Strategy Inc (MSTR) FY 2022 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information

The following discussion and analysis provides information which our management believes is relevant to an assessment and understanding of our financial condition and results of operations. This discussion and analysis should be read together with our consolidated financial statements and related notes that are included elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, this discussion and analysis contains forward-looking statements that are based upon our current expectations, beliefs, estimates and projections, and various assumptions, many of which, by their nature, are inherently uncertain and beyond our control. See the section of this Annual Report on Form 10-K entitled “Forward Looking Information and Risk Factor Summary.” Actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Part I. Item 1A. Risk Factors” or elsewhere in this Annual Report on Form 10-K.

Management’s Discussion and Analysis for the Year Ended December 31, 2020

Management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2020, including comparison of our results for the years ended December 31, 2021 and 2020, is included in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021.

Business Overview

MicroStrategy® pursues two corporate strategies in the operation of its business. One strategy is to acquire and hold bitcoin and the other strategy is to grow our enterprise analytics software business. We believe that undertaking these two, interdependent corporate strategies serves as a key differentiator for our business, as our bitcoin acquisition strategy has raised our profile with certain potential software customers while our enterprise analytics software business has provided stable cash flows that allow us to acquire and hold bitcoin for the long-term.

Our bitcoin acquisition strategy generally involves acquiring bitcoin with our liquid assets that exceed working capital requirements, and from time to time, subject to market conditions, issuing debt or equity securities or engaging in other capital raising transactions with the objective of using the proceeds to purchase bitcoin. We view our bitcoin holdings as long-term holdings and expect to continue to accumulate bitcoin. We have not set any specific target for the amount of bitcoin we seek to hold, and we will continue to monitor market conditions in determining whether to engage in additional financings to purchase additional bitcoin. This overall strategy also contemplates that we may (i) periodically sell bitcoin for general corporate purposes, including to generate cash for treasury management or in connection with strategies that generate tax benefits in accordance with applicable law, (ii) enter into additional capital raising transactions that are collateralized by our bitcoin holdings, and (iii) consider pursuing additional strategies to create income streams or otherwise generate funds using our bitcoin holdings.

We believe that bitcoin is attractive because it can serve as a store of value, supported by a robust and public open-source architecture, that is untethered to sovereign monetary policy. We also believe that, due to its limited supply, bitcoin offers the opportunity for appreciation in value if its adoption increases and has the potential to serve as a hedge against inflation in the long-term.  In addition, we believe that our bitcoin acquisition strategy is complementary to our enterprise analytics software business, as we believe that our bitcoin and related activities in support of the bitcoin network enhance awareness of our brand.

As of February 15, 2023, we hold approximately 132,500 bitcoin that were acquired at an aggregate purchase price of $3.993 billion and an average purchase price of approximately $30,137 per bitcoin, inclusive of fees and expenses.

MicroStrategy is also a global leader in enterprise analytics software and services. Since our founding in 1989, we have focused on empowering organizations to leverage the immense value of data. Our vision is to enable Intelligence Everywhere™ by providing world-class software and services that elevate enterprise users with actionable insights.

Our customers include leading companies from a wide range of industries, including retail, banking, technology, consulting, manufacturing, insurance, healthcare, telecommunications, as well as the public sector.

The analytics market is highly competitive. Our future success depends on the effectiveness with which we can differentiate our offerings from those offered by large software vendors that provide products across multiple lines of business, including one or more products that directly compete with our offerings, and other potential competitors across analytics implementation projects of varying sizes. We believe a key differentiator of MicroStrategy is our modern, open, comprehensive enterprise platform that can be extended to other tools

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and systems, can scale across the enterprise, is optimized for cloud or on-premises deployments, and can be combined with unique packages of our expert services and education offerings.

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:

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.

During 2021 and 2022, we used the proceeds of the following capital raising transactions to purchase bitcoin. The transactions are further described in the “—Liquidity and Capital Resources— Long-term Debt” and “—Liquidity and Capital Resources— At-the-Market Equity Offerings” sections under this “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”:

As of December 31, 2022, we held an aggregate of approximately 132,500 bitcoins, with 14,890 bitcoins held directly by MicroStrategy Incorporated and 117,610 bitcoins held by MacroStrategy LLC, a wholly-owned subsidiary of MicroStrategy. As of December 31, 2022, all of the approximately 14,890 bitcoins held directly by MicroStrategy Incorporated serve as part of the collateral securing the 2028 Secured Notes, and approximately 34,619 of the 117,610 bitcoins held by MacroStrategy serve as part of the collateral securing the 2025 Secured Term Loan.

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

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

The following table shows the approximate number of bitcoins held at the end of each respective period, as well as market value calculations of our bitcoin holdings based on the lowest, highest, and ending market prices of one bitcoin on the Coinbase exchange (our principal market) for each respective year, as further defined below:

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 year.  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, net of gains on sale, have significantly contributed to our operating expenses and net loss. During 2022, digital asset impairment losses, net of gains on sale, of $1.286 billion represented 76.9% of our operating expenses, contributing to our net loss of $1.470 billion for 2022, compared to digital asset impairment losses of $830.6 million during 2021, representing 69.0% of our operating expenses and contributing to our net loss of $535.5 million for 2021.

As of February 15, 2023, we held approximately 132,500 bitcoins that were acquired at an aggregate purchase price of $3.993 billion and an average purchase price of approximately $30,137 per bitcoin, inclusive of fees and expenses. As of February 15, 2023, at 4:00 p.m. Eastern Time, the market price of one bitcoin reported on the Coinbase exchange was $24,163.86.

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Impact of COVID-19 on Our Software Strategy

The COVID-19 pandemic has resulted, and may continue to result, in significant economic disruption and 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 years ended December 31, 2022 and 2021 were not materially impacted by COVID-19, our revenues may be negatively impacted in future periods.

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 businesses, purchase our products and services, and make timely payments; curtailed consumer spending; deferred purchasing decisions; delayed consulting services implementations; decreases in product licenses revenues driven by channel partners; and compliance costs and business disruptions associated with certain government requirements and recommendations adopted in response to the pandemic.  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 years ended December 31, 2022 and 2021:

We have incurred and may continue to incur significant impairment losses on our digital assets and we have recognized and may continue to recognize gains upon sale of our digital assets in the future, which are presented net of any impairment losses within operating expenses. In addition, we base our internal operating expense forecasts on expected revenue trends and strategic objectives in our enterprise analytics software business.  Many of our expenses, such as office leases and certain personnel costs, are relatively fixed.  Accordingly, any decrease in the price of bitcoin during any quarter, any sales by us of our bitcoin at prices above their then current carrying costs or any shortfall in revenue in our software business may cause significant variation in our operating results.  We therefore believe that quarter-to-quarter comparisons of our operating results may not be a good indication of our future performance.

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Share-based Compensation Expense

As discussed in Note 11, 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, each of which represents a right to receive a share of our class A common stock upon the satisfaction of applicable vesting requirements, and certain other stock-based awards under our 2013 Equity Plan. We also provide opportunities to eligible employees to purchase shares of our class A common stock under our 2021 Employee Stock Purchase Plan (the “2021 ESPP”).  Share-based compensation expense (in thousands) from these awards was recognized in the following cost of revenues and operating expense line items for the periods indicated:

The $19.5 million increase in share-based compensation expense during 2022, as compared to the prior year, is primarily due to the continued expansion of our equity award programs worldwide. As of December 31, 2022, we estimated that an aggregate of approximately $171.0 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 2.7 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 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 impacts 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 measurements prepared in accordance with GAAP, and are not a substitute for such measurements.  For example, we expect that share-based compensation expense, which is excluded from 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.

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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:

The following are reconciliations of our non-GAAP net loss and non-GAAP diluted loss per share, in each case excluding the impacts 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:

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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:

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. See Note 2, Summary of Significant Accounting Policies, to the Consolidated Financial Statements for a description of our significant accounting policies. As described in Note 2, 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 further below.

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Revenue Recognition

See Note 2(n), Summary of Significant Accounting Policies – Revenue Recognition, to the Consolidated Financial Statements for information regarding our significant accounting policies over revenue recognition.

Many of our contracts with customers include multiple performance obligations, and we make estimates and judgments to allocate the transaction price to each performance obligation based on an observable or estimated standalone selling price (“SSP”). The SSP is the price, or estimated price, of the software or service when sold on a standalone basis at contract inception. We consider our evaluation of SSP to be a critical accounting estimate.

An observable price of a good or service sold separately provides the best evidence of SSP.  However, in many situations, SSP will not be readily observable, but must still be estimated using reasonably available information.  We have observable standalone selling prices of our product support, consulting services, and education services, and therefore use historical transaction data on a standalone basis, along with our judgment, to establish SSP ranges for each of these services, as described in Note 2(n). However, SSP is not directly observable for product licenses (product licenses are not sold on a standalone basis and pricing is highly variable) and subscription services (the selling price of subscription services is highly variable), and we use a residual approach to establish SSP for these revenue streams. As such, the establishment of SSP of our product support, consulting services, and education services directly impacts the amount of product licenses and subscription services revenues recognized, and therefore also impacts the overall timing of revenue recognition.

We review and analyze the SSP ranges we have established for product support, consulting services, and education services semi-annually, and these SSP ranges have not changed significantly since adopting Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) and its subsequent amendments (“ASU 2014-09”) effective January 1, 2018.  We also perform analyses on a semi-annual basis using historical pricing data for both product license and subscription services transactions to assess whether the selling price is highly variable in order to support our conclusion that the residual method to estimate SSP of our product licenses and subscription services is a fair allocation of the transaction price. We have maintained our conclusion that the residual method is appropriate for our product licenses and subscription services since adopting ASU 2014-09.

In the future, SSP for our software and services could be impacted by various factors, including potential changes in our pricing practices, customer demand for our products and services, and various market or economic conditions. However, we consider the risk of significant volatility in our established SSP to be small given our historical transaction experience and internal processes to monitor SSP ranges on an ongoing basis and work with management in the event a trend that could impact the future ranges is detected.

Results of Operations

Comparison of the Years Ended December 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:

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

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:

Product licenses revenues decreased $15.3 million during 2022, as compared to the prior year. For the years ended December 31, 2022 and 2021, product licenses transactions with more than $0.5 million in recognized revenue represented 39.0% and 38.9%, respectively, of our product licenses revenues.  During 2022, our top three product licenses transactions totaled $13.1 million in recognized revenue, or 15.1% of total product licenses revenues, compared to $12.6 million, or 12.4% of total product licenses revenues, during 2021. Our product licenses revenues may experience declines in future periods as we continue to promote our cloud offering to new and existing customers.

Domestic product licenses revenues.  Domestic product licenses revenues increased $0.7 million during 2022, as compared to the prior year, primarily due to an increase in the average deal size of transactions, partially offset by a decrease in the number of transactions with less than $0.5 million in recognized revenue and a decrease in the number of transactions with more than $1.0 million in recognized revenue.

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International product licenses revenues.  International product licenses revenues decreased $16.0 million during 2022, as compared to the prior year, primarily due to a decrease in the number of transactions and a $4.6 million unfavorable foreign currency exchange impact.

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 $17.7 million during 2022, as compared to the prior year, primarily due to conversions to cloud-based subscriptions from existing on-premises customers, an increase in the use of subscription services by existing customers, and sales contracts with new customers, partially offset by a $2.3 million unfavorable foreign currency exchange impact. 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:

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 $14.7 million during 2022, as compared to the prior year, primarily due to an $11.6 million unfavorable foreign currency exchange impact and certain existing customers converting from perpetual product licenses with separate support contracts to our subscription services or term product licenses offerings. Our product support revenues may experience declines in future periods as we continue to promote our cloud offering to new and existing customers.

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

Consulting revenues.  Consulting revenues are derived from helping customers plan and execute the deployment of our software. Consulting revenues increased $1.1 million during 2022, as compared to the prior year, primarily due to an increase in average bill rates and an increase in billable hours worldwide, partially offset by a $5.1 million unfavorable foreign currency exchange impact.

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 during 2022 as compared to the prior year.

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Costs and Expenses

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

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 during 2022 as compared to the prior year.

Cost of subscription services revenues.  Cost of subscription services revenues consists of equipment, facility and other related support costs (including cloud hosting infrastructure costs), and personnel and related overhead costs. Subscription services headcount increased 52.8% to 110 at December 31, 2022 from 72 at December 31, 2021. Cost of subscription services revenues increased $7.9 million during 2022, as compared to the prior year, primarily due to (i) a $5.1 million increase in cloud hosting infrastructure costs, which is a result of the increased usage by new and existing cloud subscription services customers, (ii) a $1.7 million increase in employee salaries primarily attributable to an increase in average staffing levels and wage increases, and (iii) a $0.7 million increase in variable compensation. Included in cost of subscription services revenues for 2022 is an aggregate $0.7 million favorable foreign currency exchange impact.

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 5.2% to 183 at December 31, 2022 from 174 at December 31, 2021. Cost of product support revenues increased $2.0 million during 2022, as compared to the prior year, primarily due to (i) a $1.0 million increase in employee salaries primarily attributable to wage increases, (ii) a $0.9 million net increase in share-based compensation expense primarily attributable to the grant of additional awards under the 2013 Equity Plan, and (iii) a $0.6 million increase in variable compensation. Included in cost of product support revenues for 2022 is an aggregate $1.1 million favorable foreign currency exchange impact.

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 8.2% to 447 at December 31, 2022 from 413 at December 31, 2021. Cost of consulting revenues increased $2.0 million during 2022, as compared to the prior year, primarily due to (i) a $1.0 million net increase in share-based compensation expense primarily attributable to the grant of additional awards under the 2013 Equity Plan and (ii) a $0.7 million increase in employee salaries primarily attributable to an increase in average staffing levels and wage increases, partially offset by a shift in staffing levels to lower cost regions, partially offset by (iii) a $0.9 million decrease in in subcontractor costs. Included in cost of consulting revenues for 2022 is an aggregate $4.3 million favorable foreign currency exchange impact.

Cost of education revenues.  Cost of education revenues consists of personnel and related overhead costs. Education headcount decreased 55.6% to 16 at December 31, 2022 from 36 at December 31, 2021. Cost of education revenues decreased $0.8 million during 2022, as compared to the prior year, primarily due to a $0.6 million decrease in compensation and related costs primarily attributable to a decrease in average staffing levels.

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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 7.7% to 434 at December 31, 2022 from 470 at December 31, 2021. The following table sets forth sales and marketing expenses (in thousands) and related percentage changes for the periods indicated:

Sales and marketing expenses decreased $13.3 million during 2022, as compared to the prior year, primarily due to (i) a $17.0 million decrease in variable compensation primarily attributable to a net increase in capitalized commissions and decreases in other personnel costs and employee relations expenses, (ii) a $1.8 million decrease in employee salaries primarily attributable to a decrease in average staffing levels, partially offset by wage increases, (iii) a $0.7 million decrease in marketing and advertising costs, (iv) a $0.7 million decrease in facility and other related support costs, and (v) a $0.6 million decrease in cloud hosting infrastructure costs, partially offset by (vi) a $5.4 million net increase in share-based compensation expense primarily attributable to the grant of additional awards under the 2013 Equity Plan, partially offset by the forfeiture of certain awards and the fair value remeasurement of certain liability-classified awards at the end of the reporting period and (vii) a $1.8 million increase in travel and entertainment expenditures that were undertaken as various COVID-19-related restrictions were lifted. Included in sales and marketing expenses for 2022 is an aggregate $6.7 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 decreased 1.6% to 688 at December 31, 2022 from 699 at December 31, 2021. The following table summarizes research and development expenses (in thousands) and related percentage changes for the periods indicated:

Research and development expenses increased $10.3 million during 2022, as compared to the prior year, primarily due to (i) a $6.5 million increase in employee salaries primarily attributable to wage increases and an increase in average staffing levels, partially offset by a shift in staffing levels to lower cost regions, (ii) a $3.1 million net increase in share-based compensation expense primarily attributable to the grant of additional awards under the 2013 Equity Plan, partially offset by certain awards that became fully vested and the fair value remeasurement of certain liability-classified awards at the end of the reporting period, (iii) a $1.4 million increase in variable compensation, and (iv) a $0.5 million increase in consulting and advisory costs, partially offset by (v) a $1.5 million decrease in facility and other related support costs. Included in research and development expenses for 2022 is an aggregate $2.3 million favorable foreign currency exchange impact.

General and administrative expenses.  General and administrative expenses consist of personnel and related overhead costs, and other costs of our executive, finance, human resources, information systems, and administrative departments, as well as third-party consulting, legal, and other professional fees. General and administrative headcount increased 6.6% to 274 at December 31, 2022 from 257 at December 31, 2021. The following table sets forth general and administrative expenses (in thousands) and related percentage changes for the periods indicated:

General and administrative expenses increased $15.9 million during 2022, as compared to the prior year, primarily due to (i) a $9.1 million net increase in share-based compensation expense primarily attributable to the grant of additional awards under the 2013 Equity Plan, partially offset by certain awards that became fully vested, (ii) a $3.1 million increase in costs related to the maintenance and operations of our corporate aircraft, (iii) a $1.7 million increase in directors and officers liability insurance, (iv) a $1.3 million increase in employee salaries primarily attributable to wage increases and an increase in average staffing levels, partially offset by a shift in staffing levels to lower cost regions, (v) a $1.0 million increase in travel and entertainment expenditures that were undertaken as various COVID-19-related restrictions were lifted, (vi) a $0.9 million increase in employee relations expenses, and (vii) a $0.5 million increase in facility and other related support costs, partially offset by (viii) a $1.5 million decrease in custodial fees incurred on our bitcoin holdings. Included in general and administrative expenses for 2022 is an aggregate $1.9 million favorable foreign currency exchange impact.

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Digital asset impairment losses, (gains on sale), net.  Digital asset impairment losses are recognized when the carrying value of our digital assets exceeds their lowest fair value at any time since their acquisition.  Impaired digital assets are written down to fair value at the time of impairment, and such impairment loss cannot be recovered for any subsequent increases in fair value. Gains (if any) are not recorded until realized upon sale. The following table sets forth digital asset impairment losses (gains on sale), net (in thousands) and related percentage changes for the periods indicated:

We may continue to incur significant digital asset impairment losses in the future.

Interest Expense, Net

During 2022, interest expense, net, of $53.1 million was primarily related to the contractual interest expense and amortization of issuance costs related to our long-term debt arrangements. During 2021, interest expense, net, of $29.1 million was primarily related to the contractual interest expense and amortization of issuance costs related to our long-term debt arrangements, and contractual interest expense incurred on trade credits with Coinbase. Refer to Note 8, Long-term Debt, and Note 4, Digital Assets, to the Consolidated Financial Statements for further information.

Other Income, Net

During 2022, other income, net, of $6.4 million was comprised primarily of foreign currency transaction net gains.  During 2021, other income, net, of $2.3 million was comprised primarily of foreign currency transaction net gains.

Provision for (Benefit from) Income Taxes

During 2022, we recorded a provision for income taxes of $147.3 million on a pre-tax loss of $1.322 billion that resulted in an effective tax rate of (11.1)%, as compared to a benefit from income taxes of $275.9 million on a pre-tax loss of $811.4 million that resulted in an effective tax rate of 34.0% during 2021.  The change in our effective tax rate in 2022, as compared to the prior year, was primarily due to the establishment of a valuation allowance on our deferred tax asset related to the impairment of our bitcoin holdings, attributable to the decrease in the market value of bitcoin as of December 31, 2022.

The U.S. Tax Cuts and Jobs Act imposed a mandatory deemed repatriation transition tax (“Transition Tax”) on previously untaxed accumulated and current earnings and profits of certain of our foreign subsidiaries.  As of December 31, 2022, $22.1 million of the Transition Tax was unpaid, of which $16.6 million is included in “Other long-term liabilities” and $5.5 million is included in “Accounts payable, accrued expenses, and operating lease liabilities” in our Consolidated Balance Sheets.

As of December 31, 2022, we had no U.S. federal net operating loss (“NOL”) carryforwards and $3.3 million of foreign NOL carryforwards.  As of December 31, 2022, digital asset impairment losses, other temporary differences and carryforwards resulted in deferred tax assets, net of valuation allowances and deferred tax liabilities, of $188.0 million.

As of December 31, 2022, we had a valuation allowance of $511.4 million primarily related to our deferred tax asset related to the impairment of our bitcoin holdings that, in our present estimation, more likely than not will not be realized. If the market value of bitcoin continues to decline or we are unable to regain profitability in future periods, we may be required to increase further the valuation allowance against our deferred tax assets, which could result in a charge that would materially adversely affect net income (loss) in the period in which the charge is incurred. To the extent the market value of bitcoin rises we may decrease the valuation allowance against our deferred tax asset. We will continue to regularly assess the realizability of deferred tax assets.

Beginning in the third quarter of 2020, we determined to no longer permanently reinvest our foreign earnings and profits.  As of December 31, 2022, we recorded a deferred tax liability of $2.2 million on undistributed foreign earnings related to foreign withholding tax and U.S. state income taxes.

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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:

The portions of multi-year contracts that will be invoiced in the future are not presented on the balance sheet in “Accounts receivable, net” and “Deferred revenue and advance payments” and instead are included in the remaining performance obligation disclosure below.  Total deferred revenue and advance payments increased $12.2 million in 2022, as compared to the prior year, primarily due to an increase in deferred revenue from new subscription services contracts and an increase in deferred license revenue from the early renewal of a large term license deal at the end of 2022, partially offset by a decrease in deferred product support revenue from the timing of product support renewals and an increase in conversions from on-premises to subscription services contracts. Included in our international deferred revenue balances at December 31, 2022 is a $7.9 million unfavorable foreign currency impact from the general strengthening of the U.S. dollar compared to the prior year.

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 December 31, 2022, we had an aggregate transaction price of $324.8 million allocated to the remaining performance obligation related to product support, subscription services, product licenses, and other services contracts. We expect to recognize approximately $241.5 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. As discussed in Note 2(g) Summary of Significant Accounting Policies – Digital Assets, to our Consolidated Financial Statements, our bitcoin are classified as indefinite-lived intangible assets.  In September 2022, we entered into a new at-the-market equity offering program, pursuant to which we may from time-to-time issue and sell shares of our class A common stock having an aggregate offering price of up to $500.0 million.  For additional information, see “—At-the-Market Equity Offerings” below.

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As of December 31, 2022 and 2021, the amount of cash and cash equivalents held by our U.S. entities was $14.8 million and $13.1 million, respectively, and by our non-U.S. entities was $29.0 million and $50.3 million, respectively. We earn a significant amount of our revenues outside the United States and we repatriated foreign earnings and profits of $44.7 million during 2022 and $57.5 million during 2021.

Our material contractual obligations (explained in further detail in the Notes to the Consolidated Financial Statements, as referenced below) and cash requirements consist of:

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 $2.413 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, an estimated $1.3 million due monthly in variable coupon interest for the 2025 Secured Term Loan (based on the interest rate in effect at December 31, 2022), and $0.1 million due monthly in principal and interest related to our other long-term secured debt. We also have long-term cash requirements for obligations related to our operating leases, the Transition Tax, and our various purchase agreements. 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.

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

As of December 31, 2022, we held approximately 132,500 bitcoins, of which approximately 82,991 are unencumbered. We do not believe we will need to sell or engage in other transactions with respect to any of our bitcoins within the next twelve months to meet our working capital requirements, although we may from time to time sell or engage in other transactions with respect to our bitcoins as part of treasury management operations, as noted above. The bitcoin market historically has been characterized by significant volatility in its price, limited liquidity and trading volumes compared to sovereign currencies markets, relative anonymity, a developing regulatory 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.

The following table sets forth a summary of our cash flows (in thousands) and related percentage changes for the periods indicated:

Net cash provided by operating activities.  The primary source of our cash provided by operating activities is cash collections of our accounts receivable from customers following the sales and renewals of our product licenses, subscription services and product support, as well as consulting and education services. Our primary uses of cash in operating activities are for personnel-related expenditures for software development, personnel-related expenditures for providing consulting, education, and subscription services, and for sales and marketing costs, general and administrative costs, interest expense related to our long-term debt arrangements, and income taxes. In

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2022 and 2021, 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, release of liabilities for unrecognized tax benefits, share-based compensation expense, digital asset impairment losses (gains on sale), net, and amortization of the issuance costs on our long-term debt.

Net cash provided by operating activities decreased $90.6 million during 2022, as compared to the prior year, due to a $934.3 million increase in net loss and a $47.7 million decrease from changes in operating assets and liabilities, partially offset by an $891.4 million increase in non-cash items (principally related to digital asset impairment losses and deferred taxes). In particular, we had a $23.0 million increase in interest payments, primarily with respect to the 2028 Senior Secured Notes and the 2025 Secured Term Loan, and a $15.0 million increase in income tax payments due primarily to decreased income tax benefits from a lower level of stock option exercises. We also had other increased payments, most notably those related to employee-related costs as we continued to invest in our workforce, and investment in our cloud infrastructure to support the growth in sales of subscription services.  Additional transitions of customers from our perpetual license arrangements to our subscription services offerings has also negatively impacted our cash provided by operating activities in 2022 as compared to 2021 as invoicing for subscription services generally occurs over multiple years, whereas perpetual licenses are invoiced up-front.

Net cash used in investing activities.  In 2022 and 2021, the changes in net cash (used in) provided by investing activities primarily relate to purchases and sales of digital assets and expenditures on property and equipment. Net cash used in investing activities decreased $2.351 billion during 2022, as compared to the prior year, primarily due to a $2.339 billion decrease in purchases of bitcoins, partially offset by an $11.8 million increase in sales of bitcoins. During 2022, we purchased bitcoin using $190.5 million of the net proceeds from the issuance of the 2025 Secured Term Loan, $44.6 million of the net proceeds from the sale of class A common stock under the 2022 Sales Agreement, $11.8 million in proceeds from sales of bitcoin, and Excess Cash. During 2021, we purchased bitcoin using the net proceeds from the issuance of our 2027 Convertible Notes and 2028 Secured Notes, the sale of class A common stock under the Open Market Sale Agreement, and Excess Cash.

Net cash provided by financing activities. In 2022 and 2021, the changes in net cash provided by (used in) financing activities primarily relate to the issuance of our long-term debt, the sale of class A common stock under the 2021 Open Market Sale Agreement and 2022 Sales Agreement, the exercise of stock options under the 2013 Equity Plan, the sales of class A common stock under the 2021 ESPP, the payment of withholding tax on vesting of restricted stock units, and the repayments of other long-term secured debt. Net cash provided by financing activities decreased $2.276 billion during 2022, as compared to the prior year, due to (i) a $1.297 billion year-over-year reduction in proceeds, net of issuance costs, from long-term debt from our 2027 Convertible Notes and 2028 Secured Notes during 2021 as compared to the proceeds, net of issuance costs, from long-term debt from our 2025 Secured Term Loan and other long-term secured debt during 2022, (ii) a $944.2 million reduction in net proceeds from the sale of class A common stock under public offerings from the 2021 Open Market Sale Agreement and the 2022 Sales Agreement, and (iii) a $39.3 million decrease in proceeds from the exercise of stock options under the 2013 Equity Plan during 2022 compared to 2021, partially offset by (iv) a $2.6 million decrease in payment of withholding tax on vesting of restricted stock units during 2022 compared to 2021 and (v) a $1.6 million increase in proceeds from the sales of class A common stock under the 2021 ESPP during 2022 compared to 2021.

Long-term Debt

The terms of each of the long-term debt instruments described below are discussed more fully in Note 8, Long-term Debt, to the Consolidated Financial Statements.

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.  During 2022 and 2021, we paid $4.9 million and $4.9 million, respectively, in interest to holders of the 2025 Convertible Notes. The 2027 Convertible Notes do not bear regular interest and we have not paid any special interest to holders of the 2027 Convertible Notes to date.

In June 2021, we issued $500.0 million aggregate principal amount of the 2028 Secured Notes. We used the net proceeds from the issuance of the 2028 Secured Notes to acquire bitcoin. As of December 31, 2022, all of the approximately 14,890 bitcoins held by MicroStrategy Incorporated serve as part of the collateral for the 2028 Secured Notes. During 2022 and 2021, we paid $30.6 million and $15.4 million, respectively, in interest to holders of the 2028 Secured Notes.

In March 2022, MacroStrategy, our wholly-owned subsidiary, entered into a Credit and Security Agreement with Silvergate Bank, pursuant to which Silvergate Bank issued the $205.0 million 2025 Secured Term Loan to MacroStrategy. We used $190.5 million of the net proceeds from the issuance of the 2025 Secured Term Loan to acquire bitcoin, used $5.0 million of the net proceeds to establish a reserve account that serves as collateral for the 2025 Secured Term Loan, and have used and expect to continue to use the remaining net proceeds to pay fees, interest, and expenses related to the 2025 Secured Term Loan. As of December 31, 2022, approximately 34,619

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of the bitcoins held by MacroStrategy serve as part of the collateral for the 2025 Secured Term Loan. Subject to certain conditions described in Note 8, Long-term Debt, to the Consolidated Financial Statements, MacroStrategy can withdraw excess collateral held in the Bitcoin Collateral Account. During 2022, we paid $7.7 million in interest to Silvergate.

In June 2022, we, through one of our wholly-owned subsidiaries, entered into a secured term loan agreement in the amount of $11.1 million, bearing interest at an annual rate of 5.2%, and maturing in June 2027. During 2022, we paid $0.5 million in principal and interest to the lender.

At-the-Market Equity Offerings

On June 14, 2021, we entered into the 2021 Open Market Sale Agreement with Jefferies, pursuant to which we issued and sold shares of our class A common stock having an aggregate offering price of approximately $1.0 billion from time to time through Jefferies. The terms of the 2021 Open Market Sale Agreement are discussed more fully in Note 13, At-the-Market Equity Offerings, to the Consolidated Financial Statements. During 2021, we issued and sold 1,413,767 shares of our class A common stock under the 2021 Open Market Sale Agreement, at an average gross price per share of approximately $707.33, for aggregate net proceeds (less $9.5 million in sales commissions and expenses) of approximately $990.5 million. As of December 31, 2021, the cumulative aggregate offering price of the shares of class A common stock sold under the 2021 Open Market Sale Agreement was approximately $1.0 billion, inclusive of sales commissions, constituting the maximum program amount under the 2021 Open Market Sale Agreement.

On September 9, 2022, we entered into the 2022 Sales Agreement with the 2022 Sales Agents, pursuant to which we may issue and sell shares of our class A common stock having an aggregate offering price of up to $500.0 million from time to time through the 2022 Sales Agents. The terms of the 2022 Sales Agreement are discussed more fully in Note 13, At-the-Market Equity Offerings, to the Consolidated Financial Statements. During 2022, we issued and sold 218,575 shares of our class A common stock under the 2022 Sales Agreement, at an average gross price per share of approximately $213.16, for aggregate net proceeds (less $0.4 million in sales commissions and expenses) of approximately $46.2 million. As of December 31, 2022, approximately $453.4 million of our class A common stock remained available for issuance and sale pursuant to the 2022 Sales Agreement.

Share repurchases. During the years ended December 31, 2022 and 2021, we did not repurchase any shares of our class A common stock.  See “Part II. Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of this Annual Report and Note 14, Treasury Stock, to the Consolidated Financial Statements for further information.

Debt repurchases and repayments. During the years ended December 31, 2022 and 2021, we did not repurchase any of our outstanding debt. We or our affiliates may, at any time and from time to time, seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity or debt, in open-market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. We may also repay our outstanding indebtedness, including our 2025 Secured Term Loan.  The prepayment of the 2025 Secured Term Loan is subject to a prepayment premium of 0.50% or 0.25% of the principal balance being prepaid, if such prepayment is made during the first year or second year, respectively, of the 2025 Secured Term Loan. The amounts involved in any such repurchase or repayment may be material. We may effect debt repurchases or repayments using proceeds from the sale of our class A common stock pursuant to the 2022 Sales Agreement (under which approximately $453.4 million remains available for sale as of the date hereof).

Unrecognized tax benefits. As of December 31, 2022, we had $6.1 million of total gross unrecognized tax benefits, including accrued interest, all of which was recorded in “Other long-term liabilities.” 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 unrecognized tax benefits during 2023.

Recent Accounting Standards

See Note 3, Recent Accounting Standards, to the Consolidated Financial Statements for further information.

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