance, consulting, healthcare, telecommunications, and the public sector. Integral to the MicroStrategy ONE platform are Generative AI capabilities that are designed to automate and accelerate the deployment of AI-enabled applications across our customers’ enterprises. By making advanced analytics accessible through conversational AI, MicroStrategy ONE provides non-technical users with the ability to directly access novel and actionable insights for decision-making. MicroStrategy ONE combines the flexibility and scalability afforded by a modern, cloud application with the reliability and security of our robust data governance model. It empowers users by making rich analytics easily accessible and personalized, while enabling organizations to harness the value of their data wherever it is needed. 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. 29 Operating Highlights The following table sets forth certain operating highlights (in thousands) for the three and six months ended June 30, 2024 and 2023: Three Months Ended Six Months Ended June 30, June 30, 2024 2023 2024 2023 Revenues Product licenses $ 9,286 $ 15,522 $ 22,224 $ 32,934 Subscription services 24,080 19,878 47,046 38,688 Total product licenses and subscription services 33,366 35,400 69,270 71,622 Product support 61,740 66,081 124,425 131,562 Other services 16,336 18,919 32,993 39,131 Total revenues 111,442 120,400 226,688 242,315 Cost of revenues Product licenses 794 444 1,361 978 Subscription services 9,560 7,216 18,164 15,072 Total product licenses and subscription services 10,354 7,660 19,525 16,050 Product support 8,193 5,816 16,740 11,584 Other services 12,388 13,645 24,685 27,428 Total cost of revenues 30,935 27,121 60,950 55,062 Gross profit 80,507 93,279 165,738 187,253 Operating expenses Sales and marketing 34,251 37,660 67,702 73,766 Research and development 30,311 29,354 59,494 60,712 General and administrative 36,129 28,830 70,795 56,736 Digital asset impairment losses 180,090 24,143 371,723 43,054 Total operating expenses 280,781 119,987 569,714 234,268 Loss from operations $ (200,274 ) $ (26,708 ) $ (403,976 ) $ (47,015 ) 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. Employees As of June 30, 2024, we had a total of 1,839 employees, of whom 603 were based in the United States and 1,236 were based internationally. The following table summarizes employee headcount as of the dates indicated: June 30, December 31, June 30, 2024 2023 2023 Subscription services 99 100 113 Product support 197 154 172 Consulting 350 399 436 Education 11 13 13 Sales and marketing 349 390 427 Research and development 625 642 674 General and administrative 208 236 264 Total headcount 1,839 1,934 2,099 30 Share-based Compensation Expense As discussed in Note 8, Share-based Compensation, to the Consolidated Financial Statements, we have awarded 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 Six Months Ended June 30, June 30, 2024 2023 2024 2023 Cost of subscription services revenues $ 119 $ 84 $ 189 $ 153 Cost of product support revenues 1,067 525 1,985 1,032 Cost of consulting revenues 496 455 881 888 Cost of education revenues 36 23 62 44 Sales and marketing 3,865 4,211 8,566 9,311 Research and development 4,014 2,211 7,117 6,157 General and administrative 11,024 7,985 19,612 15,464 Total share-based compensation expense $ 20,621 $ 15,494 $ 38,412 $ 33,049 The $5.1 million increase in share-based compensation expense during the three months ended June 30, 2024, as compared to the same period in the prior year, was primarily due to the grant of additional awards under the Stock Incentive Plans, partially offset by the forfeiture of certain stock awards and certain awards that became fully vested. The $5.4 million increase in share-based compensation expense during the six months ended June 30, 2024, as compared to the same period in the prior year, was primarily due to the grant of additional awards under the Stock Incentive Plans and the revaluation and exercise 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 June 30, 2024, we estimated that an aggregate of approximately $158.4 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 2.6 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 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, 2023. There have been no significant changes in such estimates and judgments since December 31, 2023. 31 Results of Operations Comparison of the three and six months ended June 30, 2024 and 2023 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 Six Months Ended June 30, % June 30, % 2024 2023 Change 2024 2023 Change Product Licenses and Subscription Services Revenues: Product Licenses Domestic $ 4,804 $ 10,416 -53.9 % $ 9,811 $ 19,066 -48.5 % International 4,482 5,106 -12.2 % 12,413 13,868 -10.5 % Total product licenses revenues 9,286 15,522 -40.2 % 22,224 32,934 -32.5 % Subscription Services Domestic 14,916 12,867 15.9 % 29,508 25,203 17.1 % International 9,164 7,011 30.7 % 17,538 13,485 30.1 % Total subscription services revenues 24,080 19,878 21.1 % 47,046 38,688 21.6 % Total product licenses and subscription services revenues $ 33,366 $ 35,400 -5.7 % $ 69,270 $ 71,622 -3.3 % Product licenses revenues. Product licenses revenues decreased $6.2 million and $10.7 million for the three and six months ended June 30, 2024, as compared to the same periods in the prior year, primarily due to an overall decrease in the volume and average size of deals. Our product licenses revenues may continue to experience declines in future periods as we continue to promote our cloud offering to new and existing customers. 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 $4.2 million and $8.4 million for the three and six months ended June 30, 2024, as compared to the same periods in the prior year, primarily due to conversions to cloud-based subscriptions from existing on-premises customers, a net increase in the use of subscription services by existing customers, and sales contracts with new 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 Six Months Ended June 30, % June 30, % 2024 2023 Change 2024 2023 Change Product Support Revenues: Domestic $ 37,049 $ 39,735 -6.8 % $ 74,457 $ 79,554 -6.4 % International 24,691 26,346 -6.3 % 49,968 52,008 -3.9 % Total product support revenues $ 61,740 $ 66,081 -6.6 % $ 124,425 $ 131,562 -5.4 % Product support revenues are derived from providing technical software support and software updates and upgrades to customers. Product support revenues are recognized ratably over the term of the contract, which is generally one year. Product support revenues decreased $4.3 million and $7.1 million for the three and six months ended June 30, 2024, as compared to the same periods in the prior year, primarily due to certain existing customers converting from perpetual product licenses with separate support contracts to our subscription services offerings. Our product support revenues may experience declines in future periods as we continue to promote our cloud offering to new and existing customers. 32 Other services revenues. The following table sets forth other services revenues (in thousands) and related percentage changes for the periods indicated: Three Months Ended Six Months Ended June 30, % June 30, % 2024 2023 Change 2024 2023 Change Other Services Revenues: Consulting Domestic $ 6,912 $ 8,849 -21.9 % $ 14,319 $ 18,247 -21.5 % International 8,692 9,131 -4.8 % 17,100 19,070 -10.3 % Total consulting revenues 15,604 17,980 -13.2 % 31,419 37,317 -15.8 % Education 732 939 -22.0 % 1,574 1,814 -13.2 % Total other services revenues $ 16,336 $ 18,919 -13.7 % $ 32,993 $ 39,131 -15.7 % Consulting revenues. Consulting revenues are derived from helping customers plan and execute the deployment of our software. Consulting revenues decreased $2.4 million and $5.9 million for the three and six months ended June 30, 2024, as compared to the same periods in the prior year, primarily due to a decrease in billable hours worldwide. 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 and six months ended June 30, 2024, as compared to the same periods in the prior year. 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 Six Months Ended June 30, % June 30, % 2024 2023 Change 2024 2023 Change Cost of Revenues: Product licenses and subscription services: Product licenses $ 794 $ 444 78.8 % $ 1,361 $ 978 39.2 % Subscription services 9,560 7,216 32.5 % 18,164 15,072 20.5 % Total product licenses and subscription services 10,354 7,660 35.2 % 19,525 16,050 21.7 % Product support 8,193 5,816 40.9 % 16,740 11,584 44.5 % Other services: Consulting 11,795 13,180 -10.5 % 23,541 26,192 -10.1 % Education 593 465 27.5 % 1,144 1,236 -7.4 % Total other services 12,388 13,645 -9.2 % 24,685 27,428 -10.0 % Total cost of revenues $ 30,935 $ 27,121 14.1 % $ 60,950 $ 55,062 10.7 % 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 six months ended June 30, 2024, 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. Cost of subscription services revenues increased $2.3 million for the three months ended June 30, 2024, as compared to the same period in the prior year, primarily due to a $2.4 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 $3.1 million for the six months ended June 30, 2024, as compared to the same period in the prior year, primarily due to a $3.3 million increase in cloud hosting infrastructure costs, which is a result of the increased usage by new and existing cloud subscription services customers. 33 Cost of product support revenues. Cost of product support revenues consists of personnel and related overhead costs. Cost of product support revenues increased $2.4 million for the three months ended June 30, 2024, as compared to the same period in the prior year, primarily due to (i) a $0.7 million increase in salaries and personnel costs, (ii) a $0.7 million increase in variable compensation, and (iii) a $0.5 million net increase in share-based compensation expense, which were all primarily attributable to an increase in average staffing levels, partially offset by the discontinuance of our Enterprise Support program in the current year, which previously resulted in compensation costs for certain consulting personnel being allocated to cost of product support revenues. Cost of product support revenues increased $5.2 million for the six months ended June 30, 2024, as compared to the same period in the prior year, primarily due to (i) a $1.7 million increase in variable compensation, (ii) a $1.5 million increase in salaries and personnel costs, and (iii) a $1.0 million net increase in share-based compensation expense, which were all primarily attributable to an increase in average staffing levels, partially offset by the discontinuance of our Enterprise Support program in the current year. Cost of consulting revenues. Cost of consulting revenues consists of personnel and related overhead costs. Cost of consulting revenues decreased $1.4 million for the three months ended June 30, 2024, as compared to the same period in the prior year, primarily due to (i) a $0.8 million decrease in variable compensation and (ii) a $0.7 million decrease in salaries and personnel costs attributable to a decrease in average staffing levels, partially offset by the discontinuance of our Enterprise Support program in the current year. Cost of consulting revenues decreased $2.7 million for the six months ended June 30, 2024, as compared to the same period in the prior year, primarily due to (i) a $1.4 million decrease in variable compensation and (ii) a $1.1 million decrease in salaries and personnel costs attributable to a decrease in average staffing levels, partially offset by the discontinuance of our Enterprise Support program in the current year. Cost of education revenues. Cost of education revenues consists of personnel and related overhead costs. Cost of education revenues did not materially change for the three and six months ended June 30, 2024, as compared to the same periods in the prior year. 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. The following table sets forth sales and marketing expenses (in thousands) and related percentage changes for the periods indicated: Three Months Ended Six Months Ended June 30, % June 30, % 2024 2023 Change 2024 2023 Change Sales and marketing expenses $ 34,251 $ 37,660 -9.1 % $ 67,702 $ 73,766 -8.2 % Sales and marketing expenses decreased $3.4 million for the three months ended June 30, 2024, as compared to the same period in the prior year, primarily due to (i) a $2.1 million decrease in variable compensation primarily attributable to an increase in net capitalized commissions, partially offset by an increase in commissions earned, (ii) a $1.5 million decrease in employee salaries primarily attributable to a decrease in average staffing levels, partially offset by wage increases, (iii) a $0.5 million decrease in facility and other related support costs, and (iv) a $0.4 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 (v) a $1.0 million increase in marketing costs, and (vi) a $0.5 million increase in subcontractor costs. Sales and marketing expenses decreased $6.1 million for the six months ended June 30, 2024, as compared to the same period in the prior year, primarily due to (i) a $3.8 million decrease in variable compensation primarily attributable to an increase in net capitalized commissions, partially offset by an increase in commissions earned, (ii) a $3.6 million decrease in employee salaries primarily attributable to a decrease in average staffing levels, partially offset by wage increases, (iii) a $0.9 million decrease in facility and other related support costs, and (iv) 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 upon exercise or at the end of the reporting period, partially offset by (v) a $1.7 million increase in marketing costs, and (vi) a $1.2 million increase in personnel costs primarily attributable to an increase in employer payroll taxes related to the exercise or vesting of certain awards under the Stock Incentive Plans. Research and development expenses. Research and development expenses consist of the personnel costs for our software engineering personnel and related overhead costs. The following table summarizes research and development expenses (in thousands) and related percentage changes for the periods indicated: Three Months Ended Six Months Ended June 30, % June 30, % 2024 2023 Change 2024 2023 Change Research and development expenses $ 30,311 $ 29,354 3.3 % $ 59,494 $ 60,712 -2.0 % Research and development expenses increased $1.0 million for the three months ended June 30, 2024, as compared to the same period in the prior year, primarily due to (i) a $1.8 million net increase in share-based compensation expense primarily attributable to the grant of additional awards under the Stock Incentive Plans and (ii) a $0.9 million increase in personnel costs primarily attributable to an increase in employer payroll taxes related to the exercise or vesting of certain awards under the Stock Incentive Plans, partially offset 34 by (iii) a $1.0 million decrease in employee salaries primarily attributable to a decrease in average staffing levels, partially offset by wage increases. Research and development expenses decreased $1.2 million for the six months ended June 30, 2024, as compared to the same period in the prior year, primarily due to (i) a $2.6 million decrease in employee salaries primarily attributable to a decrease in average staffing levels, partially offset by wage increases and (ii) a $0.4 million decrease in cloud hosting infrastructure costs, partially offset by (iii) a $1.3 million increase in personnel costs primarily attributable to an increase in employer payroll taxes related to the exercise or vesting of certain awards under the Stock Incentive Plans and (iv) a $1.0 million net increase in share-based compensation expense primarily attributable to the grant of additional awards under the Stock Incentive Plans, partially offset by the forfeiture of certain awards. 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, and third-party costs associated with our digital asset holdings. The following table sets forth general and administrative expenses (in thousands) and related percentage changes for the periods indicated: Three Months Ended Six Months Ended June 30, % June 30, % 2024 2023 Change 2024 2023 Change General and administrative expenses $ 36,129 $ 28,830 25.3 % $ 70,795 $ 56,736 24.8 % General and administrative expenses increased $7.3 million for the three months ended June 30, 2024, as compared to the same period in the prior year, primarily due to (i) a $3.0 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 $2.9 million increase in legal, consulting, and other advisory costs, (iii) a $2.4 million increase in personnel costs primarily attributable to an increase in employer payroll taxes related to the exercise or vesting of certain awards under the Stock Incentive Plans, and (iv) a $1.0 million increase in custodial fees incurred on our bitcoin holdings, partially offset by (v) a $1.2 million loss recorded in the prior year with respect to the Brazilian matters noted in Note 6, Commitments and Contingencies, to the Consolidated Financial Statements, and (vi) a $0.8 million decrease in employee salaries primarily attributable to a decrease in average staffing levels, partially offset by wage increases. General and administrative expenses increased $14.1 million for the six months ended June 30, 2024, as compared to the same period in the prior year, primarily due to (i) a $7.6 million increase in personnel costs primarily attributable to an increase in employer payroll taxes related to the exercise or vesting of certain awards under the Stock Incentive Plans, (ii) a $4.1 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 and the forfeiture of certain awards, (iii) a $3.9 million increase in legal, consulting, and other advisory costs, and (iv) a $1.5 million increase in custodial fees incurred on our bitcoin holdings, partially offset by (v) a $1.6 million decrease in employee salaries primarily attributable to a decrease in average staffing levels, partially offset by wage increases and (iv) a $1.2 million loss recorded in the prior year with respect to the Brazilian matters noted in Note 6, Commitments and Contingencies, to the Consolidated Financial Statements. 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 Six Months Ended June 30, % June 30, % 2024 2023 Change 2024 2023 Change Digital asset impairment losses $ 180,090 $ 24,143 645.9 % $ 371,723 $ 43,054 763.4 % We did not sell any of our digital assets during the three and six months ended June 30, 2024 and 2023. We may continue to incur significant digital asset impairment losses in the future. For example, we have incurred at least $275.5 million in digital asset impairment losses during the third quarter of 2024 on bitcoin we held as of June 30, 2024. 35 Interest Expense, Net Interest expense, net, primarily relates to the contractual interest expense and amortization of issuance costs related to our long-term debt arrangements. The following table sets forth interest expense, net (in thousands) and related percentage changes for the periods indicated: Three Months Ended Six Months Ended June 30, June 30, 2024 2023 2024 2023 Interest expense, net: 2025 Convertible Notes $ 1,841 $ 1,979 $ 3,827 $ 3,955 2027 Convertible Notes 1,011 1,007 2,021 2,013 2030 Convertible Notes 2,222 0 2,789 0 2031 Convertible Notes 1,924 0 2,204 0 2032 Convertible Notes 745 0 745 0 2028 Secured Notes 8,092 8,064 16,177 16,121 2025 Secured Term Loan 0 0 0 3,812 Other interest (income) expense, net (369 ) 45 (416 ) 124 Total interest expense, net $ 15,466 $ 11,095 $ 27,347 $ 26,025 Interest expense, net, increased $4.4 million for the three months ended June 30, 2024, as compared to the same period in the prior year, primarily as a result of interest incurred related to the 2030 Convertible Notes and 2031 Convertible Notes (which were each issued in March 2024) and interest incurred related to the 2032 Convertible Notes (which were issued in June 2024). Interest expense, net, increased $1.3 million for the six months ended June 30, 2024, as compared to the same period in the prior year, primarily as a result of interest incurred related to the 2030 Convertible Notes, 2031 Convertible Notes, and 2032 Convertible Notes, partially offset by the repayment of the 2025 Secured Term Loan in March 2023. Interest expense for future periods in 2024 is expected to increase compared to the same periods in 2023 as a result of the issuances of our 2030 Convertible Notes, 2031 Convertible Notes, and 2032 Convertible Notes, partially offset by the 2025 Convertible Notes having been converted or redeemed in their entirety by July 15, 2024. Refer to Note 5, Long-term Debt, to the Consolidated Financial Statements for further information. Gain on Debt Extinguishment For the six months ended June 30, 2023, the $44.7 million gain on debt extinguishment resulted from the repayment of the 2025 Secured Term Loan. Refer to Note 5, Long-term Debt, to the Consolidated Financial Statements for further information. Other Income (Expense), Net For the three and six months ended June 30, 2024, other income, net, of $0.7 million and $2.4 million, respectively, were comprised primarily of foreign currency transaction net gains. For the three and six months ended June 30, 2023, other expense, net, of $0.3 million and $1.7 million, respectively, were comprised primarily of foreign currency transaction net losses. Income Taxes We recorded a benefit from income taxes of $273.3 million on a pretax loss of $428.9 million that resulted in an effective tax rate of 63.7% for the six months ended June 30, 2024, as compared to a benefit from income taxes of $513.5 million on a pretax loss of $30.0 million that resulted in an effective tax rate of 1,708.9% for the six months ended June 30, 2023. During the six months ended June 30, 2024, our benefit from income taxes primarily related to (i) a tax benefit related to share-based compensation (including the income tax effects of exercises of stock options and vesting of share-settled restricted stock units) and (ii) a tax benefit from an increase in our deferred tax asset related to the impairment on our bitcoin holdings. During the six months ended June 30, 2023, our benefit from income taxes primarily related to the release of a portion of the valuation allowance on our deferred tax asset related to the impairment on our bitcoin holdings, attributable to the increase in market value of bitcoin as of June 30, 2023 compared to December 31, 2022. As of June 30, 2024, we had a valuation allowance of $1.4 million primarily related to our deferred tax assets related to foreign tax credits in certain jurisdictions. The largest deferred tax asset relates to the impairment on our bitcoin holdings. During 2023, the value of bitcoin increased substantially which allowed us to release the valuation allowance recorded against the deferred tax asset for impairment on our bitcoin holdings. Changes to the valuation allowance against the deferred tax asset are largely dependent on the change in the market value of bitcoin from the previous reporting date. If the market value of bitcoin declines or we are unable to regain profitability in future periods, we may be required to increase the valuation allowance against our deferred tax assets, which could result in a charge that would materially adversely affect net income (loss) in the period in which the charge is incurred. We routinely consider actions necessary to preserve or utilize tax attributes. We will continue to regularly assess the realizability of deferred tax assets. 36 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. The following table summarizes deferred revenue and advance payments (in thousands), as of: June 30, December 31, June 30, 2024 2023 2023 Current: Deferred product licenses revenue $ 4,200 $ 3,579 $ 974 Deferred subscription services revenue 69,566 65,512 49,898 Deferred product support revenue 127,170 152,012 141,605 Deferred other services revenue 3,901 7,059 3,340 Total current deferred revenue and advance payments $ 204,837 $ 228,162 $ 195,817 Non-current: Deferred product licenses revenue $ 0 $ 0 $ 2,493 Deferred subscription services revenue 1,623 3,097 2,888 Deferred product support revenue 3,974 4,984 5,340 Deferred other services revenue 367 443 523 Total non-current deferred revenue and advance payments $ 5,964 $ 8,524 $ 11,244 Total current and non-current: Deferred product licenses revenue $ 4,200 $ 3,579 $ 3,467 Deferred subscription services revenue 71,189 68,609 52,786 Deferred product support revenue 131,144 156,996 146,945 Deferred other services revenue 4,268 7,502 3,863 Total current and non-current deferred revenue and advance payments $ 210,801 $ 236,686 $ 207,061 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 $25.9 million as of June 30, 2024, as compared to December 31, 2023, primarily due to (i) a decrease in deferred product support revenue from an increase in conversions from on-premises to subscription services contracts and (ii) a decrease in deferred other services revenue from an increase in revenue recognized from previously deferred other services, partially offset by (iii) an increase in deferred revenue from subscription services contracts. Total deferred revenue and advance payments increased $3.7 million as of June 30, 2024, as compared to June 30, 2023, primarily due to (i) an increase in deferred revenue from subscription services contracts, partially offset by (ii) a decrease in deferred product support revenue from an increase in conversions from on-premises to subscription services contracts. 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 June 30, 2024, we had an aggregate transaction price of $360.7 million allocated to the remaining performance obligation related to subscription services, product support, product licenses, and other services contracts. We expect to recognize approximately $242.4 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. On August 1, 37 2024, we filed a prospectus for a new at-the-market equity offering program pursuant to which we may sell class A common stock having an aggregate offering price of up to $2.0 billion from time to time. For additional information, see “—At-the-Market Equity Offerings” below. As of June 30, 2024 and December 31, 2023, the amount of cash and cash equivalents held by our U.S. entities was $30.3 million and $10.5 million, respectively, and by our non-U.S. entities was $36.6 million and $36.3 million, respectively. We earn a significant amount of our revenues outside the United States. We did not repatriate any foreign earnings and profits during the six months ended June 30, 2024 or 2023. Our material contractual obligations and cash requirements consist of: • principal and interest payments related to our long-term debt, which includes: o principal due upon maturity of our long-term debt instruments in the aggregate of $3.762 billion, excluding the 2025 Convertible Notes, which were converted or redeemed in their entirety on or before July 15, 2024; o $2.5 million in coupon interest due each semi-annual period for the 2030 Convertible Notes; o $2.6 million in coupon interest due each semi-annual period for the 2031 Convertible Notes; o $9.0 million in coupon interest due each semi-annual period for the 2032 Convertible Notes; o $15.3 million in coupon interest due each semi-annual period for the 2028 Secured Notes; and o $0.1 million due monthly in principal and interest related to our other long-term secured 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 cloud hosting services and 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 5, 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, 2023 and in the Notes to the Consolidated Financial Statements included therein. Other than our issuances of the 2030 Convertible Notes, 2031 Convertible Notes, and 2032 Convertible Notes described more fully below and in Note 5, Long-term Debt, to the Consolidated Financial Statements included in this Quarterly Report, and the conversions and redemption of the 2025 Convertible Notes described more fully below and in Note 5, Long-term Debt, and Note 13, Subsequent Events, to the Consolidated Financial Statements included in this Quarterly Report, there have been no changes to our material contractual obligations and cash requirements since December 31, 2023. 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 also have long-term cash requirements for obligations related to our operating leases, the Transition Tax, and our various purchase agreements. As of June 30, 2024, 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 the conditional conversion features of the Convertible Notes are triggered, we may elect to settle the conversions of Convertible Notes in shares of our class A common stock, or a combination of cash and shares of class A common stock, rather than in all cash, 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 2027 Convertible Notes (which is November 16, 2026) or (ii) 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 2027 Convertible Notes or such future convertible debt, as applicable, remains outstanding. In addition, while the 2030 Convertible Notes, the 2031 Convertible Notes, and the 2032 Convertible Notes have maturity dates of March 15, 2030, March 15, 2031, and June 15, 2032, respectively, the holders of these Convertible Notes each have the right to require us to repurchase for cash all or any portion of these Convertible Notes on September 15, 2028, in the case of the 2030 Convertible Notes and the 2031 Convertible Notes, or June 15, 2029, in the case of the 2032 Convertible Notes, at a repurchase price in each case equal to 100% of the principal amount of the applicable Convertible Notes to be repurchased, plus any accrued and unpaid interest to, but excluding the repurchase date. As of June 30, 2024, we held approximately 226,331 bitcoins, of which approximately 175,721 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 38 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 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: Six Months Ended June 30, % 2024 2023 Change Net cash provided by operating activities $ 5,258 $ 18,925 -72.2 % Net cash used in investing activities $ (2,435,405 ) $ (527,416 ) 361.8 % Net cash provided by financing activities $ 2,451,831 $ 525,911 366.2 % 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 (loss) income 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 $13.7 million for the six months ended June 30, 2024, as compared to the same period in the prior year, due to a $639.1 million decrease in net income and a $7.2 million decrease from changes in operating assets and liabilities, which was partially offset by a $632.7 million increase 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). 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 $1.908 billion for the six months ended June 30, 2024, as compared to the same period in the prior year, primarily due to a $1.907 billion increase in purchases of bitcoins. During the six months ended June 30, 2024, we purchased $2.433 billion of bitcoin using net proceeds from the issuances of our 2030 Convertible Notes, 2031 Convertible Notes, and 2032 Convertible Notes, net proceeds from the sale of class A common stock under our at-the-market equity offering program, and Excess Cash, while during the six months ended June 30, 2023, we purchased $526.3 million of bitcoin using net proceeds from the sale of class A common stock under our at-the-market equity offering program and Excess Cash. Net cash provided by financing activities. The changes in cash provided by and used in financing activities primarily relate to the issuance and subsequent repayment of long-term debt, the sale of class A common stock under our at-the-market equity offering program, the exercise or vesting of certain awards under the Stock Incentive Plans, and the sales of class A common stock under the 2021 ESPP. Net cash provided by financing activities increased $1.926 billion for the six months ended June 30, 2024, as compared to the same period in the prior year, primarily due to (i) a $2.162 billion increase in long-term debt proceeds, net of issuance costs, during the six months ended June 30, 2024 as compared to the same period in the prior year, (ii) the $160.0 million repayment of the 2025 Secured Term Loan and related third-party extinguishment costs during the six months ended June 30, 2023, which was repaid using proceeds from our sale of class A common stock offered under our at-the-market equity offering program, and (iii) a $141.2 million increase in proceeds from the exercise of stock options under the Stock Incentive Plans in the six months ended June 30, 2024, as compared to the same period in the prior year, partially offset by, (iv) a $535.3 million decrease in net proceeds from the sale of class A common stock under our at-the-market equity offering program during the six months ended June 30, 2024 as compared to the same period in the prior year. Long-term Debt The terms of each of the long-term debt instruments are discussed more fully in Note 5, 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, 2023. 39 In December 2020, we issued $650.0 million aggregate principal amount of the 2025 Convertible Notes; in February 2021, we issued $1.050 billion aggregate principal amount of the 2027 Convertible Notes; in March 2024, we issued $800.0 million aggregate principal amount of the 2030 Convertible Notes and $603.8 million aggregate principal amount of the 2031 Convertible Notes; and in June 2024, we issued $800.0 million aggregate principal amount of the 2032 Convertible Notes. We principally used the net proceeds from the issuances of the Convertible Notes to acquire bitcoin. During each of the six months ended June 30, 2024 and 2023, we paid $2.4 million in interest to holders of the Convertible Notes. During the period from April 1, 2024 to July 15, 2024, we issued 1,632,305 shares of class A common stock and paid a nominal amount of cash in lieu of fractional shares in connection with conversions of $649.7 million aggregate principal amount of 2025 Convertible Notes and on July 15, 2024 redeemed $0.3 million aggregate principal amount of 2025 Convertible Notes, constituting all of the 2025 Convertible Notes then outstanding, at an aggregate redemption price of $0.3 million, equal to 100% of the principal amount of the 2025 Convertible Notes redeemed, plus accrued and unpaid interest, to but excluding such 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 June 30, 2024, approximately 50,610 of the bitcoins held by the Company serve as part of the collateral for the 2028 Secured Notes. During each of the six months ended June 30, 2024 and 2023, 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 establish 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. 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 each of the six months ended June 30, 2024 and 2023, we paid $0.5 million in principal and interest to the lender. Other than as discussed above, during the six months ended June 30, 2024 and 2023, we did not repurchase or prepay any of our 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 of certain debt using proceeds from the sale of our class A common stock pursuant to the August 2024 Sales Agreement (under which $2.0 billion is available for sale as of the date hereof), as described in the Use of Proceeds section of the related prospectus. At-the-Market Equity Offerings From time to time, we have entered into sales agreements with agents pursuant to which we could issue and sell shares of our class A common stock through at-the-market equity offering programs. See Note 10, At-the-Market Equity Offerings, to the Consolidated Financial Statements for additional information regarding sales of our class A common stock pursuant to each of the sales agreements that were active during the six months ended June 30, 2024 and the year ended December 31, 2023. On August 1, 2024, we filed a prospectus for a new at-the-market equity offering program pursuant to which we may sell class A common stock having an aggregate offering price of up to $2.0 billion from time to time, through TD Securities (USA) LLC, The Benchmark Company, LLC, BTIG, LLC, Canaccord Genuity LLC, Maxim Group LLC and SG Americas Securities, LLC, as agents (the “August 2024 Sales Agents”) under a sales agreement dated August 1, 2024 (the “August 2024 Sales Agreement”). 40 The following table sets forth total shares sold and total net proceeds received (net of sales commissions and expenses) from shares sold under our at-the-market equity offering programs for the periods indicated (in thousands, except number of shares): Three Months Ended Six Months Ended June 30, June 30, 2024 2023 2024 2023 Total shares sold pursuant to at-the-market equity offering programs 0 1,079,170 195,162 2,428,025 Total net proceeds received from shares sold pursuant to at-the-market equity offering programs $ 0 $ 333,494 $ 137,152 $ 672,456 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 from operations Non-GAAP loss 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 from operations to loss from operations, its most directly comparable GAAP measure, (in thousands) for the periods indicated: Three Months Ended Six Months Ended June 30, June 30, 2024 2023 2024 2023 Reconciliation of non-GAAP loss from operations: Loss from operations $ (200,274 ) $ (26,708 ) $ (403,976 ) $ (47,015 ) Share-based compensation expense 20,621 15,494 38,412 33,049 Non-GAAP loss from operations $ (179,653 ) $ (11,214 ) $ (365,564 ) $ (13,966 ) 41 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 Six Months Ended June 30, June 30, 2024 2023 2024 2023 Reconciliation of non-GAAP net (loss) income: Net (loss) income $ (102,559 ) $ 22,243 $ (155,677 ) $ 483,436 Share-based compensation expense 20,621 15,494 38,412 33,049 Interest expense arising from amortization of debt issuance costs 3,842 2,190 6,399 4,400 Gain on debt extinguishment 0 0 0 (44,686 ) Income tax effects (1) (57,962 ) (2,998 ) (167,200 ) 5,768 Non-GAAP net (loss) income $ (136,058 ) $ 36,929 $ (278,066 ) $ 481,967 Reconciliation of non-GAAP diluted (loss) earnings per share (2): Diluted (loss) earnings per share $ (5.74 ) $ 1.52 $ (8.88 ) $ 33.56 Share-based compensation expense (per diluted share) 1.15 0.96 2.19 2.27 Interest expense arising from amortization of debt issuance costs (per diluted share) (3) 0.22 0.03 0.37 0.06 Gain on debt extinguishment (per diluted share) 0.00 0.00 0.00 (3.07 ) Income tax effects (per diluted share) (3) (3.25 ) (0.16 ) (9.54 ) 0.46 Non-GAAP diluted (loss) earnings per share $ (7.62 ) $ 2.35 $ (15.86 ) $ 33.28 (1) Income tax effects reflect the net tax effects of share-based compensation, 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 three and six months ended June 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 three and six months ended June 30, 2023. 42 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 June 30, GAAP Foreign Currency Exchange Rate Impact (1) Non-GAAP Constant Currency (2) GAAP GAAP % Change Non-GAAP Constant Currency % Change (3) 2024 2024 2024 2023 2024 2024 Product licenses revenues $ 9,286 $ (20 ) $ 9,306 $ 15,522 -40.2 % -40.0 % Subscription services revenues 24,080 (125 ) 24,205 19,878 21.1 % 21.8 % Product support revenues 61,740 (364 ) 62,104 66,081 -6.6 % -6.0 % Other services revenues 16,336 (146 ) 16,482 18,919 -13.7 % -12.9 % Cost of product support revenues 8,193 (22 ) 8,215 5,816 40.9 % 41.2 % Cost of other services revenues 12,388 (6 ) 12,394 13,645 -9.2 % -9.2 % Sales and marketing expenses 34,251 (177 ) 34,428 37,660 -9.1 % -8.6 % Research and development expenses 30,311 (160 ) 30,471 29,354 3.3 % 3.8 % General and administrative expenses 36,129 (9 ) 36,138 28,830 25.3 % 25.3 % 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 $ 15,522 $ 105 $ 15,417 $ 20,129 -22.9 % -23.4 % Subscription services revenues 19,878 13 19,865 14,017 41.8 % 41.7 % Product support revenues 66,081 188 65,893 66,521 -0.7 % -0.9 % Other services revenues 18,919 31 18,888 21,406 -11.6 % -11.8 % Cost of product support revenues 5,816 (1 ) 5,817 5,127 13.4 % 13.5 % Cost of other services revenues 13,645 132 13,513 14,148 -3.6 % -4.5 % Sales and marketing expenses 37,660 68 37,592 36,862 2.2 % 2.0 % Research and development expenses 29,354 (370 ) 29,724 31,790 -7.7 % -6.5 % General and administrative expenses 28,830 26 28,804 28,502 1.2 % 1.1 % 43 Six Months Ended June 30, GAAP Foreign Currency Exchange Rate Impact (1) Non-GAAP Constant Currency (2) GAAP GAAP % Change Non-GAAP Constant Currency % Change (3) 2024 2024 2024 2023 2024 2024 Product licenses revenues $ 22,224 $ (102 ) $ 22,326 $ 32,934 -32.5 % -32.2 % Subscription services revenues 47,046 (39 ) 47,085 38,688 21.6 % 21.7 % Product support revenues 124,425 (120 ) 124,545 131,562 -5.4 % -5.3 % Other services revenues 32,993 (88 ) 33,081 39,131 -15.7 % -15.5 % Cost of product support revenues 16,740 8 16,732 11,584 44.5 % 44.4 % Cost of other services revenues 24,685 201 24,484 27,428 -10.0 % -10.7 % Sales and marketing expenses 67,702 (159 ) 67,861 73,766 -8.2 % -8.0 % Research and development expenses 59,494 (424 ) 59,918 60,712 -2.0 % -1.3 % General and administrative expenses 70,795 77 70,718 56,736 24.8 % 24.6 % 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 $ 32,934 $ (495 ) $ 33,429 $ 36,642 -10.1 % -8.8 % Subscription services revenues 38,688 (417 ) 39,105 26,862 44.0 % 45.6 % Product support revenues 131,562 (1,153 ) 132,715 133,672 -1.6 % -0.7 % Other services revenues 39,131 (648 ) 39,779 44,174 -11.4 % -9.9 % Cost of product support revenues 11,584 (116 ) 11,700 10,318 12.3 % 13.4 % Cost of other services revenues 27,428 (378 ) 27,806 28,747 -4.6 % -3.3 % Sales and marketing expenses 73,766 (617 ) 74,383 70,102 5.2 % 6.1 % Research and development expenses 60,712 (1,087 ) 61,799 65,313 -7.0 % -5.4 % General and administrative expenses 56,736 (196 ) 56,932 55,208 2.8 % 3.1 % (1) The “Foreign Currency Exchange Rate Impact” reflects the estimated impact of fluctuations in foreign currency exchange rates on international components of our Consolidated Statements of Operations. It shows the increase (decrease) in material international revenues or expenses, as applicable, from the same period in the prior year, based on comparisons to the prior year quarterly average foreign currency exchange rates. Beginning in the third quarter of 2023, the term “international” refers to operations outside of the United States and Canada only where the functional currency is the local currency (i.e., excluding any location whose economy is considered highly inflationary). Prior year comparative periods have been recast to conform to current period presentation. (2) The “Non-GAAP Constant Currency” reflects the current period GAAP amount, less the Foreign Currency Exchange Rate Impact. (3) The “Non-GAAP Constant Currency % Change” reflects the percentage change between the current period Non-GAAP Constant Currency amount and the GAAP amount for the same period in the prior year. 44 Item 3. Quantitative and Qualitat ive Disclosures About Market Risk The following discussion about our market risk exposures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. We are exposed to the impact of market price changes in bitcoin and foreign currency fluctuations. Market Price Risk of Bitcoin. We have used a significant portion of our cash, including cash generated from capital raising transactions, to acquire bitcoin and, as of June 30, 2024, we held approximately 226,331 bitcoins. The carrying value of our bitcoins as of June 30, 2024 was $5.688 billion, which reflects cumulative impairments of $2.641 billion, on our Consolidated Balance Sheet. We account for our bitcoin as indefinite-lived intangible assets, which are subject to impairment losses if the fair value of our bitcoin decreases below their carrying value at any time since their acquisition. Impairment losses cannot be recovered for any subsequent increase in fair value. For example, the market price of one bitcoin on the Coinbase exchange (our principal market for bitcoin) ranged from a low of $38,501.00 to a high of $73,835.57 during the six months ended June 30, 2024, but the carrying value of each bitcoin we held at the end of the reporting period reflects the lowest price of one bitcoin quoted on the active exchange at any time since its acquisition. Therefore, negative swings in the market price of bitcoin could have a material impact on our earnings and on the carrying value of our digital assets. Positive swings in the market price of bitcoin are not reflected in the carrying value of our digital assets and impact earnings only when the bitcoin is sold at a gain. For the six months ended June 30, 2024, we incurred an impairment loss of $371.7 million on our bitcoin. Foreign Currency Risk. We conduct a significant portion of our business in currencies other than the U.S. dollar, the currency in which we report our Consolidated Financial Statements. International revenues accounted for 42.8% and 40.7% of our total revenues for the three months ended June 30, 2024 and 2023, respectively, and 43.5% and 41.8% of our total revenues for the six months ended June 30, 2024 and 2023, respectively. We anticipate that international revenues will continue to account for a significant portion of our total revenues. The functional currency of each of our foreign subsidiaries is generally the local currency. Assets and liabilities of our foreign subsidiaries are translated into U.S. dollars at exchange rates in effect as of the applicable Balance Sheet date and any resulting translation adjustments are included as an adjustment to stockholders’ equity. Revenues and expenses generated from these subsidiaries are translated at average monthly exchange rates during the quarter in which the transactions occur. Transaction gains and losses arising from transactions denominated in a currency other than the functional currency of the entity involved are included in the results of operations. As a result of transacting in multiple currencies and reporting our Consolidated Financial Statements in U.S. dollars, our operating results may be adversely impacted by currency exchange rate fluctuations in the future. The impact of foreign currency exchange rate fluctuations on current and comparable periods is described in the “Non-GAAP Financial Measures” section under “Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We cannot predict the effect of exchange rate fluctuations upon our future results. We attempt to minimize our foreign currency risk by converting our excess foreign currency held in foreign jurisdictions to U.S. dollar-denominated cash and investment accounts. As of June 30, 2024 and December 31, 2023, a 10% adverse change in foreign currency exchange rates versus the U.S. dollar would have decreased our aggregate reported cash and cash equivalents by 3.9% and 5.4%, respectively. If average exchange rates during the six months ended June 30, 2024 had changed unfavorably by 10%, our revenues for the six months ended June 30, 2024 would have decreased by 3.8%. During the six months ended June 30, 2024, our revenues were lower by 0.2% as a result of a 0.2% unfavorable change in weighted average exchange rates, as compared to the same period in the prior year.