What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-15 compared with 2022-02-16 · 144 added, 122 removed, 168 unchanged (61% of the section changed)

1 unchanged sentence

BUSINESS OVERVIEW

We develop, market, license, host, and support enterprise software that helps organizations simplify business complexity.

Our powerful low-code platform for workflow automation and AI-powered decisioning enables the world’s leading brands and government agencies to hyper-personalize customer experiences, streamline customer service, and automate mission-critical business processes and workflows.

We develop, market, license, host, and support enterprise software that helps organizations build agility into their business so they can adapt to change.

Our powerful low-code platform for workflow automation and artificial intelligence-powered decisioning enables the world’s leading brands and government agencies to hyper-personalize customer experiences, streamline customer service, and automate mission-critical business processes and workflows.

With Pega, our clients can leverage our intelligent technology and scalable architecture to accelerate their digital transformation.

Our client success teams, world-class partners, and clients themselves leverage our Pega Express™ methodology to design and deploy mission-critical applications quickly and collaboratively.

In addition, our client success teams, world-class partners, and clients leverage our Pega Express™ methodology to design and deploy mission-critical applications quickly and collaboratively.

Our target clients are Global 2000 organizations and government agencies that require solutions to distinguish themselves in the markets they serve.

Our solutions achieve and facilitate differentiation by increasing business agility, driving growth, improving productivity, attracting and retaining customers, and reducing risk.

Along with our partners, we deliver solutions tailored to our clients’ specific industry needs.

Along with our partners, we deliver solutions tailored to the specific industry needs of our clients.

Subscription transition

We are transitioning our business to sell software primarily through subscription arrangements.

Until we fully complete our subscription transition, which we expect will occur in 2023, our revenue and operating cash flow growth may be impacted.

Operating performance and the actual mix of revenue and new arrangements in each period can fluctuate based on client preferences for our perpetual and subscription offerings.

Until we fully complete our subscription transition, which we expect will occur in 2023, our operating results may be impacted.

Operating performance, revenue mix, and new arrangements in each period can fluctuate based on client preferences for our perpetual and subscription offerings.

See risk factor "If we fail to manage our transition to a more subscription-based business model successfully, our results of operations and/or cash flows could be negatively impacted" in Item 1A of this Annual Report for additional information.

Coronavirus (‘COVID-19”)

As of December 31, 2021, COVID-19 has not had a material impact on our results of operations or financial condition.

Our direct financial exposure to Ukraine, Russia, and Belarus is not material.

In 2021, before Russia's invasion of Ukraine, we made a business decision to stop pursuing new clients in Russia and closed our local office.

However, the ultimate impact of Russia’s invasion of Ukraine on our business will depend on future developments, including the duration and spread of the conflict and the impact on our people, partners, clients, and vendors in neighboring countries and globally, all of which are uncertain and unpredictable.

Performance metrics

We use performance metrics to analyze and assess our overall performance, make operating decisions, and forecast and plan for future periods, including:

Annual contract value (“ACV”) | Increased 20% since December 31, 2020

Annual contract value (“ACV”)

ACV represents the annualized value of our active contracts as of the measurement date.

The contract's total value is divided by its duration in years to calculate ACV for term license and Pega Cloud contracts.

The contract's total value is divided by its duration in years to calculate ACV for subscription license and Pega Cloud contracts.

Maintenance revenue for the quarter then ended is multiplied by four to calculate ACV for maintenance.

ACV is a performance measure that we believe provides useful information to our management and investors, particularly during our subscription transition.

Foreign currency exchange rate changes were a 1% headwind to ACV growth in 2021.

Remaining performance obligations (“Backlog”) | Increased 25% since December 31, 2020

Expected future revenue from existing non-cancellable contracts:

Remaining performance obligations (“Backlog”)

Reconciliation of GAAP Backlog and Constant Currency Backlog

(in millions, except percentages) Q4 2022 1 Year Growth Rate

Backlog $ 1,356 1 %

Impact of changes in foreign exchange rates 39 3 %

Backlog - Constant Currency $ 1,395 4 %

Constant currency measures are calculated by applying foreign exchange rates for the earliest period shown to all periods.

The above constant currency measures reflect foreign exchange rates applicable as of Q4 2021.

We believe that non-GAAP financial measures help investors understand our core operating results and prospects, consistent with how management measures and forecasts our performance without the effect of often one-time charges and other items outside our normal operations.

The supplementary non-GAAP financial measures are not meant to be superior to or a substitute for financial measures prepared under U.S.

Free Cash Flow (1)

(in thousands, except percentages) Year Ended

2022 2021 Change

Cash provided by operating activities $ 22,336 $ 39,118 (43) %

Investment in property and equipment (35,379) (10,456)

Legal fees 41,789 11,390

Interest on convertible senior notes 4,500 4,500

Facilities — (18,000)

Other 6,805 115

Free cash flow $ 40,051 $ 26,667 50 %

Total Revenue $ 1,317,845 $ 1,211,653

Free cash flow margin 3 % 2 %

* not meaningful

(1) Our non-GAAP free cash flow measures reflect the following adjustments:

• Investment in property and equipment :

Investment in property and equipment fluctuates in amount and frequency and is significantly affected by the timing and size of investments in our facilities.

We believe excluding these amounts provides a useful comparison of our operational performance in different periods.

• Legal Fees :

Includes legal and related fees arising from proceedings outside of the ordinary course of business.

We believe excluding these expenses from our non-GAAP financial measures is useful to investors as the disputes giving rise to them are not representative of our core business operations and ongoing operating performance.

• Interest on convertible senior notes :

In February 2020, we issued convertible senior notes with an aggregate principal amount of $600 million, due March 1, 2025, in a private placement.

We believe excluding the interest payments provides a useful comparison of our operational performance in different periods.

• Facilities :

In February 2021, we agreed to accelerate our exit from our then Cambridge, Massachusetts headquarters to October 1, 2021, in exchange for a one-time payment from our landlord of $18 million, which was received in October 2021.

We believe excluding the impact from our non-GAAP financial measures is useful to investors as the modified lease, including the $18 million payment, is not representative of our core business operations and ongoing operating performance.

We have excluded capital advisory fees and fees incurred due to the cancellation of in-person sales and marketing events.

We believe excluding these amounts from our non-GAAP financial measures is useful to investors as the types of events giving rise to them are not representative of our core business operations and ongoing operating performance.

RESULTS OF OPERATIONS

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We are transitioning our business to sell software primarily through subscription arrangements.

This transition has impacted revenue growth as revenue is recognized differently for subscription services than for license sales.

Revenue from Pega Cloud and maintenance arrangements is typically recognized over the contract term, while revenue from license sales is recognized when the license rights become effective, typically upfront.

This transition has impacted revenue growth as revenue from subscription service arrangements, which includes Pega Cloud and maintenance, is typically recognized over the contract term, while revenue from license sales is recognized when the license rights become effective, typically upfront.

(Dollars in thousands) 2022 2021 Change

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Subscription services 701,835 53 % 621,223 51 % 80,612 13 %

Subscription license (A)

336,248 28 % 266,352 26 % 69,896 26 %

Subscription license 366,063 28 % 336,248 28 % 29,815 9 %

Subscription 1,067,898 81 % 957,471 79 % 110,427 12 %

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$ 1,317,845 100 % $ 1,211,653 100 % $ 106,192 9 %

(A) Revenue from term licenses.

The change in revenue in 2021 generally reflects the impact of our subscription transition.

Additional contributing factors were:

• An increasing portion of our term license contracts include multi-year committed maintenance periods instead of annually renewable maintenance.

Under multi-year committed maintenance arrangements, a larger portion of the total contract value is recognized as maintenance revenue over the contract term rather than upon the effectiveness of the license rights as subscription license revenue.

In 2021, multi-year committed maintenance contributed $17.1 million to maintenance revenue growth and reduced subscription license revenue growth by $4.0 million.

• Maintenance renewal rates remained over 90% in 2021.

• The increase in perpetual revenue was primarily due to license rights becoming effective in 2021 related to several large software license contracts entered into in prior years.

• The increase in consulting revenue in 2021 was primarily due to an increase in billable hours, which offset the impact of reduced billable travel expenses due to COVID-19.

As part of our long-term strategy, we intend to continue growing and increasingly leveraging our ecosystem of partners on future implementation projects, potentially reducing our future consulting revenue growth rate.

The revenue change in 2022 generally reflects the impact of our subscription transition.

Other factors impacting our revenue include:

dollar has strengthened against foreign currencies in our operating markets, which reduced total revenue growth by approximately 4 percent.

• The decrease in maintenance revenue was primarily due to the continuing shift to Pega Cloud.

• The increase in consulting revenue was primarily due to an increase in consultant billable hours in North America.

(Dollars in thousands) 2022 2021 Change

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$ 949,210 72 % $ 875,290 72 % $ 73,920 8 %

The increase in gross profit in 2021 was primarily due to overall revenue growth and cost-efficiency gains as Pega Cloud grows and scales because of our subscription transition.

The gross profit change in 2022 was primarily due to a shift in the revenue mix.

• The increase in Pega Cloud gross profit percent was primarily due to cost-efficiency gains as Pega Cloud grows and scales.

• The decrease in consulting gross profit percent was due to an increase in consultant availability.

Operating expenses

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General and administrative $ 117,734 9 % $ 83,506 7 % $ 34,228 41 %

• The increase in selling and marketing in 2021 was primarily due to an increase in compensation and benefits of $82.7 million, attributable to increases in headcount and incentive compensation.

The increase in headcount reflects our efforts to increase our sales capacity to deepen relationships with existing clients and target new accounts.

• The increase in research and development in 2021 was primarily due to an increase in compensation and benefits of $24.8 million, attributable to increases in headcount and incentive compensation.

The increase in headcount reflects additional investments in the development of our solutions, particularly for Pega Cloud.

• The increase in general and administrative in 2021 was primarily due to an increase of $14.4 million in legal fees and related expenses arising from proceedings that originated outside of the ordinary course of business.

We have incurred and expect to continue to incur additional expenses for these proceedings in 2022.

Restructuring $ 21,743 2 % $ — — % $ 21,743 *

* not meaningful

• The decrease in selling and marketing was primarily due to a decrease in marketing programs of $12.1 million, partially offset by an increase in professional services of $4.9 million and an increase in facilities expense of $4.9 million.

• The increase in research and development was primarily due to an increase in compensation and benefits of $24.2 million, attributable to an increase in headcount and incentive compensation, and an increase in facilities expense of $4.2 million.

The increase in headcount reflects additional investments in developing our solutions.

• The increase in general and administrative was primarily due to an increase in compensation and benefits of $8.4 million, an increase in facilities expense of $2.9 million, and an increase in legal fees and related expenses arising from litigation proceedings outside the ordinary course of business of $16.4 million.

We have incurred and expect to continue to incur additional costs for these proceedings in 2023.

See "Note 20.

Commitments And Contingencies" in Item 8 of this Annual Report for additional information.

• In February 2021, we agreed to accelerate our exit from our prior Cambridge, Massachusetts headquarters to October 1, 2021, in exchange for a one-time payment from our landlord of $18 million.

This agreement was the primary contributor to decreases in facilities expenses of $5.1 million in selling and marketing, $5.6 million in research and development, and $2.7 million in general and administrative, in 2021.

Commitments And Contingencies" in Item 8 and Item 1A.

“Risk Factors” in this Annual Report for additional information.

• During the fourth quarter of 2022, management committed to a restructuring plan aligned with our target organization go-to-market strategy and commitment to be a Rule of 40 managed company.

The plan resulted in a restructuring expense of $21.7 million in 2022, primarily associated with severance and benefits for impacted employees and expenses incurred as a result of the closure of our Salem, New Hampshire office.

Other income and expenses

(Dollars in thousands) 2022 2021 Change

Foreign currency transaction (loss) gain $ (6,459) $ 3,704 $ (10,163) *

Foreign currency transaction gain (loss) $ 4,560 $ (6,459) $ 11,019 *

Interest income 1,643 704 939 133 %

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* not meaningful

• The change in foreign currency transaction (loss) gain in 2021 was primarily due to the impact of fluctuations in foreign currency exchange rates associated with our foreign currency-denominated cash, receivables, and intercompany balances held by our subsidiary in the United Kingdom.

• The decrease in interest income in 2021 was primarily due to declines in market interest rates and invested funds.

• The decrease in interest expense in 2021 was primarily due to our adoption of Accounting Standards Update 2020-06 on January 1, 2021.

See "Note 11.

Debt" in Item 8 of this Annual Report for additional information.

Interest expense related to the Notes:

(in thousands) 2021 2020 Change

Contractual interest expense (0.75% coupon)

$ 4,500 $ 3,825 $ 675

Amortization of debt discount — 12,898 (12,898)

Amortization of issuance costs 2,977 1,915 1,062

$ 7,477 $ 18,638 $ (11,161)

• The decrease in the (loss) gain on capped call transactions in 2021 was due to fair value adjustments on the Capped Call Transactions.

• The increase in foreign currency transaction gain (loss) was primarily due to the impact of fluctuations in foreign currency exchange rates associated with foreign currency-denominated cash and receivables held by our subsidiary in the United Kingdom.

• The increase in interest income was primarily due to increases in market interest rates.

• The increase in (loss) gain on capped call transactions was due to fair value adjustments for our capped call transactions.

See "Note 14.

Debt" in Item 8 of this Annual Report for additional information.

• The decrease in other income, net in 2021 was due to a smaller gain from our venture investments portfolio in 2021.

(Benefit from) income taxes

Fair Value Measurements" in Item 8 of this Annual Report for additional information.

• The increase in other income, net was due to gains on our venture investments.

Provision for (benefit from) income taxes

(Dollars in thousands) 2022 2021

(Benefit from) income taxes $ (68,947) $ (63,516)

Effective income tax benefit rate 52 % 51 %

During 2021, the change in our effective income tax benefit rate was primarily due to the impact of excess tax benefits from stock-based compensation and changes in statutory tax rates applicable to our U.K.-based deferred tax assets.

See "Note 17.

Income Taxes" in Item 8 of this Annual Report for additional information.

Stock-based compensation increases the variability of our effective tax rates.

The impact on our effective tax rate in each period depends on our profitability and the tax deductions from our stock compensation activity, which depend upon our stock price and the award holders' exercise behavior.

Provision for (benefit from) income taxes $ 183,785 $ (68,947)

Effective income tax rate (benefit rate) 114 % (52) %

The change in the effective income tax rate (benefit rate) in 2022 was primarily due to the recognition of a full valuation allowance of $188.3 million on our U.S.

deferred tax assets.

LIQUIDITY AND CAPITAL RESOURCES

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Effect of exchange rate on cash and cash equivalents (3,333) (1,712)

Net (decrease) increase in cash and cash equivalents $ (11,934) $ 103,536

Net (decrease) in cash and cash equivalents $ (14,911) $ (11,934)

(in thousands)

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Total cash, cash equivalents, and marketable securities $ 297,221 $ 362,779

We believe that our current cash, cash flow from operations, and borrowing capacity will be sufficient to fund our operations, stock repurchases, and quarterly cash dividends for at least the next 12 months and to meet our known long-term cash requirements.

We believe that our current cash, cash flow from operations, borrowing capacity, and ability to engage in capital market transactions will be sufficient to fund our operations, stock repurchases, and quarterly cash dividends for at least the next 12 months and to meet our known long-term cash requirements.

Whether these resources are adequate to meet our liquidity needs beyond that period will depend on our future growth, operating results, and the investments needed to support our operations.

If we require additional capital resources, we may utilize available funds or additional external financing.

If it becomes necessary to repatriate foreign funds, we may have to pay U.S.

and foreign taxes upon repatriation.

Due to the complexity of income tax laws and regulations, it is impracticable to estimate the amount of taxes we would have to pay.

See risk factor "If it becomes necessary or desirable to repatriate any of our foreign cash balances to the United States, we may be subject to increased taxes, other restrictions, and limitations" in Item 1A of this Annual Report for additional information.

Cash provided by (used in) operating activities

We may utilize available funds or seek external financing if we require additional capital resources.

If it becomes necessary or desirable to repatriate these funds, we may be required to pay federal, state, and local income and foreign withholding taxes upon repatriation.

However, due to the complexity of income tax laws and regulations, it is impracticable to estimate the amount of taxes we would have to pay.

See risk factor "If it becomes necessary or desirable to repatriate our foreign cash balances to the United States, we may be subject to increased taxes, other restrictions, and limitations" in Item 1A of this Annual Report for additional information.

Cash provided by operating activities

We are transitioning our business to sell software primarily through subscription arrangements.

This transition has impacted and is expected to continue impacting our billings and cash collections, as the timing of billings and cash collections generally differs between our subscription and perpetual license arrangements.

Subscription license and services are generally billed and collected over the contract term, while perpetual license arrangements usually are billed and collected upfront when the license rights become effective.

The change in cash provided by (used in) operating activities in 2021 was primarily due to a significant increase in client collections.

In addition, in 2021 we incurred $18.2 million in legal fees and related expenses arising from proceedings that originated outside of the ordinary course of business.

We have incurred and expect to continue to incur additional expenses for these proceedings in 2022.

This transition has impacted and is expected to continue affecting our billings and cash collections.

Subscription licenses and services are typically billed and collected over the contract term, while perpetual license arrangements are generally billed and collected upfront when the license rights become effective.

The change in cash provided by operating activities in 2022 was primarily due to our subscription transition and increased costs as we invested in research and development to support the development of our offerings, partially offset by strong client collections.

In addition, in 2022 and 2021, we incurred $34.6 million and $18.2 million in legal fees and related expenses arising from proceedings that originated outside of the ordinary course of business.

We expect to continue to incur additional costs for these proceedings.

See "Note 20.

Commitments And Contingencies" in Item 8 of this Annual Report for additional information.

Corporate headquarters

In February 2021, we agreed to accelerate our exit from our previous corporate headquarters to October 1, 2021, in exchange for a one-time payment from our landlord of $18 million, which was received in October 2021.

The accelerated exit from this lease reduced our future lease liabilities by $21.1 million.

On March 31, 2021 we leased office space at One Main Street, Cambridge, Massachusetts, to serve as our corporate headquarters.

The 4.5 year lease includes a base rent of $2 million per year.

New Waltham Office

On July 6, 2021, we entered into an office space lease for 131 thousand square feet in Waltham, Massachusetts.

The lease term of 11 years began on August 1, 2021.

The annual rent equals the base rent plus a portion of building operating costs and real estate taxes.

Rent first becomes payable on August 1, 2022.

Base rent for the first year is approximately $6 million and will increase by 3% annually.

In addition, we will receive an improvement allowance from the landlord of up to $11.8 million.

This lease increased our lease liabilities and lease-related right of use assets by $42.1 million on August 1, 2021.

Commitments And Contingencies" in Item 8 and Item 1A.

“Risk Factors” in this Annual Report for additional information

Investing activities

The change in cash provided by (used in) investing activities in 2021 was primarily driven by investments in financial instruments, an acquisition, and a decrease in office space related capital expenditures.

The change in cash provided by investing activities in 2022 was primarily driven by our investments in financial instruments and capital expenditures for our recently completed office in Waltham, Massachusetts.

See "Note 11.

Leases" in Item 8 of this Annual Report for additional information.

Financing activities

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In February 2020, we issued $600 million in aggregate principal amount of convertible senior notes, which mature on March 1, 2025.

(in thousands) Amount

Principal $ 600,000

issuance costs (14,527)

Capped Call Transactions (51,900)

In November 2019, and as amended as of February 2020, July 2020, and September 2020, we entered into a five-year $100 million senior secured revolving credit agreement with PNC Bank, National Association.

As of December 31, 2021, we had no outstanding borrowings under the Credit Facility.

In November 2019, and as since amended, we entered into a five-year $100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association.

As of December 31, 2022, we had no outstanding cash borrowings under the Credit Facility but had $27.3 million in outstanding letters of credit which reduce the available borrowing capacity.

See "Note 12.

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December 31, 2022 $ 58,075

(1) On June 8, 2021, we announced that our Board of Directors extended the current stock repurchase program’s expiration date to June 30, 2022 and increased the remaining common stock repurchase authority to $60 million.

(1) On June 2, 2022, we announced that our Board of Directors extended the current stock repurchase program’s expiration date to June 30, 2023.

(2) Purchases under this program have been made on the open market.

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622 $ 45,128 982 $ 123,535

During 2021 and 2020, instead of receiving cash from the equity holders, we withheld shares with a value of $56.1 million and $59.6 million, respectively, for the exercise price of options.

During 2022 and 2021, instead of receiving cash from the equity holders for the exercise price of options, we withheld shares with a value of $14.3 million and $56.1 million, respectively.

These amounts have been excluded from the table above.

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We intend to pay a quarterly cash dividend of $0.03 per share.

However, the Board of Directors may terminate or modify the dividend program at any time without prior notice.

However, the Board of Directors may terminate or modify the dividend program without prior notice.

Contractual obligations

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Operating lease obligations 18,476 17,101 14,444 10,860 49,079 — 109,960

Investment commitments 1,000 — — — — — 1,000

Liability for uncertain tax positions (3)

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(1) Includes principal and interest.

(2) Represents the fixed or minimum amounts due under purchase obligations for hosting services and sales and marketing programs.

(2) Represents the fixed or minimum amounts due under purchase obligations for hosting services, software subscriptions, and sales and marketing programs.

(3) We are unable to reasonably estimate the timing of the cash outflow due to uncertainties in the timing of the effective settlement of tax positions.

2 unchanged sentences

CRITICAL ACCOUNTING ESTIMATES AND SIGNIFICANT JUDGMENTS

Management’s discussion and analysis of the financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S.

Management’s discussion and analysis of the financial condition and results of operations is based upon our consolidated financial statements, which have been prepared following accounting principles generally accepted in the U.S.

and the rules and regulations of the U.S.

Securities and Exchange Commission for annual financial reporting.

The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

We base our estimates and judgments on historical experience, knowledge of current conditions, and beliefs of what could occur in the future, given the available information.

Preparing these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

We base our estimates and judgments on historical experience, knowledge of current conditions, and beliefs about what could occur in the future, given the available information.

We believe that of our significant accounting policies, described in “Note 2.

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Our client contracts typically contain promises by us to provide multiple products and services.

Specifically, contracts associated with Pega Platform sales and other software applications, sold either as licenses to use functional intellectual property or as a cloud-based solution, typically include consulting services.

Specifically, contracts associated with Pega Platform sales and other software applications, sold as licenses to use functional intellectual property or as a cloud-based solution, typically include consulting services.

Determining whether such products and services within a client contract are considered distinct performance obligations that should be accounted for separately requires significant judgment.

We review client contracts to identify all separate promises to transfer goods and services that would be considered performance obligations.

Accordingly, we review client contracts to identify all separate promises to transfer goods and services that would be considered performance obligations.

Judgment is also required in determining whether an option to acquire additional products and services within a client contract represents a material right that the client would not receive without entering into that contract.

A contract modification is a legally binding change to the scope, price, or both of an existing contract.

A contract modification is a legally binding change to an existing contract’s scope, price, or both.

Contract modifications are reviewed to determine whether they should be accounted for as part of the original contract or as a separate contract.

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We have concluded that the stand-alone selling prices of certain performance obligations, specifically software licenses and Pega Cloud arrangements, are highly variable.

In these instances, we estimate the stand-alone selling prices using the residual approach, determined based on total transaction price minus the stand-alone selling price of other performance obligations promised in the contract.

In these instances, we estimate the stand-alone selling prices using the residual approach, determined based on the total transaction price minus the stand-alone selling price of other performance obligations promised in the contract.

We update our stand-alone selling price analysis periodically, including a re-assessment of whether the residual approach used to determine the stand-alone selling prices for software licenses and Pega Cloud arrangements remains appropriate.

Changes in the assumptions or judgments used in determining the performance obligations in client contracts and stand-alone selling prices could significantly impact the timing and amount of revenue we report in a particular period.

Significant Accounting Policies", "Note 4.

Receivables, Contract Assets, And Deferred Revenue", and "Note 15.

Revenue" in Item 8 of this Annual Report for additional information.

Goodwill and intangible assets impairment

Our goodwill and intangible assets result from our previous business acquisitions.

Goodwill and intangible assets with indefinite useful lives are not amortized but are tested for impairment at least annually or as circumstances indicate their value may no longer be recoverable.

We do not carry any intangible assets with indefinite useful lives other than goodwill.

Our goodwill and intangible assets arise from our previous business acquisitions.

• Goodwill is tested for impairment at least annually or as circumstances indicate its value may no longer be recoverable.

• We do not have any intangible assets with indefinite useful lives other than goodwill.

• We perform our annual goodwill impairment test as of November 30th.

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The key assumptions of the cash flow model involve significant subjectivity.

If such assets are impaired, an impairment is measured by the amount by which the carrying amount of the asset exceeds its fair value.

If such assets are impaired, an impairment is measured by the amount the asset’s carrying value exceeds its fair value.

As of December 31, 2022, we had $81.4 million of goodwill and $10.9 million of intangible assets.

1 unchanged sentence

To date, there have been no impairments of goodwill or intangible assets.

Significant Accounting Policies" and "Note 7.

Goodwill And Other Intangible Assets" in Item 8 of this Annual Report for additional information.

Accounting for income taxes

Significant judgment is required to determine our provision for income taxes and income tax assets and liabilities, including evaluating uncertainties in applying accounting principles and complex tax laws.

Changes in tax laws or our interpretation of tax laws and the resolution of any tax audits could significantly impact our financial statements.

Accordingly, changes in tax laws or our interpretation of tax laws and the resolution of any tax audits could significantly impact our financial statements.

We regularly assess the need for a valuation allowance against our deferred tax assets.

Future realization of our deferred tax assets ultimately depends on sufficient taxable income within the available carryback or carryforward periods.

The future realization of our deferred tax assets ultimately depends on sufficient taxable income within the available carryback or carryforward periods.

Changes in our valuation allowance impact income tax expense in the period of adjustment.

Our deferred tax valuation allowance requires significant judgment and uncertainties, including assumptions about future taxable income based on historical and projected information.

We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized.

In making such a determination, we consider all available objective and verifiable negative and positive evidence, including future reversals of existing taxable temporary differences, our firm contractual backlog, projected future taxable income (inclusive of the impact of enacted legislation), tax-planning strategies and results of recent operations.

Based on our firm contractual backlog and our current projections of taxable income, we determined that it is more likely than not that we will be able to realize our net deferred tax asset as of December 31, 2021.

We assess our income tax positions and record tax benefits based upon management’s evaluation of the facts, circumstances, and information available at the reporting date.

We recognize deferred tax assets to the extent that we believe that they are more likely than not to be realized.

In making such a determination, we consider all available objective and verifiable negative and positive evidence, including future reversals of existing taxable temporary differences, our firm contractual backlog, projected future taxable income (including the impact of enacted legislation), tax-planning strategies and results of recent operations.

In 2022, we determined that the objectively and verifiable negative evidence outweighed the positive evidence, and we recorded a full valuation allowance of $188.3 million on our U.S.

deferred tax assets.

We assess our income tax positions and record tax benefits based on management’s evaluation of the facts, circumstances, and information available at the reporting date.

For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, we record the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information.

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As a global company, we use significant judgment to calculate and provide for income taxes in each of the tax jurisdictions in which we operate.

In the ordinary course of our business, there are transactions and calculations undertaken whose ultimate tax outcome cannot be certain.

In the ordinary course of our business, transactions and calculations occur whose ultimate tax outcome cannot be certain.

Some of these uncertainties arise due to transfer pricing for transactions with our subsidiaries, the determination of tax nexus, and tax credit estimates.

In addition, the calculation of acquired tax attributes and the associated limitations are complex.

We estimate our exposure to unfavorable outcomes related to these uncertainties and estimate the probability of such outcomes.

Although we believe our estimates are reasonable, no guarantee can be given that the final tax outcome will not be different from what is reflected in our historical income tax provisions, returns, and accruals.

We estimate our exposure to unfavorable outcomes related to these uncertainties and the probability of such outcomes.

Although we believe our estimates are reasonable, there is no guarantee that the final tax outcome will not be different from what is reflected in our historical income tax provisions, returns, and accruals.

Such differences, or changes in estimates relating to potential differences, could have a material impact on our income tax provision and operating results in the period in which such a determination is made.

See "Note 17.

Significant Accounting Policies" and "Note 18.

Income Taxes" in Item 8 of this Annual Report for additional information.

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The fair value of the Capped Call Transactions at the end of each reporting period is determined using a Black-Scholes option-pricing model.

The valuation models use various market-based inputs, including stock price, remaining contractual term, expected volatility, risk-free interest rate, and expected dividend yield.

The valuation model uses various market-based inputs, including stock price, remaining contractual term, expected volatility, risk-free interest rate, and expected dividend yield.

Management applies judgment when determining expected volatility.

We consider both historical and implied volatility levels of the underlying equity security.

We consider the underlying equity security’s historical and implied volatility levels.

As of December 31, 2022, a hypothetical 10% increase in our stock price would have increased the fair value of the capped call to $3.6 million, while a hypothetical 10% decrease in our stock price would have decreased the fair value of the capped call to $1.7 million.

2 unchanged sentences

Fair Value Measurements" in Item 8 of this Annual Report for additional information.

Loss Contingencies

We are subject to various claims, including claims with customers and vendors, pending and potential legal actions for damages, investigations relating to governmental laws and regulations, and other matters arising out of the normal conduct of our business.

When a loss is considered probable and reasonably estimable, we record a liability in the amount of our best estimate for the ultimate loss.

However, the likelihood of a loss with respect to a particular contingency is often difficult to predict and determining a meaningful estimate of the loss or a range of loss may not be practicable based on the information available and the potential effect of future events and decisions by third parties that will determine the ultimate resolution of the contingency.

Moreover, it is common for such matters to be resolved over many years, during which time relevant developments and new information must be reevaluated at least quarterly to determine both the likelihood of potential loss and whether it is possible to reasonably estimate a range of possible loss.

When a material loss is reasonably possible or probable, but a reasonable estimate cannot be made, disclosure of the proceeding is provided.

Legal fees are recognized as incurred when the legal services are provided.

We review all contingencies at least quarterly to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the potential loss or range of the loss can be made.

Significant Accounting Policies" and "Note 20.

Commitments And Contingencies" in Item 8 of this Annual Report for additional information.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis