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 that undertaking these two, interdependent corporate strategies serves as a key differentiator for our business, as our bitcoin acquisition strategy has raised our profile with potential software customers while our enterprise analytics software business has provided stable cash flows that allow us to acquire and hold bitcoin for the long-term. Our bitcoin acquisition strategy 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. As part of our bitcoin acquisition strategy, we also periodically engage in activities to educate the market regarding bitcoin. We view our bitcoin holdings as long-term holdings, and we do not plan to engage in regular trading of bitcoin and have not hedged or otherwise entered into derivative contracts with respect to our bitcoin holdings, though we may sell bitcoin in future periods as needed to generate cash for treasury management and other general corporate purposes. We may consider entering into additional capital raising transactions that may be collateralized by our bitcoin holdings and may consider strategies to create income streams or otherwise generate funds using our bitcoin holdings, including lending bitcoin to creditworthy counterparties. 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. 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. We believe that our bitcoin acquisition strategy is complementary to our enterprise analytics software business, as we believe that our bitcoin and related activities in support of the bitcoin network enhance awareness of our brand and can provide opportunities to secure new customers for our analytics software offerings. We are also exploring opportunities to apply bitcoin-related technologies such as blockchain analytics into our software offerings. 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. Pursuant to this corporate strategy, and from time to time, subject to market conditions, we issue debt or equity securities or engage in other capital raising transactions with the objective of using the proceeds to purchase bitcoin. 19 During 2021 and 2022, we used the proceeds of the following capital raising transactions to purchase bitcoin . The transactions are further described below under “—Liquidity and Capital Resources— Long-term Debt ” and under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Open Market Sale Agreement” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 : • $1.050 billion aggregate principal amount of the 2027 Convertible Notes issued in February 2021; • $500.0 million aggregate principal amount of the 2028 Secured Notes issued in June 2021; • 1,413,767 shares of class A common stock issued during the second half of 2021, for aggregate gross proceeds of $1.0 billion pursuant to an Open Market Sale Agreement (the “Open Market Sale Agreement”) with Jefferies LLC, as agent; and • $205.0 million aggregate principal amount of the 2025 Secured Term Loan issued in March 2022. As of March 31, 2022, we held an aggregate of approximately 129,218 bitcoins, with 14,109 bitcoins held directly by MicroStrategy Incorporated and 115,109 bitcoins held by MacroStrategy LLC, a wholly-owned subsidiary of MicroStrategy. The approximately 14,109 bitcoins held directly by MicroStrategy Incorporated serve as part of the collateral securing our 2028 Secured Notes, and approximately 19,466 of the 115,109 bitcoins held by MacroStrategy serve as part of the collateral securing our 2025 Secured Term Loan. 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 December 31, 2020 $ 1,125,000 $ (70,698 ) $ 1,054,302 70,469 $ 15,964 Digital asset purchases (a) 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 (b) 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 (c) 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 Digital asset purchases (d) 591,058 591,058 10,349 57,113 Digital asset impairment losses (146,587 ) (146,587 ) Balance at December 31, 2021 $ 3,751,529 $ (901,319 ) $ 2,850,210 124,391 $ 30,159 Digital asset purchases (e) 215,500 215,500 4,827 44,645 Digital asset impairment losses (170,091 ) (170,091 ) Balance at March 31, 2022 $ 3,967,029 $ (1,071,410 ) $ 2,895,619 129,218 $ 30,700 (a) 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. (b) 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. (c) 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 Open Market Sale Agreement and excess cash. (d) In the fourth quarter of 2021, we purchased bitcoin using $591.0 million in net proceeds from our sale of 858,588 shares of class A common stock offered under the Open Market Sale Agreement and excess cash. (e) In the first quarter of 2022, we purchased bitcoin using $190.5 million of the net proceeds from the issuance of the 2025 Secured Term Loan and excess cash. 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 bitcoin) for each respective quarter, as further defined below: 20 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, 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 December 31, 2021 124,391 $ 42,333.00 $ 5,265,844 $ 69,000.00 $ 8,582,979 $ 45,879.97 $ 5,707,055 March 31, 2022 129,218 $ 32,933.33 $ 4,255,579 $ 48,240.00 $ 6,233,476 $ 45,602.79 $ 5,892,701 (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 for bitcoin) in each scenario defined above multiplied by the number of bitcoins we held 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 for bitcoin) 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 March 31, 2022, digital asset impairment losses of $170.1 million represented 64.5% of our operating expenses, contributing to our net loss of $130.8 million for the three months ended March 31, 2022, compared to digital asset impairment losses of $194.1 million in the three months ended March 31, 2021, representing 68.5% of our operating expenses and contributing to our net loss of $110.0 million for the three months ended March 31, 2021. As of May 2, 2022, we held approximately 129,218 bitcoins that were acquired at an aggregate purchase price of $3.967 billion and an average purchase price of approximately $30,700 per bitcoin, inclusive of fees and expenses. As of May 2, 2022, at 4:00 p.m. Eastern Time, the market price of one bitcoin reported on the Coinbase exchange was $38,550.43. 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, the MicroStrategy platform, helps achieve this vision for our enterprise customers around the world. It delivers actionable intelligence and modern analytics on an open, comprehensive enterprise platform. The MicroStrategy platform empowers our customers to quickly build and deploy high-performance, governed, and secure applications that can scale across their enterprises. Our core product offering is our software platform. In 2021, we moved to a monthly release cadence to enable the same functionality, security, and stability enhancements that we have historically delivered for our platform in annual releases, without the friction of a single, annual release. Our platform features the following: 21 • Pervasive, Modern Analytics: MicroStrategy delivers insights across multiple clients and devices to users via our HyperIntelligence ® products, visualization and reporting capabilities, mobility features, and custom applications developed on our platform. o Data Visualization and Reporting – Dossier ® , our dashboarding and data-visualization tool, provides users with the formatting, layout, and input controls needed to quickly build low-code/no-code analytics applications, from infographic-style reports to high-impact productivity applications. o Transformational Mobility – Our platform empowers the mobile workforce to make decisions and take action from any location. It delivers more ways to quickly deploy mobile productivity apps for a variety of business functions and roles on any standard smartphone or tablet. o HyperIntelligence – Our platform offers the potential to radically improve business processes by enhancing the websites, applications, and mobile devices people use every day with contextual intelligence, next-action suggestions, and workflows. o Custom Applications – Our platform enables users to create highly customized web and mobile applications that leverage the full breadth of the MicroStrategy platform to deliver intuitive BI apps for teams, departments, and organizations. • Open, Federated Architecture: MicroStrategy embraces an agile approach to development and innovation, addressing our strategy of seeking to offer 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. The MicroStrategy platform integrates with popular business apps, including Microsoft Excel, Power BI, and Tableau to provide users with the flexibility to leverage trusted data from MicroStrategy directly within the client applications to which they are accustomed. The MicroStrategy platform also provides out-of-the-box integrations to popular data-science tools like Jupyter and RStudio, allowing users to develop predictive, machine learning-enhanced data models on top of the secure and trusted foundation offered by the MicroStrategy platform. o APIs and Gateways – Our gateways, application programming interfaces (“APIs”), and connectors enable the MicroStrategy platform to integrate with the most popular enterprise platforms and tools. We certify more than 200 connectors to popular data sources both locally stored and in the cloud, and we offer a comprehensive set of Representational State Transfer (“REST”) 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, fully managed and hosted by us. • Enterprise Platform: Our platform is designed to securely scale analytics at high data volumes. The MicroStrategy platform has the tools and functionality 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. This feature allows users to have a consistent and secure view of data across the enterprise—effectively delivering what we refer to as a single version of truth . o Scalability – Our platform powers some of the largest business intelligence deployments in the world. The 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 that provides superior administration, security, and architecture, including role-based access to both row and column data. This level of data security gives our customers that are subject to the most stringent data security requirements, including financial institutions, healthcare providers, and government agencies, the confidence they need to deploy our platform across their enterprise. 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. 22 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 continued to disrupt global travel and supply chains and adversely impacted global commercial activity. Considerable uncertainty still surrounds COVID-19, the evolution of its variants, its potential long-term economic effects, as well as the effectiveness of any responses taken by government authorities and businesses and of various efforts to inoculate the global population. The travel restrictions, limits on hours of operations and/or closures of non-essential businesses, and other efforts to curb the spread of COVID-19 have significantly disrupted business activity globally and there is uncertainty as to when these disruptions will fully subside. Significant uncertainty continues to exist concerning the impact of the COVID-19 pandemic on our customers’ and prospects’ business and operations in future periods. Although our total revenues for the three months ended March 31, 2022 and 2021 were not materially impacted by COVID-19, our revenues may be negatively impacted in future periods until the effects of the pandemic and the efforts to address it have fully subsided and the current macroeconomic environment has substantially recovered. The uncertainty related to COVID-19 may also result in increased volatility in the financial projections we use as the basis for estimates and assumptions used in our financial statements. We adapted our operations to meet the challenges of the pandemic, including establishing flexible working arrangements for our employees, reducing business travel, and shifting certain of our customer, employee, and industry events to virtual formats. 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 months ended March 31, 2022 and 2021: Three Months Ended March 31, 2022 2021 Revenues Product licenses $ 16,513 $ 21,280 Subscription services 12,845 10,026 Total product licenses and subscription services 29,358 31,306 Product support 67,151 70,649 Other services 22,768 20,947 Total revenues 119,277 122,902 Cost of revenues Product licenses 477 488 Subscription services 5,410 3,628 Total product licenses and subscription services 5,887 4,116 Product support 5,191 4,812 Other services 14,599 13,621 Total cost of revenues 25,677 22,549 Gross profit 93,600 100,353 Operating expenses Sales and marketing 33,240 38,198 Research and development 33,523 29,483 General and administrative 26,706 21,729 Digital asset impairment losses 170,091 194,095 Total operating expenses 263,560 283,505 Loss from operations $ (169,960 ) $ (183,152 ) 23 We have incurred and may continue to incur significant impairment losses on our digital assets and we may recognize gains upon sale of our digital assets in the future, which would be presented net of any impairment losses within operating expenses. In addition, we base our internal operating expense forecasts on expected revenue trends and strategic objectives in our enterprise analytics software business. Many of our expenses, such as office leases and certain personnel costs, are relatively fixed. Accordingly, any decrease in the price of bitcoin during any quarter, any sales by us of our bitcoin at prices above their then current carrying costs or any shortfall in revenue in our software business may cause significant variation in our operating results. We therefore believe that quarter-to-quarter comparisons of our operating results may not be a good indication of our future performance. Employees As of March 31, 2022, we had a total of 2,143 employees, of whom 775 were based in the United States and 1,368 were based internationally. The following table summarizes employee headcount as of the dates indicated: March 31, December 31, March 31, 2022 2021 2021 Subscription services 77 72 54 Product support 167 174 155 Consulting 429 413 391 Education 36 36 39 Sales and marketing 462 470 471 Research and development 720 699 654 General and administrative 252 257 251 Total headcount 2,143 2,121 2,015 Share-based Compensation Expense As discussed in Note 8, Share-based Compensation, to the Consolidated Financial Statements, we have outstanding stock options to purchase shares of our class A common stock, restricted stock units, 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 March 31, 2022 2021 Cost of subscription services revenues $ 107 $ 49 Cost of product support revenues 450 149 Cost of consulting revenues 376 79 Cost of education revenues 52 10 Sales and marketing 4,283 2,384 Research and development 3,314 2,067 General and administrative 5,812 2,973 Total share-based compensation expense $ 14,394 $ 7,711 The $6.7 million increase in share-based compensation expense during the three months ended March 31, 2022, as compared to the same period in the prior year, is primarily due to the continued expansion of our equity award programs worldwide. As of March 31, 2022, we estimated that an aggregate of approximately $201.0 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 3.2 years. Non-GAAP Financial Measures We are providing supplemental financial measures for (i) non-GAAP loss from operations that excludes the impact of our share-based compensation expense, (ii) non-GAAP net loss and non-GAAP diluted loss per share that exclude the impact of our share-based compensation expense, interest expense arising from the amortization of debt issuance costs 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 24 generally accepted accounting principles in the United States (“GAAP”) and, as a result, these supplemental financial measures may not be comparable to similarly titled measures of other companies. Management uses these non-GAAP financial measures internally to help understand, manage, and evaluate our business performance and to help make operating decisions. We believe that these non-GAAP financial measures are also useful to investors and analysts in comparing our performance across reporting periods on a consistent basis. The first supplemental financial measure excludes a significant non-cash expense that we believe is not reflective of our general business performance, and for which the accounting requires management judgment and the resulting share-based compensation expense could vary significantly in comparison to other companies. The second set of supplemental financial measures excludes the impact of (i) share-based compensation expense, (ii) non-cash interest expense arising from the amortization of debt issuance costs related to our long-term debt, and (iii) related income tax effects. The third set of supplemental financial measures excludes changes resulting from fluctuations in foreign currency exchange rates so that results may be compared to the same period in the prior year on a non-GAAP constant currency basis. We believe the use of these non-GAAP financial measures can also facilitate comparison of our operating results to those of our competitors. Non-GAAP financial measures are subject to material limitations as they are not in accordance with, or a substitute for, measurements prepared in accordance with GAAP. For example, we expect that share-based compensation expense, which is excluded from the first two non-GAAP financial measures, will continue to be a significant recurring expense over the coming years and is an important part of the compensation provided to certain employees, officers, and directors. Similarly, we expect that interest expense arising from the amortization of debt issuance costs will continue to be a recurring expense over the term of the long-term debt. Our non-GAAP financial measures are not meant to be considered in isolation and should be read only in conjunction with our Consolidated Financial Statements, which have been prepared in accordance with GAAP. We rely primarily on such Consolidated Financial Statements to understand, manage, and evaluate our business performance and use the non-GAAP financial measures only supplementally. The following is a reconciliation of our non-GAAP loss from operations, which excludes the impact of share-based compensation expense, to its most directly comparable GAAP measures (in thousands) for the periods indicated: Three Months Ended March 31, 2022 2021 Reconciliation of non-GAAP loss from operations: Loss from operations $ (169,960 ) $ (183,152 ) Share-based compensation expense 14,394 7,711 Non-GAAP loss from operations $ (155,566 ) $ (175,441 ) The following are reconciliations of our non-GAAP net loss and non-GAAP diluted loss per share, in each case excluding the impact of (i) share-based compensation expense, (ii) interest expense arising from the amortization of debt issuance costs on our long-term debt, and (iii) related income tax effects to their most directly comparable GAAP measures (in thousands, except per share data) for the periods indicated: Three Months Ended March 31, 2022 2021 Reconciliation of non-GAAP net loss: Net loss $ (130,751 ) $ (110,020 ) Share-based compensation expense 14,394 7,711 Interest expense arising from amortization of debt issuance costs 2,129 1,172 Income tax effects (1) (3,444 ) (23,737 ) Non-GAAP net loss $ (117,672 ) $ (124,874 ) Reconciliation of non-GAAP diluted loss per share (2): Diluted loss per share $ (11.58 ) $ (11.40 ) Share-based compensation expense (per diluted share) 1.28 0.80 Interest expense arising from amortization of debt issuance costs (per diluted share) 0.19 0.12 Income tax effects (per diluted share) (0.31 ) (2.46 ) Non-GAAP diluted loss per share $ (10.42 ) $ (12.94 ) 25 (1) Income tax effects reflect the net tax effects of share-based compensation expense, which includes tax benefits on exercises of stock options and vesting of share-settled restricted stock units, and interest expense for amortization of debt issuance costs. (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. 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 March 31, GAAP Foreign Currency Exchange Rate Impact (1) Non-GAAP Constant Currency (2) GAAP GAAP % Change Non-GAAP Constant Currency % Change (3) 2022 2022 2022 2021 2022 2022 Product licenses revenues $ 16,513 $ (488 ) $ 17,001 $ 21,280 -22.4 % -20.1 % Subscription services revenues 12,845 (205 ) 13,050 10,026 28.1 % 30.2 % Product support revenues 67,151 (1,699 ) 68,850 70,649 -5.0 % -2.5 % Other services revenues 22,768 (802 ) 23,570 20,947 8.7 % 12.5 % Cost of product support revenues 5,191 (131 ) 5,322 4,812 7.9 % 10.6 % Cost of other services revenues 14,599 (686 ) 15,285 13,621 7.2 % 12.2 % Sales and marketing expenses 33,240 (812 ) 34,052 38,198 -13.0 % -10.9 % Research and development expenses 33,523 17 33,506 29,483 13.7 % 13.6 % General and administrative expenses 26,706 (241 ) 26,947 21,729 22.9 % 24.0 % 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 $ 21,280 $ 325 $ 20,955 $ 12,584 69.1 % 66.5 % Subscription services revenues 10,026 190 9,836 7,968 25.8 % 23.4 % Product support revenues 70,649 1,917 68,732 71,158 -0.7 % -3.4 % Other services revenues 20,947 618 20,329 19,714 6.3 % 3.1 % Cost of product support revenues 4,812 58 4,754 6,718 -28.4 % -29.2 % Cost of other services revenues 13,621 351 13,270 13,093 4.0 % 1.4 % Sales and marketing expenses 38,198 425 37,773 39,518 -3.3 % -4.4 % Research and development expenses 29,483 445 29,038 26,101 13.0 % 11.3 % General and administrative expenses 21,729 102 21,627 21,332 1.9 % 1.4 % 26 (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 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, 2021. There have been no significant changes in such estimates and judgments since December 31, 2021. Results of Operations Comparison of the three months ended March 31, 2022 and 2021 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 March 31, % 2022 2021 Change Product Licenses and Subscription Services Revenues: Product Licenses Domestic $ 9,844 $ 13,246 -25.7 % International 6,669 8,034 -17.0 % Total product licenses revenues 16,513 21,280 -22.4 % Subscription Services Domestic 9,098 7,469 21.8 % International 3,747 2,557 46.5 % Total subscription services revenues 12,845 10,026 28.1 % Total product licenses and subscription services revenues $ 29,358 $ 31,306 -6.2 % 27 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 March 31, 2022 2021 Product Licenses Transactions with Recognized Licenses Revenue in the Applicable Period: More than $1.0 million in licenses revenue recognized 1 2 Between $0.5 million and $1.0 million in licenses revenue recognized 3 5 Total 4 7 Domestic: More than $1.0 million in licenses revenue recognized 1 2 Between $0.5 million and $1.0 million in licenses revenue recognized 2 2 Total 3 4 International: More than $1.0 million in licenses revenue recognized 0 0 Between $0.5 million and $1.0 million in licenses revenue recognized 1 3 Total 1 3 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 March 31, % 2022 2021 Change Product Licenses Revenue Recognized in the Applicable Period: More than $1.0 million in licenses revenue recognized $ 1,125 $ 6,103 -81.6 % Between $0.5 million and $1.0 million in licenses revenue recognized 1,953 3,053 -36.0 % Less than $0.5 million in licenses revenue recognized 13,435 12,124 10.8 % Total 16,513 21,280 -22.4 % Domestic: More than $1.0 million in licenses revenue recognized 1,125 6,103 -81.6 % Between $0.5 million and $1.0 million in licenses revenue recognized 1,443 1,414 2.1 % Less than $0.5 million in licenses revenue recognized 7,276 5,729 27.0 % Total 9,844 13,246 -25.7 % International: More than $1.0 million in licenses revenue recognized 0 0 n/a Between $0.5 million and $1.0 million in licenses revenue recognized 510 1,639 -68.9 % Less than $0.5 million in licenses revenue recognized 6,159 6,395 -3.7 % Total $ 6,669 $ 8,034 -17.0 % Product licenses revenues decreased $4.8 million for the three months ended March 31, 2022, as compared to the same period in the prior year. For the three months ended March 31, 2022 and 2021, product licenses transactions with more than $0.5 million in recognized revenue represented 18.6% and 43.0%, respectively, of our product licenses revenues. For the three months ended March 31, 2022, our top three product licenses transactions totaled $2.6 million in recognized revenue, or 15.6% of total product licenses revenues, compared to $7.0 million, or 32.8% of total product licenses revenues, for the three months ended March 31, 2021. Domestic product licenses revenues. Domestic product licenses revenues decreased $3.4 million for the three months ended March 31, 2022, as compared to the same period in the prior year, primarily due to a decrease in the average deal size and number of transactions with more than $1.0 million in recognized revenue and a decrease in the number of transactions with less than $0.5 million in recognized revenue, partially offset by an increase in the average deal size of transactions with less than $0.5 million in recognized revenue. International product licenses revenues. International product licenses revenues decreased $1.4 million for the three months ended March 31, 2022, as compared to the same period in the prior year, primarily due to a decrease in the number of transactions with recognized revenue between $0.5 million and $1.0 million and a $0.5 million unfavorable foreign currency exchange impact. 28 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 $2.8 million for the three months ended March 31, 2022, as compared to the same period in the prior year, primarily due to conversions to cloud-based subscriptions from existing on-premises customers, an increase in the use of subscription services by existing customers, and sales contracts with new customers. 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 March 31, % 2022 2021 Change Product Support Revenues: Domestic $ 39,083 $ 40,090 -2.5 % International 28,068 30,559 -8.2 % Total product support revenues $ 67,151 $ 70,649 -5.0 % Product support revenues are derived from providing technical software support and software updates and upgrades to customers. Product support revenues are recognized ratably over the term of the contract, which is generally one year. Product support revenues decreased $3.5 million for the three months ended March 31, 2022, 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 and a $1.7 million unfavorable 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 March 31, % 2022 2021 Change Other Services Revenues: Consulting Domestic $ 9,581 $ 8,716 9.9 % International 11,854 10,995 7.8 % Total consulting revenues 21,435 19,711 8.7 % Education 1,333 1,236 7.8 % Total other services revenues $ 22,768 $ 20,947 8.7 % Consulting revenues. Consulting revenues are derived from helping customers plan and execute the deployment of our software. Consulting revenues increased $1.7 million for the three months ended March 31, 2022, as compared to the same period in the prior year, primarily due to an increase in billable hours worldwide, partially offset by a $0.8 million unfavorable foreign currency exchange impact and a decrease in average bill rates. Education revenues. Education revenues are derived from the education and training that we provide to our customers to enhance their ability to fully utilize the features and functionality of our software. These offerings include self-tutorials, custom course development, joint training with customers’ internal staff, and standard course offerings, with pricing dependent on the specific offering delivered. Education revenues did not materially change for the three months ended March 31, 2022, as compared to the same period in the prior year. 29 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 March 31, % 2022 2021 Change Cost of Revenues: Product licenses and subscription services: Product licenses $ 477 $ 488 -2.3 % Subscription services 5,410 3,628 49.1 % Total product licenses and subscription services 5,887 4,116 43.0 % Product support 5,191 4,812 7.9 % Other services: Consulting 13,300 12,332 7.8 % Education 1,299 1,289 0.8 % Total other services 14,599 13,621 7.2 % Total cost of revenues $ 25,677 $ 22,549 13.9 % Cost of product licenses revenues. Cost of product licenses revenues consists of referral fees paid to channel partners, the costs of product manuals and media, and royalties paid to third-party software vendors. Cost of product licenses revenues did not materially change for the three months ended March 31, 2022, as compared to the same period 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 42.6% to 77 at March 31, 2022 from 54 at March 31, 2021. Cost of subscription services revenues increased $1.8 million for the three months ended March 31, 2022, as compared to the same period in the prior year primarily due to a $1.2 million increase in cloud hosting infrastructure costs, which is a result of the increased usage by new and existing cloud subscription services customers, and a $0.4 million increase in employee salaries primarily due to periodic wage increases and an increase 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 increased 7.7% to 167 at March 31, 2022 from 155 at March 31, 2021. Cost of product support revenues did not materially change for the three months ended March 31, 2022, as compared to the same period in the prior year. Cost of consulting revenues. Cost of consulting revenues consists of personnel and related overhead costs, excluding those under our Enterprise Support program which are allocated to cost of product support revenues. Consulting headcount increased 9.7% to 429 at March 31, 2022 from 391 at March 31, 2021. Cost of consulting revenues increased $1.0 million for the three months ended March 31, 2022, as compared to the same period in the prior year, primarily due to a $0.5 million increase in employee salaries primarily due to an increase in average staffing levels and consulting personnel providing a decreased level of Enterprise Support services. Included in cost of consulting revenues for the three months ended March 31, 2022 is an aggregate $0.7 million favorable foreign currency exchange impact. Cost of education revenues. Cost of education revenues consists of personnel and related overhead costs. Education headcount decreased 7.7% to 36 at March 31, 2022 from 39 at March 31, 2021. Cost of education revenues did not materially change for the three months ended March 31, 2022, as compared to the same period 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. Sales and marketing headcount decreased 1.9% to 462 at March 31, 2022 from 471 at March 31, 2021. The following table sets forth sales and marketing expenses (in thousands) and related percentage changes for the periods indicated: Three Months Ended March 31, % 2022 2021 Change Sales and marketing expenses $ 33,240 $ 38,198 -13.0 % Sales and marketing expenses decreased $5.0 million for the three months ended March 31, 2022, as compared to the same period in the prior year, primarily due to a $7.1 million decrease in variable compensation primarily due to an increase in capitalized commissions 30 and decreases in bonuses and personnel costs , partially offset by a $ 1.9 million net increase in share-based compensation expense . The $ 1 . 9 million net in crease in share-based compensation expense is primarily due to the grant of additional awards under the 2013 Equity Plan , partially offset by the forfeiture of certain awards . Included in sales and marketing expenses for the three months ended March 31, 2022 is an aggregate $0.8 million favorable 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 increased 10.1% to 720 at March 31, 2022 from 654 at March 31, 2021. The following table summarizes research and development expenses (in thousands) and related percentage changes for the periods indicated: Three Months Ended March 31, % 2022 2021 Change Research and development expenses $ 33,523 $ 29,483 13.7 % Research and development expenses increased $4.0 million for the three months ended March 31, 2022, as compared to the same period in the prior year, primarily due to a $2.6 million increase in employee salaries primarily due to periodic wage increases and an increase in average staffing levels, partially offset by a shift in staffing levels to lower cost regions, and a $1.2 million net increase in share-based compensation expense, partially offset by a $0.6 million decrease in cloud hosting infrastructure costs. The $1.2 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. General and administrative expenses consist of personnel and related overhead costs, and other costs of our executive, finance, human resources, information systems, and administrative departments, as well as third-party consulting, legal, and other professional fees. General and administrative headcount increased 0.4% to 252 at March 31, 2022 from 251 at March 31, 2021. The following table sets forth general and administrative expenses (in thousands) and related percentage changes for the periods indicated: Three Months Ended March 31, % 2022 2021 Change General and administrative expenses $ 26,706 $ 21,729 22.9 % General and administrative expenses increased $5.0 million for the three months ended March 31, 2022, as compared to the same period in the prior year, primarily due to a $2.8 million net increase in share-based compensation expense and a $0.7 million increase in facility and other related support costs. The $2.8 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 that became 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 March 31, % 2022 2021 Change Digital asset impairment losses $ 170,091 $ 194,095 -12.4 % We did not sell any of our digital assets during the three months ended March 31, 2022 and 2021. We may continue to incur significant digital asset impairment losses in the future. For example, we have incurred at least $30.2 million in digital asset impairment losses during the second quarter of 2022 and on bitcoin we held as of March 31, 2022. Interest Expense, Net For the three months ended March 31, 2022, interest expense, net, of $11.0 million was primarily related to the contractual interest expense related to our 2028 Secured Notes, 2025 Convertible Notes, and 2025 Secured Term Loan, and the amortization of issuance costs related to our long-term debt arrangements. For the three months ended March 31, 2021, interest expense, net, of $2.4 million was primarily related to the contractual interest expense related to our 2025 Convertible Notes and the amortization of issuance costs related to our Convertible Notes. Refer to Note 4, Long-term Debt, to the Consolidated Financial Statements for further information. 31 Other Income, Net For the three months ended March 31, 2022 and 2021, other income, net, of $2.2 million and $1.3 million, respectively, were comprised primarily of foreign currency transaction net gains. Benefit from Income Taxes We recorded a benefit from income taxes of $48.0 million on a pretax loss of $178.8 million for the three months ended March 31, 2022 and a benefit from income taxes of $74.3 million on a pretax loss of $184.3 million for the three months ended March 31, 2021. Our benefit from income taxes decreased from the same period in the prior year primarily due to higher excess tax benefits from share-based compensation expense in 2021 as compared to 2022. As of March 31, 2022, we had a valuation allowance of $1.0 million primarily related to certain foreign tax credit carryforward tax assets that, in our present estimation, more likely than not will not be realized. If the market value of bitcoin declines or we are unable to regain profitability in future periods, we may be required to increase the valuation allowance against our deferred tax assets, which could result in a charge that would materially adversely affect net income (loss) in the period in which the charge is incurred. We will continue to regularly assess the realizability of deferred tax assets. Our effective tax rate may fluctuate due to changes in our domestic and foreign earnings and losses, material discrete tax items, or a combination of these factors resulting from transactions or events. Deferred Revenue and Advance Payments Deferred revenue and advance payments represent amounts received or due from our customers in advance of our transferring our software or services to the customer. In the case of multi-year service contract arrangements, we generally do not invoice more than one year in advance of services and do not record deferred revenue for amounts that have not been invoiced. Revenue is subsequently recognized in the period(s) in which control of the software or services is transferred to the customer. The following table summarizes deferred revenue and advance payments (in thousands), as of: March 31, December 31, March 31, 2022 2021 2021 Current: Deferred product licenses revenue $ 1,090 $ 993 $ 195 Deferred subscription services revenue 34,185 35,589 25,689 Deferred product support revenue 166,119 166,477 167,282 Deferred other services revenue 4,823 6,801 5,814 Total current deferred revenue and advance payments $ 206,217 $ 209,860 $ 198,980 Non-current: Deferred product licenses revenue $ 80 $ 68 $ 67 Deferred subscription services revenue 2,153 1,064 8,317 Deferred product support revenue 5,368 6,203 5,401 Deferred other services revenue 635 754 732 Total non-current deferred revenue and advance payments $ 8,236 $ 8,089 $ 14,517 Total current and non-current: Deferred product licenses revenue $ 1,170 $ 1,061 $ 262 Deferred subscription services revenue 36,338 36,653 34,006 Deferred product support revenue 171,487 172,680 172,683 Deferred other services revenue 5,458 7,555 6,546 Total current and non-current deferred revenue and advance payments $ 214,453 $ 217,949 $ 213,497 32 The changes in total deferred revenue and advance payments as of March 31, 2022, as compared to December 31, 2021 and March 31, 2021, were not material. 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 March 31, 2022 are $1.4 million and $3.8 million unfavorable foreign currency impacts from the general strengthening of the U.S. dollar compared to December 31, 2021 and March 31, 2021, respectively. 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 March 31, 2022, we had an aggregate transaction price of $280.6 million allocated to the remaining performance obligation related to product support, subscription services, product licenses, and other services contracts. We expect to recognize approximately $221.4 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. As of March 31, 2022 and December 31, 2021, the amount of cash and cash equivalents held by our U.S. entities was $42.2 million and $13.1 million, respectively, and by our non-U.S. entities was $50.5 million and $50.3 million, respectively. We earn a significant amount of our revenues outside the United States. We repatriated foreign earnings and profits of $57.5 million during 2021 and $10.0 million during the three months ended March 31, 2022. Our material contractual obligations and cash requirements consist of: • principal and interest payments related to our long-term debt; • rent payments under noncancellable operating leases; • payments related to the mandatory deemed repatriation transition tax (the “Transition Tax”) under the U.S. Tax Cuts and Jobs Act (the “Tax Act”); • payments under various purchase agreements, primarily related to third-party software supporting our products, marketing, and operations; and • ongoing personnel-related expenditures and vendor payments. The above items are explained in further detail in Note 4, Long-term Debt, to the Consolidated Financial Statements included in this Quarterly Report as well as under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 and in the Notes to the Consolidated Financial Statements included therein. There have been no changes to our material contractual obligations and cash requirements since December 31, 2021, except for the issuance of the 2025 Secured Term Loan, as described in Note 4, Long-term Debt, to the Consolidated Financial Statements. We believe that existing cash and cash equivalents held by us and cash and cash equivalents anticipated to be generated by us are sufficient to meet working capital requirements, anticipated capital expenditures, and contractual obligations for at least the next 12 months. Beyond the next 12 months, our long-term cash requirements are primarily for obligations related to our long-term debt. We have principal due upon maturity of our long-term debt instruments in the aggregate of $2.405 billion in addition to $2.4 million in coupon interest due each semi-annual period for the 2025 Convertible Notes, $15.3 million in coupon interest due each semi-annual period for the 2028 Secured Notes, and an estimated $0.7 million due monthly in variable coupon interest for the 2025 Secured Term Loan (based on the interest rate in effect at March 31, 2022). We also have long-term cash requirements for obligations related to our operating leases, the Transition Tax, and our various purchase agreements. If cash and cash equivalents generated by future operating activities are not sufficient to enable us to satisfy these obligations, we may seek to generate cash and cash equivalents from other sources. The sources could include the sale of bitcoins, additional borrowings collateralized by our bitcoins, as well as the issuance and sale of shares of our class A common stock. Furthermore, if certain conditions are met, we may have the right to elect to settle the Convertible Notes upon a conversion of such Convertible Notes in shares of our class A common stock, or a combination of cash and shares of class A common stock, which may enable us to reduce the amount of our cash obligations under the Convertible Notes. As of March 31, 2022, we held approximately 129,218 bitcoins, of which approximately 95,643 are unencumbered. We do not believe we will need to sell or engage in other transactions with respect to any of our bitcoins within the next twelve months to meet our working capital requirements, although we may from time to time sell or engage in other transactions with respect to our bitcoins as part of treasury management operations, as noted above. The bitcoin market historically has been characterized by significant volatility in its 33 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 risk s inherent in its entirely electronic, virtual form and decentralized network. During times of instability in the b itcoin market, we may not be able to sell our bitcoins at reasonable prices or at all. A s a result, our bitcoin s 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: March 31, % 2022 2021 Change Net cash provided by operating activities $ 43,682 $ 62,703 -30.3 % Net cash used in investing activities $ (216,141 ) $ (1,086,822 ) -80.1 % Net cash provided by financing activities $ 207,291 $ 1,049,258 -80.2 % 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 and product support, as well as consulting, education, and subscription services. Our primary uses of cash in operating activities are for personnel-related expenditures for software development, personnel-related expenditures for providing consulting, education, and subscription services, and for sales and marketing costs, general and administrative costs, and income taxes. Non-cash items to further reconcile net loss to net cash provided by operating activities consist primarily of depreciation and amortization, reduction in the carrying amount of operating lease right-of-use 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. Net cash provided by operating activities decreased $19.0 million for the three months ended March 31, 2022, as compared to the same period in the prior year, due to a $20.7 million increase in net loss and a $1.5 million decrease from changes in operating assets and liabilities, partially offset by a $3.2 million increase from changes in non-cash items. 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 decreased $870.7 million for the three months ended March 31, 2022, as compared to the same period in the prior year, primarily due to a $870.9 million decrease in purchases of bitcoins. During the three months ended March 31, 2022, we purchased bitcoin using $190.5 million of the net proceeds from the issuance of the 2025 Secured Term Loan and excess cash. During the three months ended March 31, 2021, we purchased bitcoin using the net proceeds from the issuance of our 2027 Convertible Notes and excess cash. Net cash provided by financing activities. The changes in net cash provided by (used in) financing activities primarily relate to the issuance of our long-term debt, the exercise of stock options under the 2013 Equity Plan, the sales of class A common stock under the 2021 ESPP, and the payment of withholding tax on vesting of restricted stock units. Net cash provided by financing activities decreased $842.0 million for the three months ended March 31, 2022, as compared to the same period in the prior year, primarily due to $1.050 billion in gross proceeds from our 2027 Convertible Notes during the three months ended March 31, 2021, a $23.6 million decrease in proceeds from the exercise of stock options under the 2013 Equity Plan, and $0.5 million of withholding tax paid on vesting of restricted stock units during the three months ended March 31, 2022, partially offset by $204.7 million in gross proceeds, net of lender fees, from our 2025 Secured Term Loan during the three months ended March 31, 2022, $24.6 million in issuance costs paid for our Convertible Notes during the three months ended March 31, 2021, and $2.8 million in proceeds from the sales of class A common stock under the 2021 ESPP in the three months ended March 31, 2022. Long-term Debt In December 2020, we issued $650.0 million aggregate principal amount of the 2025 Convertible Notes and in February 2021, we issued $1.050 billion aggregate principal amount of the 2027 Convertible Notes. We used the net proceeds from the issuance of the Convertible Notes to acquire bitcoin. The terms of the Convertible Notes are discussed more fully in Note 4, Long-term Debt, to the Consolidated Financial Statements included in this Quarterly Report as well as Note 8, Long-term Debt, to the Consolidated Financial Statements of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. We did not pay any interest to holders of the 2025 Convertible Notes during the three months ended March 31, 2022 and 2021. The 2027 Convertible Notes do not bear regular interest and we have not paid any special interest to holders of the 2027 Convertible Notes to date. In June 2021, we issued $500.0 million aggregate principal amount of the 2028 Secured Notes. We used the net proceeds from the issuance of the 2028 Secured Notes to acquire bitcoin. As of March 31, 2022, approximately 14,109 of the bitcoins held by the Company serve as part of the collateral for the 2028 Secured Notes. The terms of the 2028 Secured Notes are discussed more fully in Note 4, 34 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, 2021 . We did not pay any interest to holders of the 2028 Secured Notes during the three months ended March 31, 2022 . 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, used $5.0 million of the net proceeds to establish the Reserve Account which serves as collateral for the 2025 Secured Term Loan, and expect to use the remaining net proceeds to pay fees, interest, and expenses related to the 2025 Secured Term Loan or for general corporate purposes. As of March 31, 2022, approximately 19,466 of the bitcoins held by MacroStrategy serve as part of the collateral for the 2025 Secured Term Loan. The terms of the 2025 Secured Term Loan are discussed more fully in Note 4, Long-term Debt to the Consolidated Financial Statements. We did not pay any interest to Silvergate during the three months ended March 31, 2022.