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 ® 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 a key differentiator of MicroStrategy is our two, interdependent corporate strategies in the operation of our business. In the first quarter of 2021, we determined to pursue as part of our overall corporate strategy, a strategy of acquiring bitcoin with our liquid assets that exceed working capital requirements, and from time to time, subject to market conditions, issuing debt or equity securities in capital raising transactions with the objective of using the proceeds to purchase bitcoin. We believe that bitcoin is attractive because it can serve as a store of value, supported by a robust and public open-source architecture, that is untethered to sovereign monetary policy and can therefore serve as a hedge against inflation. We also believe that bitcoin offers additional opportunity for appreciation in value with increasing adoption due to its limited supply. Under this corporate strategy, we also periodically engage in activities to educate the market regarding bitcoin. We believe that our bitcoin acquisition strategy is complementary to our enterprise analytics software and services business, as we believe that our bitcoin and related activities in support of the bitcoin network enhance awareness of our brand and can provide opportunities to secure new customers for our analytics offerings. We are also exploring opportunities to apply bitcoin-related technologies such as blockchain analytics into our software offerings. We view our bitcoin holdings as long-term holdings, and we do not plan to engage in regular trading of bitcoin and have not hedged or otherwise entered into derivative contracts with respect to our bitcoin holdings, though we may sell bitcoin in future periods as needed to generate cash for treasury management and other general corporate purposes. We have not set any specific target for the amount of bitcoin we seek to hold, and we will continue to monitor market conditions in determining whether to conduct debt or equity financings to purchase additional bitcoin. Our Bitcoin Acquisition Strategy In September 2020, our Board of Directors adopted a Treasury Reserve Policy (as amended to date, the “Treasury Reserve Policy”) that updated our treasury management and capital allocation strategies, under which our treasury reserve assets will consist of: • cash and cash equivalents and short-term investments (“Cash Assets”) held by us that exceed working capital requirements; and • bitcoin held by us, with bitcoin serving as the primary treasury reserve asset on an ongoing basis, subject to market conditions and anticipated needs of the business for Cash Assets. In the first quarter of 2021, we adopted, in addition to and in conjunction with our Treasury Reserve Policy, a corporate strategy of acquiring and holding bitcoin, and from time to time, subject to market conditions, issuing debt or equity securities in capital raising transactions with the objective of using the proceeds to purchase bitcoin. On June 14, 2021, we entered into the Sale Agreement with Jefferies LLC, as agent, pursuant to which we may issue and sell shares of our class A common stock having an aggregate offering price of up to $1.0 billion from time to time through Jefferies. During the three months ended September 30, 2021 we issued and sold 555,179 shares of our class A common stock under the Sale Agreement, at an average gross price per share of approximately $727.64, for aggregate net proceeds (less $4.5 million in sales commissions and expenses) of approximately $399.5 million. We used the net proceeds of these sales to purchase additional bitcoin. 24 The following table presents a rollforward of our bitcoin holdings, including additional information related to our bitcoin purchases and digital asset impairment losses within the respective periods. We have not sold any of our bitcoin as of the date of this Quarterly Report. 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 June 30, 2020 $ 0 $ 0 $ 0 0 n/a Digital asset purchases (a) 425,000 425,000 38,250 11,111 Digital asset impairment losses (44,242 ) (44,242 ) Balance at September 30, 2020 $ 425,000 $ (44,242 ) $ 380,758 38,250 $ 11,111 Digital asset purchases (b) 700,000 700,000 32,219 21,726 Digital asset impairment losses (26,456 ) (26,456 ) Balance at December 31, 2020 $ 1,125,000 $ (70,698 ) $ 1,054,302 70,469 $ 15,964 Digital asset purchases (c) 1,086,375 1,086,375 20,857 52,087 Digital asset impairment losses (194,095 ) (194,095 ) Balance at March 31, 2021 $ 2,211,375 $ (264,793 ) $ 1,946,582 91,326 $ 24,214 Digital asset purchases (d) 529,231 529,231 13,759 38,464 Digital asset impairment losses (424,774 ) (424,774 ) Balance at June 30, 2021 $ 2,740,606 $ (689,567 ) $ 2,051,039 105,085 $ 26,080 Digital asset purchases (e) 419,865 419,865 8,957 46,876 Digital asset impairment losses (65,165 ) (65,165 ) Balance at September 30, 2021 $ 3,160,471 $ (754,732 ) $ 2,405,739 114,042 $ 27,713 (a) In the third quarter of 2020, we purchased bitcoin using excess cash, including cash from the liquidation of short-term investments. (b) In the fourth quarter of 2020, we purchased bitcoin using $634.7 million in net proceeds from our issuance of the 2025 Convertible Notes and excess cash. (c) In the first quarter of 2021, we purchased bitcoin using $1.026 billion in net proceeds from our issuance of the 2027 Convertible Notes and excess cash. (d) In the second quarter of 2021, we purchased bitcoin using $487.2 million in net proceeds from our issuance of the 2028 Secured Notes and excess cash. (e) In the third quarter of 2021, we purchased bitcoin using $399.5 million in net proceeds from our sale of 555,179 shares of class A common stock offered under the Sale Agreement and excess cash. 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 (f) Market Value of Bitcoin Held at End of Quarter Using Lowest Market Price (in thousands) (g) Highest Market Price Per Bitcoin During Quarter (h) Market Value of Bitcoin Held at End of Quarter Using Highest Market Price (in thousands) (i) Market Price Per Bitcoin at End of Quarter (j) Market Value of Bitcoin Held at End of Quarter Using Ending Market Price (in thousands) (k) June 30, 2020 0 n/a n/a n/a n/a n/a n/a September 30, 2020 38,250 $ 8,905.84 $ 340,648 $ 12,486.61 $ 477,613 $ 10,706.00 $ 409,505 December 31, 2020 70,469 $ 10,363.76 $ 730,324 $ 29,321.90 $ 2,066,285 $ 29,181.00 $ 2,056,356 March 31, 2021 91,326 $ 27,678.00 $ 2,527,721 $ 61,788.45 $ 5,642,892 $ 58,601.28 $ 5,351,820 June 30, 2021 105,085 $ 28,800.00 $ 3,026,448 $ 64,899.00 $ 6,819,911 $ 34,763.47 $ 3,653,119 September 30, 2021 114,042 $ 29,301.56 $ 3,341,609 $ 52,944.96 $ 6,037,949 $ 43,534.56 $ 4,964,768 (f) 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. (g) The "Market Value of Bitcoin Held Using Lowest Market Price" represents a mathematical calculation consisting of the lowest market price for one bitcoin reported on the Coinbase exchange during the respective quarter multiplied by the number of bitcoins held by us at the end of the applicable period. (h) 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. (i) The "Market Value of Bitcoin Held Using Highest Market Price" represents a mathematical calculation consisting of the highest market price for one bitcoin reported on the Coinbase exchange during the respective quarter multiplied by the number of bitcoins held by us at the end of the applicable period. 25 (j) 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. (k) 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 held by us 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, 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 and net loss. For the three months ended September 30, 2021, digital asset impairment losses of $65.2 million represented 42.0% of our operating expenses, compared to digital asset impairment losses of $44.2 million representing 35.1% of our operating expenses in the three months ended September 30, 2020, contributing to our net loss of $36.1 million for the three months ended September 30, 2021 compared to net loss of $14.2 million for the three months ended September 30, 2020. For the nine months ended September 30, 2021, digital asset impairment losses of $684.0 million represented 71.6% of our operating expenses, compared to $44.2 million in digital asset impairment losses representing 15.1% of our operating expenses in the nine months ended September 30, 2020, contributing to our net loss of $445.5 million for the nine months ended September 30, 2021 compared to net loss of $10.2 million for the nine months ended September 30, 2020. As of October 27, 2021, we held approximately 114,042 bitcoins that were acquired at an aggregate purchase price of $3.160 billion and an average purchase price of approximately $27,713 per bitcoin, inclusive of fees and expenses. As of October 27, 2021, at 4:00 p.m. Eastern Time, the market price of one bitcoin reported on the Coinbase exchange was $59,111.02. Our Enterprise Analytics Software Strategy As a global leader in enterprise analytics software and services, our vision is to enable Intelligence Everywhere. Our core offering, MicroStrategy 2021 ™ , helps achieve this vision by delivering actionable intelligence and modern analytics on an open, comprehensive enterprise platform. MicroStrategy 2021 allows our customers to build high-performance, governed, and secure applications that can scale across their enterprises. Our core product offering is our software platform. In December 2020, we released MicroStrategy 2021, the newest release of our flagship enterprise analytics platform, which provides customers with the following features: • Modern Analytics: We offer a modern analytics experience by delivering insights across multiple devices to users via our HyperIntelligence ® products, visualization and reporting capabilities, mobility features, and custom applications developed on our platform. o HyperIntelligence —Our platform improves business processes by providing cards with contextual intelligence, suggestions, and workflows directly within the websites, applications, and mobile devices that people rely on every day. For example, users can simply hover over a highlighted word on a website to instantly bring up relevant, contextual insights on key data. o Data Visualization and Reporting —Our platform uses Dossier ® , our self-service dashboarding tool, that provides users with the formatting, layout, and input controls they need to build beautiful analytics applications. o Transformational Mobility —Our platform empowers the increasingly mobile workforce to make decisions and take action quickly on-the-go. It delivers more ways for organizations to quickly deploy mobile productivity apps for a variety of business functions and roles on any standard device. o Custom Applications —Our platform enables users to create highly customized web and mobile applications using the Document tool. 26 • Open, Federated Architecture: Our strategy is to embrace innovation and deliver the most open analytics platform on the market. o Federated Analytics —Our platform provides analysts and data scientists with seamless access to trusted, governed data directly within their favorite tools. MicroStrategy 2021 includes integrations with Microsoft Excel, Power BI, and Tableau to provide users with the flexibility to leverage trusted data from MicroStrategy directly within the client applications they are accustomed to. MicroStrategy 2021 also provides integrations for Jupyter and R Studio to enable data scientists to connect to published MicroStrategy data, leverage it in their tools, and publish updated data back into MicroStrategy 2021—all without leaving Jupyter or R Studio. o APIs and Gateways —Our gateways, application programming interfaces (“APIs”), and connectors enable MicroStrategy 2021 to integrate with the most popular enterprise platforms and tools. In addition to over 200 connectors to popular drivers and gateways to enterprise assets, we offer a comprehensive set of Representational State Transfer APIs that makes it easy to embed the platform in packaged and custom applications, workflows, and devices. o Multiple Deployment Options —We also believe that customers should have the choice of where to deploy their analytics platform without compromising functionality. Our fully featured platform can be deployed in three ways: on premises, the customer’s cloud environment, or the MicroStrategy Cloud ™ Environment (“MCE”). MCE is a cloud subscription service that allows customers to deploy the platform on Amazon Web Services (“AWS”) or Microsoft Azure environments hosted and managed by us. • Enterprise Platform: Our platform is designed to securely scale analytics across the enterprise. MicroStrategy 2021 has the tools that enable organizations to deliver secure, high-performance applications at scale. o Enterprise Semantic Graph ™ —The engine of our platform is our proprietary Enterprise Semantic Graph, which provides a structured view of a company’s data assets by organizing them into understandable business terms. Our Enterprise Semantic Graph also enriches metadata content with real-time location intelligence and content and system usage telemetry. The Enterprise Semantic Graph allows users to have a consistent and secure view across multiple data sources to deliver a single version of truth. o Scalability —Our platform powers some of the largest business intelligence deployments in the world. Our platform is designed to scale efficiently to hundreds of thousands of users, with millions of personalized queries, across hundreds of applications, built on top of the largest datasets. o Security — Our platform includes a comprehensive set of features for superior administration, security, and architecture, including role-based access to both row and column data. Our cloud environment also provides robust security delivered via annual certification, regular assessment, and proactive enhancements. Our customers include leading global organizations from a wide range of industries, including retail, consulting, technology, manufacturing, banking, insurance, finance, healthcare, telecommunications, as well as the public sector. To stand apart in a highly competitive market, we depend on the effectiveness with which we can differentiate our offerings from those of large software vendors that provide products across multiple lines of business, including one or more products that directly compete with our offerings, and other potential competitors across analytics implementation projects of varying sizes. Impact of COVID-19 on Our Software Strategy The COVID-19 pandemic has resulted, and may continue to result, in significant economic disruption despite progress made in the development and distribution of vaccines. It has already disrupted global travel and supply chains and adversely impacted global commercial activity. Considerable uncertainty still surrounds COVID-19, the evolution of its variants, its potential long-term economic effects, as well as the effectiveness of any responses taken by government authorities and businesses and of various efforts to inoculate the global population. The travel restrictions, limits on hours of operations and/or closures of non-essential businesses, and other efforts to curb the spread of COVID-19 have significantly disrupted business activity globally and there is uncertainty as to when these disruptions will fully subside. Significant uncertainty continues to exist concerning the impact of the COVID-19 pandemic on our customers’ and prospects’ business and operations in future periods. Although our total revenues for the three and nine months ended September 30, 2021 were not materially impacted by COVID-19, we believe our revenues may be negatively impacted in future periods until the effects of the pandemic have fully subsided and the current macroeconomic environment has substantially recovered. The uncertainty related to COVID-19 may also result in increased volatility in the financial projections we use as the basis for estimates and assumptions used in our financial statements. 27 We have adapted our operations to meet the challenges of this uncertain and rapidly evolving situation, including establishing remote working arrangements for our employees, limiting non-essential business travel, and cancelling or shifting our customer, employee, and industry events to a virtual-only format for the foreseeable future. We have received, and may continue to receive, government assistance from various relief packages available in countries where we operate. For example, in the United States, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020 to provide broad-based economic relief to various sectors of the U.S. economy through a variety of means, including payroll and income tax deferrals and employee retention credits. We deferred payment of $4.6 million of our employer portion of U.S. social security taxes accrued through December 31, 2020, half of which we expect to pay by December 31, 2021 and the remainder by December 31, 2022. Where taxes payable to government entities have been deferred to a later date, no reduction of expenses has been recorded. Effects of the COVID-19 pandemic that may negatively impact our business in future periods include, but are not limited to: limitations on the ability of our customers to conduct their business, purchase our products and services, and make timely payments; curtailed consumer spending; deferred purchasing decisions; delayed consulting services implementations; and decreases in product licenses revenues driven by channel partners. We will continue to actively monitor the nature and extent of the impact to our business, operating results, and financial condition. Operating Highlights The following table sets forth certain operating highlights (in thousands) for the three and nine months ended September 30, 2021 and 2020: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Revenues Product licenses $ 25,830 $ 29,573 $ 69,261 $ 56,973 Subscription services 10,853 8,305 31,221 24,294 Total product licenses and subscription services 36,683 37,878 100,482 81,267 Product support 70,387 71,352 212,063 212,548 Other services 20,924 18,178 63,702 55,601 Total revenues 127,994 127,408 376,247 349,416 Cost of revenues Product licenses 383 545 1,290 1,729 Subscription services 4,282 3,656 11,720 11,512 Total product licenses and subscription services 4,665 4,201 13,010 13,241 Product support 4,679 5,679 14,353 19,234 Other services 12,975 11,856 40,543 37,795 Total cost of revenues 22,319 21,736 67,906 70,270 Gross profit 105,675 105,672 308,341 279,146 Operating expenses Sales and marketing 38,209 35,330 116,728 109,799 Research and development 28,211 26,638 86,242 78,606 General and administrative 23,751 19,733 68,397 60,514 Digital asset impairment losses 65,165 44,242 684,034 44,242 Total operating expenses 155,336 125,943 955,401 293,161 Loss from operations $ (49,661 ) $ (20,271 ) $ (647,060 ) $ (14,015 ) We have incurred and may continue to incur significant impairment losses on our digital assets and we may recognize gains upon sale of our digital assets in the future, which would be presented net of any impairment losses within operating expenses. In addition, we base our internal operating expense forecasts on expected revenue trends and strategic objectives in our enterprise analytics software business. Many of our expenses, such as office leases and certain personnel costs, are relatively fixed. Accordingly, any 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. 28 Employees As of September 30, 2021, we had a total of 2,057 employees, of whom 787 were based in the United States and 1,270 were based internationally. The following table summarizes employee headcount as of the dates indicated: September 30, December 31, September 30, 2021 2020 2020 Subscription services 71 49 54 Product support 165 154 165 Consulting 393 393 397 Education 36 37 38 Sales and marketing 473 479 495 Research and development 661 642 666 General and administrative 258 243 258 Total headcount 2,057 1,997 2,073 Share-based Compensation Expense As discussed in Note 10, Share-based Compensation, to the Consolidated Financial Statements, we have outstanding stock options to purchase shares of our class A common stock, restricted stock units, and certain other stock-based awards under our 2013 Equity Plan, as well as opportunities for eligible employees to purchase shares of our class A common stock under our 2021 ESPP. Share-based compensation expense (in thousands) from these awards was recognized in the following cost of revenues and operating expense line items in our Consolidated Statements of Operations for the periods indicated: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Cost of subscription services revenues $ 83 $ 16 $ 172 $ 49 Cost of product support revenues 345 34 787 108 Cost of consulting revenues 240 0 424 0 Cost of education revenues 34 67 66 200 Sales and marketing 3,600 203 9,239 1,009 Research and development 2,956 625 7,546 1,837 General and administrative 4,908 1,615 12,739 4,694 Total share-based compensation expense $ 12,166 $ 2,560 $ 30,973 $ 7,897 As of September 30, 2021, we estimated that an aggregate of approximately $151.1 million of additional share-based compensation expense associated with the 2013 Equity Plan and the 2021 ESPP will be recognized over a remaining weighted average period of 3.3 years. Non-GAAP Financial Measures We are providing supplemental financial measures for (i) non-GAAP income from operations that excludes the impact of our share-based compensation expense and impairment losses and gains on sale from intangible assets, which include our digital assets, (ii) non-GAAP net income and non-GAAP diluted earnings per share that exclude the impact of our share-based compensation expense, impairment losses and gains on sale from intangible assets, which include our digital assets, interest expense arising from the amortization of debt issuance costs on our long-term debt, and related income tax effects, and (iii) certain non-GAAP constant currency revenues, cost of revenues, and operating expenses that exclude foreign currency exchange rate fluctuations. These supplemental financial measures are not measurements of financial performance under generally accepted accounting principles in the United States (“GAAP”) and, as a result, these supplemental financial measures may not be comparable to similarly titled measures of other companies. Management uses these non-GAAP financial measures internally to help understand, manage, and evaluate our business performance and to help make operating decisions. 29 We believe that these non-GAAP financial measures are also useful to investors and analysts in comparing our performance across reporting periods on a consistent basis. The first supplemental financial measure excludes ( i ) a significant non-cash expense that we believe is not reflective of our general business performance, and for which the accounting requires management judgment and the resulting share-based compensation expense could vary significantly in comparison to other companies and (ii) significant impairment losses and gains on sale from intangible assets, which include our bitcoin. The second set of supplemental financial measures excludes the impact of ( i ) share-based compensation expense , (ii) impairment losses and gains on sale from intangible assets, which include our bitcoin , (iii) non-cash interest expense arising from the amortization of debt issuance costs related to our long-term debt , and (iv) related income tax effects. The third set of supplemental financial measures excludes changes resulting from fluctuations in foreign currency exchange rates so that results may be compared to the same period in the prior year on a non-GAAP constant currency basis. We believe the use of these non-GAAP financial measures can also facilitate comparison of our operating results to those of our competitors. With respect to the exclusion of impairment losses on bitcoin in the first two supplemental financial measures, we also believe that adjusting our operating results to remove GAAP impairment losses aligns with our corporate strategy of acquiring and holding bitcoin because the impairment losses do not account for the subsequent increases in market value we have experienced while holding our bitcoin. In addition, in conjunction with other excluded items, the exclusion of impairment losses on bitcoin helps to provide greater transparency on the operating results from our enterprise analytics software business. Non-GAAP financial measures are subject to material limitations as they are not in accordance with, or a substitute for, measurements prepared in accordance with GAAP. For example, we expect that share-based compensation expense, which is excluded from the first two non-GAAP financial measures, will continue to be a significant recurring expense over the coming years and is an important part of the compensation provided to certain employees, officers, and directors. Similarly, we expect that interest expense arising from the amortization of debt issuance costs will continue to be a recurring expense over the term of the long-term debt. We have also excluded impairment losses and gains on sale from intangible assets from the first two non-GAAP financial measures, either of which may occur in future periods as a result of our continued holdings of significant amounts of bitcoin. Our non-GAAP financial measures are not meant to be considered in isolation and should be read only in conjunction with our Consolidated Financial Statements, which have been prepared in accordance with GAAP. We rely primarily on such Consolidated Financial Statements to understand, manage, and evaluate our business performance and use the non-GAAP financial measures only supplementally. The following is a reconciliation of our non-GAAP income from operations, which excludes the impact of (i) share-based compensation expense and (ii) impairment losses and gains on sale from intangible assets, which include our digital assets, to its most directly comparable GAAP measures (in thousands) for the periods indicated: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Reconciliation of non-GAAP income from operations: Loss from operations $ (49,661 ) $ (20,271 ) $ (647,060 ) $ (14,015 ) Share-based compensation expense 12,166 2,560 30,973 7,897 Digital asset impairment losses 65,165 44,242 684,034 44,242 Non-GAAP income from operations $ 27,670 $ 26,531 $ 67,947 $ 38,124 30 The following are reconciliations of our non-GAAP net income and non-GAAP diluted earnings per share, in each case excluding the impact of (i) share-based compensation expense (ii) impairment losses and gains on sale from intangible assets, which include our digital assets, (iii) interest expense arising from the amortization of debt issuance costs on our long-term debt, and (iv) related income tax effects to 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, 2021 2020 2021 2020 Reconciliation of non-GAAP net income: Net loss $ (36,136 ) $ (14,229 ) $ (445,503 ) $ (10,185 ) Share-based compensation expense 12,166 2,560 30,973 7,897 Digital asset impairment losses 65,165 44,242 684,034 44,242 Interest expense arising from amortization of debt issuance costs 2,107 0 5,084 0 Income tax effects (1) (24,736 ) (12,729 ) (224,407 ) (12,293 ) Non-GAAP net income $ 18,566 $ 19,844 $ 50,181 $ 29,661 Reconciliation of non-GAAP diluted earnings per share (2): Diluted loss per share $ (3.61 ) $ (1.48 ) $ (45.47 ) $ (1.04 ) Share-based compensation expense (per diluted share) 1.21 0.27 3.16 0.81 Digital asset impairment losses (per diluted share) 6.52 4.59 69.81 4.52 Interest expense arising from amortization of debt issuance costs (per diluted share) 0.21 0.00 0.52 0.00 Income tax effects (per diluted share) (2.47 ) (1.32 ) (22.90 ) (1.26 ) Non-GAAP diluted earnings per share $ 1.86 $ 2.06 $ 5.12 $ 3.03 (1) Income tax effects reflect the net tax effects of stock-based compensation expense, digital asset impairment losses, and interest expense for amortization of debt issuance costs. (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. 31 The following are reconciliations of certain non-GAAP constant currency revenues, cost of revenues, and operating expenses to their most directly comparable GAAP measures (in thousands) for the periods indicated: 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) 2021 2021 2021 2020 2021 2021 Product licenses revenues $ 25,830 $ (146 ) $ 25,976 $ 29,573 -12.7 % -12.2 % Subscription services revenues 10,853 110 10,743 8,305 30.7 % 29.4 % Product support revenues 70,387 450 69,937 71,352 -1.4 % -2.0 % Other services revenues 20,924 143 20,781 18,178 15.1 % 14.3 % Cost of product support revenues 4,679 (18 ) 4,697 5,679 -17.6 % -17.3 % Cost of other services revenues 12,975 (53 ) 13,028 11,856 9.4 % 9.9 % Sales and marketing expenses 38,209 (64 ) 38,273 35,330 8.1 % 8.3 % Research and development expenses 28,211 399 27,812 26,638 5.9 % 4.4 % General and administrative expenses 23,751 60 23,691 19,733 20.4 % 20.1 % GAAP Foreign Currency Exchange Rate Impact (1) Non-GAAP Constant Currency (2) GAAP GAAP % Change Non-GAAP Constant Currency % Change (3) 2020 2020 2020 2019 2020 2020 Product licenses revenues $ 29,573 $ (341 ) $ 29,914 $ 18,972 55.9 % 57.7 % Subscription services revenues 8,305 91 8,214 7,894 5.2 % 4.1 % Product support revenues 71,352 670 70,682 72,885 -2.1 % -3.0 % Other services revenues 18,178 269 17,909 19,942 -8.8 % -10.2 % Cost of product support revenues 5,679 3 5,676 6,922 -18.0 % -18.0 % Cost of other services revenues 11,856 88 11,768 12,478 -5.0 % -5.7 % Sales and marketing expenses 35,330 (235 ) 35,565 43,935 -19.6 % -19.1 % Research and development expenses 26,638 95 26,543 27,457 -3.0 % -3.3 % General and administrative expenses 19,733 (69 ) 19,802 19,900 -0.8 % -0.5 % 32 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) 2021 2021 2021 2020 2021 2021 Product licenses revenues $ 69,261 $ 311 $ 68,950 $ 56,973 21.6 % 21.0 % Subscription services revenues 31,221 564 30,657 24,294 28.5 % 26.2 % Product support revenues 212,063 4,792 207,271 212,548 -0.2 % -2.5 % Other services revenues 63,702 1,524 62,178 55,601 14.6 % 11.8 % Cost of product support revenues 14,353 123 14,230 19,234 -25.4 % -26.0 % Cost of other services revenues 40,543 819 39,724 37,795 7.3 % 5.1 % Sales and marketing expenses 116,728 1,348 115,380 109,799 6.3 % 5.1 % Research and development expenses 86,242 1,502 84,740 78,606 9.7 % 7.8 % General and administrative expenses 68,397 406 67,991 60,514 13.0 % 12.4 % GAAP Foreign Currency Exchange Rate Impact (1) Non-GAAP Constant Currency (2) GAAP GAAP % Change Non-GAAP Constant Currency % Change (3) 2020 2020 2020 2019 2020 2020 Product licenses revenues $ 56,973 $ (1,537 ) $ 58,510 $ 57,384 -0.7 % 2.0 % Subscription services revenues 24,294 9 24,285 22,142 9.7 % 9.7 % Product support revenues 212,548 (1,671 ) 214,219 217,313 -2.2 % -1.4 % Other services revenues 55,601 (229 ) 55,830 55,957 -0.6 % -0.2 % Cost of product support revenues 19,234 (175 ) 19,409 21,710 -11.4 % -10.6 % Cost of other services revenues 37,795 (605 ) 38,400 41,055 -7.9 % -6.5 % Sales and marketing expenses 109,799 (2,340 ) 112,139 140,968 -22.1 % -20.5 % Research and development expenses 78,606 (370 ) 78,976 83,436 -5.8 % -5.3 % General and administrative expenses 60,514 (492 ) 61,006 63,684 -5.0 % -4.2 % (1) The “Foreign Currency Exchange Rate Impact” reflects the estimated impact of fluctuations in foreign currency exchange rates on international components of our Consolidated Statements of Operations. It shows the increase (decrease) in material international revenues or expenses, as applicable, from the same period in the prior year, based on comparisons to the prior year quarterly average foreign currency exchange rates. The term “international” refers to operations outside of the United States and Canada. (2) The “Non-GAAP Constant Currency” reflects the current period GAAP amount, less the Foreign Currency Exchange Rate Impact. (3) The “Non-GAAP Constant Currency % Change” reflects the percentage change between the current period Non-GAAP Constant Currency amount and the GAAP amount for the same period in the prior year. Critical Accounting Policies 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. These estimates, particularly estimates relating to revenue recognition and, in the prior year only, to our Convertible Notes prior to the adoption of ASU 2020-06, have a material impact on our Consolidated Financial Statements. Actual results and outcomes could differ from these estimates and assumptions. The section “Critical Accounting Policies” included in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020 provides a more detailed explanation of the judgments made and a discussion of our accounting estimates and policies relating to revenue recognition. There have been no significant changes in such estimates and policies since December 31, 2020. 33 Results of Operations Comparison of the three and nine months ended September 30, 2021 and 2020 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, % 2021 2020 Change 2021 2020 Change Product Licenses and Subscription Services Revenues: Product Licenses Domestic $ 16,662 $ 22,894 -27.2 % $ 39,927 $ 35,557 12.3 % International 9,168 6,679 37.3 % 29,334 21,416 37.0 % Total product licenses revenues 25,830 29,573 -12.7 % 69,261 56,973 21.6 % Subscription Services Domestic 7,717 6,176 25.0 % 22,782 18,304 24.5 % International 3,136 2,129 47.3 % 8,439 5,990 40.9 % Total subscription services revenues 10,853 8,305 30.7 % 31,221 24,294 28.5 % Total product licenses and subscription services revenues $ 36,683 $ 37,878 -3.2 % $ 100,482 $ 81,267 23.6 % 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, 2021 2020 2021 2020 Product Licenses Transactions with Recognized Licenses Revenue in the Applicable Period: More than $1.0 million in licenses revenue recognized 5 3 9 4 Between $0.5 million and $1.0 million in licenses revenue recognized 4 6 16 13 Total 9 9 25 17 Domestic: More than $1.0 million in licenses revenue recognized 4 3 7 3 Between $0.5 million and $1.0 million in licenses revenue recognized 3 4 9 7 Total 7 7 16 10 International: More than $1.0 million in licenses revenue recognized 1 0 2 1 Between $0.5 million and $1.0 million in licenses revenue recognized 1 2 7 6 Total 2 2 9 7 34 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, % 2021 2020 Change 2021 2020 Change Product Licenses Revenue Recognized in the Applicable Period: More than $1.0 million in licenses revenue recognized $ 7,283 $ 13,175 -44.7 % $ 17,422 $ 16,370 6.4 % Between $0.5 million and $1.0 million in licenses revenue recognized 2,594 4,194 -38.1 % 10,485 8,838 18.6 % Less than $0.5 million in licenses revenue recognized 15,953 12,204 30.7 % 41,354 31,765 30.2 % Total 25,830 29,573 -12.7 % 69,261 56,973 21.6 % Domestic: More than $1.0 million in licenses revenue recognized 6,236 13,175 -52.7 % 13,942 13,175 5.8 % Between $0.5 million and $1.0 million in licenses revenue recognized 1,900 2,865 -33.7 % 5,977 4,698 27.2 % Less than $0.5 million in licenses revenue recognized 8,526 6,854 24.4 % 20,008 17,684 13.1 % Total 16,662 22,894 -27.2 % 39,927 35,557 12.3 % International: More than $1.0 million in licenses revenue recognized 1,047 0 n/a 3,480 3,195 8.9 % Between $0.5 million and $1.0 million in licenses revenue recognized 694 1,329 -47.8 % 4,508 4,140 8.9 % Less than $0.5 million in licenses revenue recognized 7,427 5,350 38.8 % 21,346 14,081 51.6 % Total $ 9,168 $ 6,679 37.3 % $ 29,334 $ 21,416 37.0 % Product licenses revenues decreased $3.7 million and increased $12.3 million for the three and nine months ended September 30, 2021, respectively, as compared to the same periods in the prior year. For the three months ended September 30, 2021 and 2020, product licenses transactions with more than $0.5 million in recognized revenue represented 38.2% and 58.7%, respectively, of our product licenses revenues. For the nine months ended September 30, 2021, our top three product licenses transactions totaled $10.1 million in recognized revenue, or 14.6% of total product licenses revenues, compared to $14.7 million, or 25.8% of total product licenses revenues, for the nine months ended September 30, 2020. Domestic product licenses revenues. Domestic product licenses revenues decreased $6.2 million for the three months ended September 30, 2021, as compared to the same period in the prior year, primarily due to a decrease in the average deal size of transactions with more than $1.0 million in recognized revenue (in particular, from one deal in the third quarter of 2020 that resulted in $9.8 million in recognized revenue in the prior year period) and a decrease in the number of transactions with recognized revenue between $0.5 million and $1.0 million, partially offset by an increase in the average deal size of transactions with less than $0.5 million in recognized revenue. Domestic product licenses revenues increased $4.4 million for the nine months ended September 30, 2021, as compared to the same period in the prior year, primarily due to an increase in the average deal size of transactions with less than $0.5 million in recognized revenue and an increase in the number of transactions with more than $0.5 million in recognized revenue. International product licenses revenues. International product licenses revenues increased $2.5 million for the three months ended September 30, 2021, as compared to the same period in the prior year, primarily due to an increase in the number of transactions with less than $0.5 million in recognized revenue and more than $1.0 million in recognized revenue, partially offset by a decrease in the number of transactions with recognized revenue between $0.5 million and $1.0 million. International product licenses revenues increased $7.9 million for the nine months ended September 30, 2021, as compared to the same period in the prior year, primarily due to an increase in the number of transactions with less than $0.5 million in recognized revenue. Subscription services revenues. Subscription services revenues are derived from the MicroStrategy Cloud Environment, a cloud subscription service, and are recognized ratably over the service period in the contract. Subscription services revenues increased $2.5 million for the three months ended September 30, 2021, as compared to the same period in the prior year, primarily due to conversions to cloud-based subscriptions from existing on-premises customers and an increase in the use of subscription services by existing customers. Subscription services revenues increased $6.9 million for the nine months ended September 30, 2021, 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 a $0.6 million favorable foreign currency exchange impact. 35 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, % 2021 2020 Change 2021 2020 Change Product Support Revenues: Domestic $ 40,350 $ 41,645 -3.1 % $ 121,179 $ 126,073 -3.9 % International 30,037 29,707 1.1 % 90,884 86,475 5.1 % Total product support revenues $ 70,387 $ 71,352 -1.4 % $ 212,063 $ 212,548 -0.2 % 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 $1.0 million for the three months ended September 30, 2021, 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. Product support revenues did not materially change for the nine months ended September 30, 2021, 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, substantially offset by a $4.8 million favorable foreign currency exchange impact. Other services revenues. The following table sets forth other services revenues (in thousands) and related percentage changes for the periods indicated: Three Months Ended Nine Months Ended September 30, % September 30, % 2021 2020 Change 2021 2020 Change Other Services Revenues: Consulting Domestic $ 9,202 $ 7,384 24.6 % $ 27,728 $ 24,396 13.7 % International 10,536 9,570 10.1 % 32,343 27,577 17.3 % Total consulting revenues 19,738 16,954 16.4 % 60,071 51,973 15.6 % Education 1,186 1,224 -3.1 % 3,631 3,628 0.1 % Total other services revenues $ 20,924 $ 18,178 15.1 % $ 63,702 $ 55,601 14.6 % Consulting revenues. Consulting revenues are derived from helping customers plan and execute the deployment of our software. Consulting revenues increased $2.8 million for the three months ended September 30, 2021, as compared to the same period in the prior year, primarily due to an increase in billable hours worldwide, partially offset by a decrease in average bill rates and a decrease in billable travel and entertainment expenditures. Consulting revenues increased $8.1 million for the nine months ended September 30, 2021, as compared to the same period in the prior year, primarily due to an increase in billable hours worldwide and a $1.4 million favorable foreign currency exchange impact, partially offset by a decrease in average bill rates and a decrease in billable travel and entertainment expenditures. Education revenues. Education revenues are derived from the education and training that we provide to our customers to enhance their ability to fully utilize the features and functionality of our software. These offerings include self-tutorials, custom course development, joint training with customers’ internal staff, and standard course offerings, with pricing dependent on the specific offering delivered. Education revenues did not materially change for the three and nine months ended September 30, 2021, as compared to the same periods in the prior year. 36 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, % 2021 2020 Change 2021 2020 Change Cost of Revenues: Product licenses and subscription services: Product licenses $ 383 $ 545 -29.7 % $ 1,290 $ 1,729 -25.4 % Subscription services 4,282 3,656 17.1 % 11,720 11,512 1.8 % Total product licenses and subscription services 4,665 4,201 11.0 % 13,010 13,241 -1.7 % Product support 4,679 5,679 -17.6 % 14,353 19,234 -25.4 % Other services: Consulting 11,745 10,331 13.7 % 36,515 31,927 14.4 % Education 1,230 1,525 -19.3 % 4,028 5,868 -31.4 % Total other services 12,975 11,856 9.4 % 40,543 37,795 7.3 % Total cost of revenues $ 22,319 $ 21,736 2.7 % $ 67,906 $ 70,270 -3.4 % 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, 2021, 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, and personnel and related overhead costs. Subscription services headcount increased 31.5% to 71 at September 30, 2021 from 54 at September 30, 2020. Cost of subscription services revenues increased $0.6 million for the three months ended September 30, 2021, as compared to the same period in the prior year primarily due to a $1.0 million increase in technology infrastructure costs. Cost of subscription services revenues did not materially change for the nine months ended September 30, 2021, as compared to the same period in the prior year, primarily due to a $1.6 million increase in technology infrastructure costs, partially offset by a $1.3 million decrease in compensation and related costs due to a decrease in average staffing levels. 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 was 165 as of both September 30, 2021 and 2020. Cost of product support revenues decreased $1.0 million for the three months ended September 30, 2021, as compared to the same period in the prior year, primarily due to a $1.0 million decrease in compensation and related costs attributable to non-product support personnel providing a decreased level of Enterprise Support services. Cost of product support revenues decreased $4.9 million for the nine months ended September 30, 2021, as compared to the same period in the prior year, primarily due to a $3.0 million decrease in compensation and related costs due to a decrease in product support average staffing levels, a $1.9 million decrease in compensation and related costs attributable to non-product support personnel providing a decreased level of Enterprise Support services, and a $0.6 million decrease in facility and other related support costs, partially offset by a $0.7 million net increase in share-based compensation expense. The $0.7 million net increase in share-based compensation expense is primarily due to the grant of additional awards under the 2013 Equity Plan. 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 1.0% to 393 at September 30, 2021 from 397 at September 30, 2020. Cost of consulting revenues increased $1.4 million for the three months ended September 30, 2021, as compared to the same period in the prior year, primarily due to a $1.0 million increase in subcontractor costs and a $0.9 million increase in compensation and related costs attributable to consulting personnel providing a decreased level of Enterprise Support services, partially offset by a $0.5 million decrease in compensation and related costs due to a decrease in average staffing levels. Cost of consulting revenues increased $4.6 million for the nine months ended September 30, 2021, as compared to the same period in the prior year, primarily due to a $3.3 million increase in subcontractor costs, a $1.6 million increase in compensation and related costs attributable to consulting personnel providing a decreased level of Enterprise Support services, and a $0.4 million increase in variable compensation, partially offset by a $1.0 million decrease in travel and entertainment expenditures. Included in cost of consulting revenues for the nine months ended September 30, 2021 is an aggregate $0.8 million unfavorable foreign currency exchange impact. Cost of education revenues. Cost of education revenues consists of personnel and related overhead costs and technology infrastructure costs. Education headcount decreased 5.3% to 36 at September 30, 2021 from 38 at September 30, 2020. Cost of education revenues did not materially change for the three months ended September 30, 2021, as compared to the same period in the prior year. Cost of education revenues decreased $1.8 million for the nine months ended September 30, 2021, as compared to the same period in the prior 37 year , primarily due to a $0. 8 million decrease in technology infrastructure costs associated with education offerings that we made available at no charge for a limited time period during the first half of 2020 in response to the COVID-19 pandemic and a $0.6 million decrease in compensation and related costs due to a decrease in average staffing levels . 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 4.4% to 473 at September 30, 2021 from 495 at September 30, 2020. 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, % 2021 2020 Change 2021 2020 Change Sales and marketing expenses $ 38,209 $ 35,330 8.1 % $ 116,728 $ 109,799 6.3 % Sales and marketing expenses increased $2.9 million for the three months ended September 30, 2021, as compared to the same period in the prior year, primarily due to a $3.4 million net increase in share-based compensation expense and a $0.5 million increase in marketing and advertising costs, partially offset by a $1.0 million decrease in compensation and related costs due to a decrease in average staffing levels. The $3.4 million net increase in share-based compensation expense is primarily due to the grant of additional awards under the 2013 Equity Plan. Sales and marketing expenses increased $6.9 million for the nine months ended September 30, 2021, as compared to the same period in the prior year, primarily due to a $10.1 million increase in variable compensation and an $8.2 million net increase in share-based compensation expense, partially offset by a $5.6 million decrease in employee salaries due to a decrease in average staffing levels, a $3.1 million decrease in travel and entertainment expenditures, a $1.5 million decrease in facility and other related support costs, a $0.8 million decrease in marketing and advertising costs, and a $0.5 million decrease in subcontractor costs. The $8.2 million net increase in share-based compensation expense is primarily due to the grant of additional awards under the 2013 Equity Plan and the 2021 ESPP. Included in sales and marketing expenses for the nine months ended September 30, 2021 is an aggregate $1.3 million unfavorable foreign currency exchange impact. Research and development expenses. Research and development expenses consist of the personnel costs for our software engineering personnel, depreciation of equipment, and other related costs. Research and development headcount decreased 0.8% to 661 at September 30, 2021 from 666 at September 30, 2020. 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, % 2021 2020 Change 2021 2020 Change Research and development expenses $ 28,211 $ 26,638 5.9 % $ 86,242 $ 78,606 9.7 % Research and development expenses increased $1.6 million for the three months ended September 30, 2021, as compared to the same period in the prior year, primarily due to a $2.3 million net increase in share-based compensation expense, partially offset by a $0.5 million decrease in facility and other related support costs. The $2.3 million net increase in share-based compensation expense is primarily due to the grant of additional awards under the 2013 Equity Plan. Research and development expenses increased $7.6 million for the nine months ended September 30, 2021, as compared to the same period in the prior year, primarily due to a $5.7 million net increase in share-based compensation expense, a $2.1 million increase in variable compensation which, in the nine months ended September 30, 2020, included certain COVID-19-related employer payroll tax exemptions in the Asia Pacific region, and a $0.5 million increase in technology infrastructure costs, partially offset by a $0.6 million decrease in facility and other related support costs. The $5.7 million net increase in share-based compensation expense is primarily due to the grant of additional awards under the 2013 Equity Plan and the 2021 ESPP. Included in research and development expenses for the nine months ended September 30, 2021 is an aggregate $1.5 million unfavorable foreign currency exchange impact. 38 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 was 258 as of both September 30, 2021 and 2020. 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, % 2021 2020 Change 2021 2020 Change General and administrative expenses $ 23,751 $ 19,733 20.4 % $ 68,397 $ 60,514 13.0 % General and administrative expenses increased $4.0 million for the three months ended September 30, 2021, as compared to the same period in the prior year, primarily due to a $3.3 million net increase in share-based compensation expense and a $1.8 million increase in legal, consulting, and other advisory costs, partially offset by a $0.9 million decrease in compensation and related costs due to a decrease in average staffing levels and a $0.8 million decrease in bad debt expense. The $3.3 million net increase in share-based compensation expense is primarily due to the grant of additional awards under the 2013 Equity Plan. General and administrative expenses increased $7.9 million for the nine months ended September 30, 2021, as compared to the same period in the prior year, primarily due to an $8.0 million net increase in share-based compensation expense and a $4.9 million increase in legal, consulting, and other advisory costs, partially offset by a $3.6 million decrease in compensation and related costs due to a decrease in average staffing levels, and a $1.3 million decrease in bad debt expense. The $8.0 million net increase in share-based compensation expense is primarily due to the grant of additional awards under the 2013 Equity Plan, partially offset by certain awards becoming fully vested. Digital asset impairment losses. Digital asset impairment losses are recognized when the carrying value of our digital assets exceeds their lowest fair value at any time since their acquisition. Impaired digital assets are written down to fair value at the time of impairment, and such impairment loss cannot be recovered for any subsequent increases in fair value. The following table sets forth digital asset impairment losses (in thousands) and related percentage changes for the periods indicated: Three Months Ended Nine Months Ended September 30, % September 30, % 2021 2020 Change 2021 2020 Change Digital asset impairment losses $ 65,165 $ 44,242 47.3 % $ 684,034 $ 44,242 1446.1 % We did not sell any of our digital assets during the three and nine months ended September 30, 2021. Interest (Expense) Income, Net For the three and nine months ended September 30, 2021, interest expense, net, of $10.7 million and $17.5 million, respectively, were primarily related to the contractual interest expense and amortization of issuance costs related to our long-term debt arrangements. Refer to Note 6, Long-term Debt, to the Consolidated Financial Statements for further information. For the three months ended September 30, 2020, interest income, net, was not material. For the nine months ended September 30, 2020, interest income, net, of $2.6 million was primarily related to interest earned on cash and cash equivalents balances and the amortization of the discount on our short-term investments. Other Income (Expense), Net For the three and nine months ended September 30, 2021, other income, net, of $1.3 million and $1.6 million, respectively, were comprised primarily of foreign currency transaction net gains. For the three and nine months ended September 30, 2020 other expense, net, of $3.0 million and $4.5 million, respectively, were comprised primarily of foreign currency transaction net losses. Benefit from Income Taxes In determining our tax provision or benefit from income taxes, we estimate an annual effective tax rate for the full fiscal year and apply that rate to our income or loss before income taxes. We also record discrete items in each respective period as appropriate. 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 (e.g., non-deductible expenses). 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 our period-to-period results, fluctuations in our effective tax rate and respective tax provisions or benefits may occur. 39 For the nine months ended September 30, 2021 , we recorded a benefit from income taxes of $ 217.4 million that resulted in an effective tax rate of 32.8 %, as compared to a benefit from income taxes of $ 5.7 million that resulted in an effective tax rate of 36.0 % for the nine months ended September 30, 2020 . The change in the effective tax rate in 2021 is mainly due to certain discrete items and the change in the expected proportion of U.S. versus foreign income between periods. As of September 30, 2021, we estimated that we had NOL carryforwards, other temporary differences and carryforwards, and credits that resulted in deferred tax assets, net of valuation allowances and deferred tax liabilities, of $259.3 million. As of September 30, 2021, we had a valuation allowance of $1.3 million related to certain foreign tax credit carryforwards that, in our present estimation, more likely than not will not be realized. If we are unable to regain or increase 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 in the period in which the charge is incurred. We will continue to regularly assess the realizability of deferred tax assets. 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 contracts arrangements, the Company generally does not invoice more than one year in advance of services and does not record deferred revenue for amounts that have not been invoiced. Revenue is subsequently recognized in the period(s) in which control of the software or services is transferred to the customer. The following table summarizes deferred revenue and advance payments (in thousands), as of: September 30, December 31, September 30, 2021 2020 2020 Current: Deferred product licenses revenue $ 2,315 $ 1,495 $ 186 Deferred subscription services revenue 23,089 26,258 19,535 Deferred product support revenue 130,339 156,216 134,632 Deferred other services revenue 4,954 7,281 6,492 Total current deferred revenue and advance payments $ 160,697 $ 191,250 $ 160,845 Non-current: Deferred product licenses revenue $ 74 $ 139 $ 140 Deferred subscription services revenue 590 8,758 5,988 Deferred product support revenue 6,973 5,055 4,759 Deferred other services revenue 665 710 770 Total non-current deferred revenue and advance payments $ 8,302 $ 14,662 $ 11,657 Total current and non-current: Deferred product licenses revenue $ 2,389 $ 1,634 $ 326 Deferred subscription services revenue 23,679 35,016 25,523 Deferred product support revenue 137,312 161,271 139,391 Deferred other services revenue 5,619 7,991 7,262 Total current and non-current deferred revenue and advance payments $ 168,999 $ 205,912 $ 172,502 Total deferred revenue and advance payments decreased $36.9 million as of September 30, 2021, as compared to December 31, 2020, primarily due to the timing of product support and subscription services renewals and the presentation of multi-year contracts. The portions of such multi-year contracts that will be invoiced in the future are not presented on the balance sheet in “Accounts receivable, net” and “Deferred revenue and advance payments” and instead are included in the remaining performance obligation disclosure below. Included in our international deferred revenue balances at September 30, 2021 is a $3.3 million unfavorable foreign currency impact from the general strengthening of the U.S. dollar compared to the fourth quarter of 2020. The decrease in total deferred revenue and advance payments as of September 30, 2021 as compared to September 30, 2020 was not material. 40 Our r emaining performance obligation represent s 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 r emaining performance obligation exclude s contracts that are billed in arrears, such as certain time and materials contracts. As of September 30, 2021 , we had an aggregate transaction price of $ 198.9 million allocated to the remaining performance obligation relate d to product support, subscription services, other services, and in limited cases, product licenses contracts. We expect to recognize approximately $ 168.3 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 to acquire bitcoins, which are classified as indefinite-lived intangible assets. As of September 30, 2021 and December 31, 2020, the amount of cash and cash equivalents held by our U.S. entities was $16.4 million and $13.7 million, respectively, and by our non-U.S. entities was $40.6 million and $46.0 million, respectively. We earn a significant amount of our revenues outside the United States. We repatriated foreign earnings and profits of $186.6 million during 2020 and $57.5 million during the nine months ended September 30, 2021. As of September 30, 2021, the accumulated undistributed foreign earnings and profits is estimated to be $109.5 million. Beginning in the third quarter of 2020, we determined to no longer permanently reinvest our foreign earnings and profits. Therefore, we accrued for foreign withholding tax and U.S. state income taxes on undistributed foreign earnings in addition to the Transition Tax and GILTI tax. 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. As of September 30, 2021, we held approximately 114,042 bitcoins. We do not believe we will need to sell any of our bitcoins within the next twelve months to meet our working capital requirements, although we may from time to time sell bitcoins as part of treasury management operations, including to increase our cash balances. The bitcoin market historically has been characterized by significant volatility in its price, limited liquidity and trading volumes compared to sovereign currencies markets, relative anonymity, a developing regulatory landscape, susceptibility to market abuse and manipulation, and various other risks inherent in its entirely electronic, virtual form and decentralized network. During times of instability in the bitcoin market, we may not be able to sell our bitcoins at reasonable prices or at all. As a result, our bitcoins are less liquid than our existing cash and cash equivalents and may not be able to serve as a source of liquidity for us to the same extent as cash and cash equivalents. In addition, upon sale of our bitcoin, we may incur additional taxes related to any realized gains or we may incur capital losses as to which the tax deduction may be limited. On June 14, 2021, we entered into the Sale Agreement with Jefferies pursuant to which we may issue and sell shares of our class A common stock having an aggregate offering price of up to $1.0 billion from time to time through Jefferies. During the three and nine months ended September 30, 2021, we sold 555,179 shares of our class A common stock under the Sale Agreement, at an average gross price per share of approximately $727.64, for aggregate net proceeds (less $4.5 million in sales commissions and expenses) of approximately $399.5 million. As of September 30, 2021, approximately $596.0 million of our class A common stock remained available for issuance and sale pursuant to the Sale Agreement. 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, % 2021 2020 Change Net cash provided by operating activities $ 90,586 $ 28,297 220.1 % Net cash used in investing activities $ (2,037,353 ) $ (316,204 ) 544.3 % Net cash provided by (used in) financing activities $ 1,946,169 $ (118,864 ) 1,737.3 % Net cash provided by operating activities. The primary source of our cash provided by operating activities is cash collections of our accounts receivable from customers following the sales and renewals of our product licenses and product support, as well as consulting, education, and subscription services. Our primary uses of cash in operating activities are for personnel-related expenditures for software development, personnel-related expenditures for providing consulting, education, and subscription services, and for sales and marketing costs, general and administrative costs, and income taxes. Non-cash items to further reconcile net loss to net cash provided by operating activities consist primarily of depreciation and amortization, reduction in the carrying amount of ROU lease assets, credit losses and sales allowances, deferred taxes, share-based compensation expense, digital asset impairment losses, and amortization of debt issuance costs on our long-term debt. 41 Net cash provided by operating activities increased $62.3 million for the nine months ended September 30, 2021 , as compared to the same period in the prior year, due to a $ 458.1 million increase from changes in non-cash items and a $ 39.5 million increase from changes in operating assets and liabilities, partially offset by a $ 435.3 million increase in net loss . Net cash used in investing activities. The changes in net cash (used in) provided by investing activities relate to purchases of digital assets, purchases and redemptions of short-term investments, and expenditures on property and equipment. Net cash used in investing activities increased $1.721 billion for the nine months ended September 30, 2021, as compared to the same period in the prior year, due to a $1.610 billion increase in purchases of bitcoins and a $119.9 million decrease in proceeds from the redemption of short-term investments, partially offset by a $9.9 million decrease in purchases of short-term investments. During the nine months ended September 30, 2021, we purchased bitcoin using the net proceeds from the issuance of our 2027 Convertible Notes and 2028 Secured Notes, the issuance and sale of class A common stock under the Sale Agreement, and excess cash. During the nine months ended September 30, 2020, we purchased bitcoin using excess cash, including cash from the liquidation of short-term investments. Net cash provided by (used in) financing activities. The changes in net cash provided by (used in) financing activities primarily relate to our issuance of long-term debt, the sale of class A common stock offered under the Sale Agreement, the purchase of treasury stock, the exercise of stock options under the 2013 Equity Plan, and the issuance of class A common stock under the 2021 ESPP. Net cash provided by financing activities was $1.946 billion for the nine months ended September 30, 2021, while net cash used in financing activities was $118.9 million for the nine months ended September 30, 2020. The change in net cash provided by (used in) financing activities was due to $1.050 billion in gross proceeds from our 2027 Convertible Notes, $500.0 million in gross proceeds from our 2028 Secured Notes, $404.0 million in gross proceeds from the sale of class A common stock offered under the Sale Agreement, a $122.5 million decrease in purchases of treasury stock, a $27.8 million increase in proceeds from the exercise of stock options under the 2013 Equity Plan, and $2.9 million in proceeds from the issuance of class A common stock under the 2021 ESPP, partially offset by $24.7 million of issuance costs paid for our Convertible Notes, $12.8 million of issuance costs paid for our 2028 Secured Notes, and $4.5 million of issuance costs paid related to the Sale Agreement. Convertible Senior Notes and 2028 Senior Secured Notes In December 2020 and February 2021, we issued $650.0 million aggregate principal amount of the 2025 Convertible Notes and $1.050 billion aggregate principal amount of the 2027 Convertible Notes. We used the net proceeds from the issuance of the Convertible Notes to acquire bitcoin. The terms of the Convertible Notes are discussed more fully in Note 6, Long-term Debt, to the Consolidated Financial Statements. The Company did not pay any interest to holders of the 2025 Convertible Notes during the three months ended September 30, 2021. For the nine months ended September 30, 2021, the Company paid $2.5 million in interest to holders of the 2025 Convertible Notes. The 2027 Convertible Notes do not bear regular interest and the Company has 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. The terms of the 2028 Secured Notes are discussed more fully in Note 6, Long-term Debt to the Consolidated Financial Statements. The Company did not pay any interest to holders of the 2028 Secured Notes during the three and nine months ended September 30, 2021. Share repurchases. See “ Part II. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds” of this Quarterly Report and Note 8, Treasury Stock, to the Consolidated Financial Statements for further information. 42 Contractual obligations. The following table shows future minimum rent payments under noncancellable operating leases with initial terms of greater than one year, payments related to our Convertible Notes and 2028 Secured Notes (semi-annual interest payments and principal upon maturity), payments under purchase agreements with initial terms of greater than one year, and anticipated payments related to the Transition Tax resulting from the Tax Act, based on the expected due dates of the various installments as of September 30, 2021 (in thousands). The contractual principal payments related to the 2028 Secured Notes are included in the table below based on their stated maturity date of June 15, 2028 and our expectation that the springing maturity feature of the 2028 Secured Notes will not be triggered. Payments due by period ended September 30, Total 2022 2023-2024 2025-2026 Thereafter Contractual Obligations: Operating leases $ 119,782 $ 15,001 $ 28,450 $ 25,869 $ 50,462 2025 Convertible Notes 671,951 4,875 9,750 657,326 0 2027 Convertible Notes 1,050,000 0 0 0 1,050,000 2028 Secured Notes 714,460 30,710 61,250 61,250 561,250 Purchase obligations 24,537 11,806 11,145 1,356 230 Transition Tax 25,088 2,952 12,913 9,223 0 Total $ 2,605,818 $ 65,344 $ 123,508 $ 755,024 $ 1,661,942 Unrecognized tax benefits. As of September 30, 2021, we had $4.3 million of total gross unrecognized tax benefits, including accrued interest, of which $2.9 million was recorded in “Other long-term liabilities” and $1.4 million was recorded in “Deferred tax assets, net.” The timing of any payments that could result from these unrecognized tax benefits will depend on a number of factors, and accordingly the amount and period of any future payments cannot be estimated. We do not expect any significant tax payments related to these obligations during 2021. Off-balance sheet arrangements. As of September 30, 2021, we did not have any off-balance sheet arrangements that had a material impact on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources. Recent Accounting Standards See Note 2, Recent Accounting Standards, to the Consolidated Financial Statements for further information.