What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2023-02-15 compared with 2022-02-16 · 158 added, 151 removed, 957 unchanged (24% of the section changed)

103 unchanged sentences

Additional paid-in capital 229,602 145,810

Retained earnings 276,449 339,879

(Accumulated deficit) retained earnings ( 76,513 ) 276,449

Accumulated other comprehensive (loss)

25 unchanged sentences

General and administrative 117,734 83,506 67,452

Restructuring 21,743 — —

Total operating expenses 1,058,615 970,022 850,131

(Loss) from operations ( 109,405 ) ( 94,732 ) ( 143,527 )

Foreign currency transaction (loss) gain ( 6,459 ) 3,704 ( 2,335 )

Foreign currency transaction gain (loss) 4,560 ( 6,459 ) 3,704

Interest income 1,643 704 1,223

2 unchanged sentences

Other income, net 6,579 89 1,370

(Loss) before (benefit from) income taxes ( 131,987 ) ( 124,889 ) ( 134,846 )

(Benefit from) income taxes ( 68,947 ) ( 63,516 ) ( 44,413 )

(Loss) before provision for (benefit from) income taxes ( 161,797 ) ( 131,987 ) ( 124,889 )

Provision for (benefit from) income taxes 183,785 ( 68,947 ) ( 63,516 )

Net (loss) $ ( 345,582 ) $ ( 63,040 ) $ ( 61,373 )

13 unchanged sentences

Other comprehensive (loss) income, net of tax

Unrealized gain on available-for-sale securities 640 46 249

Unrealized (loss) gain on available-for-sale securities ( 169 ) 640 46

Foreign currency translation adjustments ( 15,913 ) ( 4,680 ) 10,234

6 unchanged sentences

Common Stock Additional paid-in capital

Retained earnings

Retained earnings (accumulated deficit)

Accumulated other comprehensive (loss) Total

1 unchanged sentence

January 1, 2020 79,599 $ 796 $ 140,523 $ 410,919 $ ( 13,228 ) $ 539,010

Equity component of convertible senior notes, net — — 61,604 — — 61,604

Repurchase of common stock ( 278 ) ( 3 ) ( 28,271 ) — — ( 28,274 )

7 unchanged sentences

December 31, 2020 80,890 $ 809 $ 204,432 $ 339,879 $ ( 2,948 ) $ 542,172

Equity component of convertible senior notes, net — — 61,604 — — 61,604

Cumulative-effect adjustment from adoption of ASU 2020-06, net — — ( 61,604 ) 9,399 — ( 52,205 )

Repurchase of common stock ( 432 ) ( 5 ) ( 53,605 ) — — ( 53,610 )

4 unchanged sentences

— — — ( 9,789 ) — ( 9,789 )

Other comprehensive income — — — — 10,280 10,280

Other comprehensive (loss) — — — — ( 4,040 ) ( 4,040 )

Net (loss) — — — ( 63,040 ) — ( 63,040 )

December 31, 2021 81,712 $ 817 $ 145,810 $ 276,449 $ ( 6,988 ) $ 416,088

Cumulative-effect adjustment from adoption of ASU 2020-06

— — ( 61,604 ) 9,399 — ( 52,205 )

Repurchase of common stock ( 280 ) ( 2 ) ( 24,506 ) — — ( 24,508 )

21 unchanged sentences

Lease expense 15,940 13,277 16,248

Amortization of debt discount and issuance costs 2,977 14,813 —

Amortization of intangible assets and depreciation 18,780 28,593 21,348

Amortization of investments 3,721 1,073 800

Foreign currency transaction loss (gain) 6,459 ( 3,704 ) 2,335

Foreign currency transaction (gain) loss ( 4,560 ) 6,459 ( 3,704 )

Other 157 7,730 15,007

20 unchanged sentences

Dividend payments to stockholders ( 9,834 ) ( 9,761 ) ( 9,628 )

Proceeds from revolving credit facility — — 45,000

Payments on revolving credit facility — — ( 45,000 )

Common stock repurchases for tax withholdings for net settlement of equity awards ( 20,620 ) ( 69,925 ) ( 75,562 )

7 unchanged sentences

Interest paid on convertible notes $ 4,500 $ 4,500 $ 2,338

Income taxes (refunded) paid $ ( 4,552 ) $ 3,377 $ 4,745

Income taxes paid (refunded) $ 7,645 $ ( 4,552 ) $ 3,377

Non-cash investing and financing activity:

Investment in property and equipment included in accounts payable and accrued liabilities $ 9,914 $ 2,143 $ 825

Dividends payable $ 2,474 $ 2,454 $ 2,428

3 unchanged sentences

BASIS OF PRESENTATION

The Company develops, markets, licenses, and supports customer engagement and digital process automation software applications in addition to the Pega Platform™ for clients that wish to build and extend their own applications.

The Company develops, markets, licenses, hosts, and supports enterprise software that helps organizations build agility into their business.

The Company’s low-code platform for workflow automation and artificial intelligence-powered decisioning enables clients to personalize customer experiences, streamline customer service, and automate business processes and workflows.

The Company provides consulting, training, support, and hosting services to facilitate the use of its software.

9 unchanged sentences

Certain prior period amounts reported in our consolidated financial statements and notes thereto have been reclassified to conform to the current year presentation.

Such reclassifications did not affect total revenues, operating income, or net income.

Such reclassifications did not affect total revenues, (loss) from operations, or net (loss).

SIGNIFICANT ACCOUNTING POLICIES

The Company’s revenue is primarily derived from:

• Subscription services, which is composed of revenue from Pega Cloud and maintenance.

• Subscription services, composed of revenue from Pega Cloud and maintenance.

Pega Cloud is the Company’s hosted Pega Platform and software applications.

Maintenance revenue is earned from providing client support, software upgrades, and bug fixes or patches.

• Subscription license, which is composed of revenue from term license arrangements for the Company’s Pega Platform and software applications.

• Subscription license, composed of revenue from term license arrangements for the Company’s Pega Platform and software applications.

Term licenses represent functional intellectual property and are delivered separately from maintenance and services.

• Perpetual license, which is composed of revenue under perpetual license arrangements for the Company’s Pega Platform and software applications.

• Perpetual license, composed of revenue from perpetual license arrangements for the Company’s Pega Platform and software applications.

Perpetual licenses represent functional intellectual property and are delivered separately from maintenance and services.

• Consulting, which is primarily related to new software license implementations, training, and reimbursable costs.

• Consulting, primarily related to new software license implementations, training, and reimbursable costs.

Performance obligations

6 unchanged sentences

Performance obligation

How standalone selling price is typically determined

How stand-alone selling price is typically determined

When performance obligation is typically satisfied

15 unchanged sentences

(1) Technical support and software updates are considered distinct services but accounted for as a single performance obligation, as they have the same pattern of transfer to the client.

The Company utilizes the residual approach for software license and Pega Cloud performance obligations since the selling price is highly variable and stand-alone selling price is not discernible from past transactions or other observable evidence.

The Company utilizes the residual approach for software license and Pega Cloud performance obligations since the selling price is highly variable and the stand-alone selling price is not discernible from past transactions or other observable evidence.

Periodically, the Company reevaluates whether the residual approach remains appropriate.

As required, the Company evaluates its residual approach estimate compared to all available observable data before concluding the estimate is representative of its stand-alone selling price.

As required, the Company evaluates its residual approach estimate compared to all available observable data before concluding the estimate represents its stand-alone selling price.

If the contract grants the client the option to acquire additional products or services, the Company assesses whether the option represents a material right to the client that the client would not receive without entering into that contract.

2 unchanged sentences

A significant portion of the total contract consideration is typically allocated to the license performance obligation.

Therefore, our contracts often result in the recording of unbilled receivables and contract assets throughout most of the contract term.

Therefore, the Company’s contracts often result in the recording of unbilled receivables and contract assets throughout most of the contract term.

The Company records an unbilled receivable or contract asset when revenue recognized on a contract exceeds the billings.

3 unchanged sentences

The Company’s arrangements can include variable fees, such as the option to purchase additional usage of a previously delivered software license.

The Company may also provide pricing concessions to clients, a business practice that also gives rise to variable fees in contracts.

The Company may also provide pricing concessions to clients, a business practice that gives rise to variable fees.

For variable fees arising from the client’s acquisition of additional usage of a previously delivered software license, the Company applies the sales and usage-based royalties guidance related to a license of intellectual property and recognizes the revenue in the period the underlying sale or usage occurs.

The Company includes variable fees in the determination of total transaction price if it is not probable that a future significant reversal of revenue will occur.

The Company includes variable fees in the determination of total transaction price if it is not probable that a significant future reversal of revenue will occur.

The Company uses the expected value or most likely value amount, whichever is more appropriate for specific circumstances, to estimate variable consideration, and the estimates are based on the level of historical price concessions offered to clients.

2 unchanged sentences

The Company generally does not intend to provide financing to its clients, as financing arrangements are not contemplated as part of the negotiated terms of contracts between the Company and its clients.

Although there may be instances with an intervening period between the delivery of the license and the payment, typically in term license arrangements, the purpose of that timing difference is to align the client’s payment with the timing of the use of the software license or service.

Although there may be an intervening period between the delivery of the license and the payment, typically in term license arrangements, the purpose of that timing difference is to align the client’s payment with the timing of the use of the software license or service.

In certain circumstances, however, there are instances where revenue recognition timing differs from the timing of payment due to extended payment terms or fees that are non-proportional to the associated usage of software licenses.

In these instances, the Company evaluates whether a significant financing component exists.

This evaluation includes determining the difference between the consideration the client would have paid at the time the performance obligation was satisfied and the amount of consideration actually paid.

This evaluation includes determining the difference between the consideration the client would have paid when the performance obligation was satisfied and the amount of consideration paid.

Contracts that include a significant financing component are adjusted for the time value of money at the rate inherent in the contract, the client’s borrowing rate, or the Company’s incremental borrowing rate, depending upon the recipient of the financing.

5 unchanged sentences

A contract modification meeting both criteria is accounted for as a separate contract.

A contract modification not meeting both criteria is considered a change to the original contract and is accounted for on either:

If a contract modification does not meet both criteria, it is accounted for as either:

• a prospective basis as a termination of the existing contract and the creation of a new contract;

5 unchanged sentences

Deferred commissions are allocated to each performance obligation within the contract and amortized according to the transfer of underlying goods and services within those contracts and expected renewals.

The expected benefit period is determined based on the length of the client contracts, client attrition rates, the underlying technology life-cycle, and the competitive marketplace’s influence in which the products and services are sold.

Deferred costs allocated to maintenance and deferred costs for Pega Cloud arrangements are amortized over an average expected benefit period of five years .

Deferred costs allocated to software licenses, and any expected renewals of term software licenses within the five years expected benefit period, are amortized at the point in time control of the software license is transferred.

The expected benefit period is determined based on the length of the client contracts, client attrition rates, the underlying technology lifecycle, and the competitive marketplace’s influence on the products and services sold.

Deferred costs allocated to maintenance and deferred costs for Pega Cloud arrangements are amortized over an average expected benefit period of 4.5 years.

Deferred costs allocated to software licenses, and any expected renewals of term software licenses within the 4.5 years expected benefit period, are amortized at the point in time control of the software license is transferred.

Deferred costs allocated to consulting are amortized over a period consistent with the pattern of transfer of control for the related services.

1 unchanged sentence

The principal financial instruments held by the Company consist of cash equivalents, marketable securities, receivables, capped call transactions, and accounts payable.

The Company considers debt securities that are readily convertible to known amounts of cash with maturities of three months or less from the purchase date to be cash equivalents.

The Company considers debt securities readily convertible to known amounts of cash with maturities of three months or less from the purchase date to be cash equivalents.

Interest is recorded when earned.

The Company’s investments are classified as available-for-sale and are carried at fair value.

Unrealized gains and losses considered temporary in nature are recorded as a component of accumulated other comprehensive (loss), net of related income taxes.

Unrealized gains and losses considered temporary are recorded as a component of accumulated other comprehensive (loss), net of related income taxes.

The Company reviews all investments for reductions in fair value that are other-than-temporary.

When such reductions occur, the investment cost is adjusted to fair value by recording a loss on investments in the consolidated statements of operations.

Gains and losses on investments are calculated based upon the specific investment.

Gains and losses on investments are calculated based on the specific investment.

Receivables, Contract Assets, And Deferred Revenue", "Note 12.

3 unchanged sentences

Property and equipment are recorded at cost.

Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, which are three years for computer equipment and five years for furniture and fixtures.

Depreciation and amortization are computed using the straight-line method over the estimated useful life of each asset, which are three years for computer equipment and five years for furniture and fixtures.

Leasehold improvements are amortized over the lesser of the lease’s term or the useful life of the asset.

Repairs and maintenance costs are expensed as incurred.

All the Company’s leases are operating leases, primarily composed of office space leases.

All of the Company’s leases are operating leases, primarily composed of office space leases.

The Company accounts for a contract as a lease when it has the right to control the asset for a period of time while obtaining substantially all of the asset’s economic benefits.

The Company determines the initial classification and measurement of its operating right of use assets and lease liabilities at the lease commencement date and thereafter if modified.

Fixed lease costs are recognized on a straight-line basis over the term of the lease.

Fixed lease costs are recognized on a straight-line basis over the lease term.

Variable lease costs are recognized in the period in which the obligation for those payments is incurred.

The Company combines lease and non-lease components in the determination of lease costs for its office space leases.

The Company combines lease and non-lease components when determining lease costs for its office space leases.

The lease liability includes lease payments related to options to extend or renew the lease term if the Company is reasonably certain it will exercise those options.

The Company’s leases do not contain any material residual value guarantees or restrictive covenants.

The Company’s leases do not contain material residual value guarantees or restrictive covenants.

Loss contingencies and legal costs

The Company accrues loss contingencies when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.

Significant judgments are required for the determination of probability and the range of the outcomes, and the estimates are based only on the information available at the time.

Significant judgments are required to determine the probability and the range of the outcomes, and the estimates are based only on the information available to us at the time.

Due to the inherent uncertainties involved in claims, legal proceedings, and in estimating the losses that may arise, actual outcomes may differ from the Company’s estimates.

Contingencies deemed not probable or for which losses were not estimable in one period may become probable, or losses may become estimable in later periods which may have a material impact on the Company’s results of operations and financial position.

As additional information becomes available, the Company reassesses the potential liability related to its pending claims and litigation and may revise its estimates.

As additional information becomes available, the Company reassesses the potential liability from pending claims and litigation and may revise its estimates.

Regardless of the outcome, legal disputes can have a material effect on the Company because of defense and settlement costs, diversion of management resources and other factors.

14 unchanged sentences

Cash equivalents

Cash equivalents include money market funds, time deposits, and other investments with original maturities of three months or less.

Cash equivalents include money market funds and other investments with original maturities of three months or less.

Business combinations

3 unchanged sentences

In addition, uncertain tax positions and tax-related valuation allowances are initially established in connection with a business combination as of the acquisition date.

The Company continues to collect information and reevaluates these estimates and assumptions quarterly and records any adjustments to the Company’s preliminary estimates to goodwill provided that the Company is within the measurement period.

The Company reevaluates these estimates and assumptions quarterly as new information arises and records any adjustments to the Company’s preliminary estimates to goodwill provided that the Company is within the measurement period.

Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s consolidated statements of operations.

8 unchanged sentences

See "Note 16.

Stock-Based Compensation" for discussion of the Company’s key assumptions included in determining the fair value of its equity awards at the grant date.

Stock-Based Compensation" for a discussion of the Company’s key assumptions when determining the fair value of its equity awards at the grant date.

Foreign currency translation and remeasurement

12 unchanged sentences

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

The Company recognizes excess tax benefits when they are realized, as a reduction of the provision for income taxes.

The Company assesses its income tax positions and records tax benefits based upon management’s evaluation of the facts, circumstances, and information available at the reporting date.

The Company recognizes excess tax benefits when realized, as a reduction of the provision for income taxes.

The Company assesses its income tax positions and records 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, the Company records 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.

6 unchanged sentences

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

See "Note 17.

Income Taxes" for additional information.

For additional information, see "Note 18.

Income Taxes".

Advertising expense

7 unchanged sentences

$ 154,866 $ — $ ( 2,699 ) $ 152,167 $ 203,659 $ 2 $ ( 847 ) $ 202,814

As of December 31, 2021, marketable securities’ maturities ranged from January 2022 to September 2024, with a weighted-average remaining maturity of 1.2 years.

As of December 31, 2022, marketable securities’ maturities ranged from January 2023 to November 2024, with a weighted-average remaining maturity of 0.5 years.

RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE

26 unchanged sentences

December 31, 2022 December 31, 2021

Client A 10 % *

* Client accounted for less than 10% of total accounts receivable and unbilled receivables.

Accounts receivable * 1 %

Unbilled receivables * 15 %

Total receivables * 10 %

* Client accounted for less than 10% of receivables.

Contract assets

Contract assets are client-committed amounts for which revenue recognized exceeds the amount billed to the client, and billing is subject to conditions other than the passage of time, such as completing a related performance obligation.

(in thousands)

4 unchanged sentences

16,470 10,643

$ 34,016 $ 23,173

(1) Included in other current assets.

70 unchanged sentences

December 31, 2022

2026 and thereafter 1,201

SEGMENT INFORMATION

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker (“CODM”) in deciding how to allocate resources and in assessing performance.

The Company derives substantially all of its revenue from the sale and support of one group of similar products and services – software that provides case management, business process management, and real-time decisioning solutions to improve customer engagement and operational excellence in the enterprise applications market.

35 unchanged sentences

$ 15,128 $ 13,499

RESTRUCTURING

During the fourth quarter of 2022, management committed to a restructuring plan aligned with the Company’s 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 the Company’s Salem, New Hampshire office.

As of December 31, 2022, the Company’s employee severance and related benefits restructuring accrual was $ 18.6 million and is included in accrued compensation and related expenses.

Corporate headquarters

3 unchanged sentences

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

New Waltham Office

Waltham office

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

1 unchanged sentence

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.

Rent first became payable on August 1, 2022.

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

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

In addition, the Company received an improvement allowance from the landlord of $ 11.8 million.

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

1 unchanged sentence

Fixed lease costs (1)

$ 20,186 $ ( 1,694 ) $ 20,235

Short-term lease costs 3,356 2,244 1,669

1 unchanged sentence

$ 27,436 $ 5,030 $ 26,374

(1) The lower fixed lease costs in 2021 was due to the modification of the corporate headquarters lease.

Right of use assets and lease liabilities

17 unchanged sentences

(in thousands) December 31, 2022

2023 $ 18,476

Thereafter 39,265

4 unchanged sentences

(in thousands) 2022 2021

Cash paid for leases $ 18,428 $ 20,548

Cash paid for operating leases, net of tenant improvement allowances $ 7,690 $ 18,428

Right of use assets recognized for new leases and amendments (non-cash) $ 4,733 $ 55,068

(1) In 2021, the Company received $ 18 million as a one-time payment for our accelerated exit from our then corporate headquarters in Cambridge, Massachusetts.

(1) In 2022 and 2021, the Company received tenant improvement allowances of $ 8.8 million and $ 3.0 million, respectively, as part of the lease of the Company’s new corporate headquarters in Waltham, Massachusetts.

(2) In 2021, the Company received $ 18 million as a one-time payment for the Company’s accelerated exit from its then corporate headquarters in Cambridge, Massachusetts.

This payment has been excluded from the above table.

8 unchanged sentences

The conversion rate will be adjusted upon certain events, including spin-offs, tender offers, exchange offers, and certain stockholder distributions.

Beginning on September 1, 2024, noteholders may convert their Notes at any time at their election.

Before September 1, 2024, noteholders may convert their Notes in the following circumstances:

2 unchanged sentences

• Upon certain corporate events or distributions or if the Company calls any Notes for redemption, noteholders may convert before the close of business on the business day immediately before the related redemption date (or, if the Company fails to pay the redemption price in full on the redemption date, until the Company pays the redemption price).

Beginning on September 1, 2024, noteholders may convert their Notes at any time at their election.

As of December 31, 2022, the Notes were not eligible for conversion.

3 unchanged sentences

A Fundamental Change relates to mergers, changes in control of the Company, liquidation/dissolution of the Company, or the delisting of the Company’s common stock.

Impact of the Notes

The Company adopted ASU 2020-06 using the modified retrospective approach on January 1, 2021.

The standard eliminates the liability and equity separation model for convertible instruments with a cash conversion feature.

Before January 1, 2021, the Notes were separated into liability and equity components.

• The initial carrying amount of the liability component was calculated by measuring a similar debt instrument’s fair value that does not have an associated conversion feature.

The excess of the Notes’ principal amount over the initial carrying amount of the liability component, the debt discount, was amortized as interest expense over the Notes’ contractual term.

• The equity component was recorded as an increase to additional paid-in capital and not remeasured.

Upon adoption of ASU 2020-06 , the book value of the Notes increased by $ 69.5 million to $ 587.7 million, and retained earnings increased by $ 9.4 million.

The retained earnings adjustment reflects the tax effected difference between the value of the Notes and the embedded conversion feature before adoption and the combined convertible instrument's amortized cost after adoption.

Carrying value of the Notes:

1 unchanged sentence

Principal $ 600,000 $ 600,000

Unamortized debt discount — ( 71,222 )

Unamortized issuance costs ( 6,391 ) ( 9,278 )

Convertible senior notes, net $ 593,609 $ 590,722

Conversion options $ — $ 84,120

Issuance costs — ( 2,037 )

Deferred taxes — ( 20,479 )

Additional paid-in capital $ — $ 61,604

Interest expense related to the Notes:

2 unchanged sentences

$ 4,500 $ 4,500

Amortization of debt discount

Amortization of issuance costs

9 unchanged sentences

$ 600,000 $ 11,250 $ 611,250

$ 600,000 $ 15,750 $ 615,750

Capped call transactions

2 unchanged sentences

The Capped Call Transactions are expected to reduce common stock dilution and/or offset any potential cash payments the Company must make, other than for principal and interest, upon conversion of the Notes, with such reduction and/or offset subject to a cap of $ 196.44 .

The cap price of the Capped Call Transactions is subject to adjustment upon the occurrence of specified extraordinary events affecting the Company, including mergers and tender offers.

The cap price of the Capped Call Transactions is subject to adjustment upon specified extraordinary events affecting the Company, including mergers and tender offers.

The Capped Call Transactions are accounted for as derivative instruments and do not qualify for the Company’s own equity scope exception in ASC 815 since, in some cases of early settlement, the settlement value of the Capped Call Transactions, calculated following the governing documents, may not represent a fair value measurement.

3 unchanged sentences

January 1, $ 59,964 $ 83,597

Issuance — 51,900

Fair value adjustment ( 57,382 ) ( 23,633 )

1 unchanged sentence

Credit facility

In November 2019, and as amended as of February 2020, July 2020, and September 2020, the Company entered into a five -year $ 100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association.

The Company may use borrowings to finance working capital needs and for general corporate purposes.

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

The Company may use borrowings for general corporate purposes and to finance working capital needs.

Subject to specific conditions, the Credit Facility allows the Company to increase the aggregate commitment to $ 200 million.

1 unchanged sentence

The Credit Facility, as amended, contains customary covenants, including, but not limited to, those relating to additional indebtedness, liens, asset divestitures, and affiliate transactions.

The Company is also required to comply with financial covenants, including:

• Beginning with the fiscal quarter ended September 30, 2020 and ending with the fiscal quarter ended December 31, 2021, at least $ 200 million in cash and investments held by Pegasystems Inc.

• Beginning with the quarter ended March 31, 2022, a maximum net consolidated leverage ratio of 3.5 to 1.0 (with a step-up in the event of certain acquisitions) and a minimum consolidated interest coverage ratio of 3.5 to 1.0.

As of December 31, 2021 and December 31, 2020, the Company had no outstanding borrowings under the Credit Facility.

The Company is required to comply with financial covenants, including:

• Beginning with the fiscal quarter that ended March 31, 2022 and ending with the fiscal quarter ended December 31, 2022, Pegasystems Inc.

must maintain at least $ 200 million in cash, investments, and availability under the Revolving Credit Loan.

• Beginning with the fiscal quarter ending March 31, 2023, a maximum net consolidated leverage ratio of 3.5 to 1.0 (with a step-up for certain acquisitions) and a minimum consolidated interest coverage ratio of 3.5 to 1.0.

As of December 31, 2022 and December 31, 2021, the Company had no outstanding cash borrowings under the Credit Facility.

As of December 31, 2022, the Company had $ 27.3 million in outstanding letters of credit which reduce the available borrowing capacity under the Credit Facility.

STOCKHOLDERS’ EQUITY

4 unchanged sentences

The Company had no t issued any shares of preferred stock through December 31, 2022.

The Company has 200 million authorized shares of common stock, $ 0.01 par value per share, of which 81.7 million shares were issued and outstanding as of December 31, 2021.

The Company has 200 million authorized shares of common stock, $ 0.01 par value per share, of which 82.4 million were issued and outstanding as of December 31, 2022.

Dividends declared

2 unchanged sentences

Dividend payments to stockholders (in thousands) $ 9,834 $ 9,761 $ 9,628

The Company paid a quarterly cash dividend of $ 0.03 per share in 2021 , 2020, and 2019, however, the Board of Directors may terminate or modify the dividend program at any time without prior notice.

The Company paid a quarterly cash dividend of $ 0.03 per share in 2022, 2021, and 2020.

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

Stock repurchases

19 unchanged sentences

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.

The Company applies judgment when determining expected volatility.

The Company considers both historical and implied volatility levels of the underlying equity security.

The Company’s venture investments are recorded at fair value based on valuation methods using the observable transaction price and other unobservable inputs, including the volatility, rights, and obligations of the securities the Company holds.

The Company considers the underlying equity security’s historical and implied volatility levels.

The Company’s venture investments are recorded at fair value based on multiple valuation methods, including observable public companies and transaction prices and unobservable inputs, including the volatility, rights, and obligations of the securities the Company holds.

The Company’s assets and liabilities measured at fair value on a recurring basis:

8 unchanged sentences

(1) Included in other long-term assets .

(2) See "Note 11.

Debt" for additional information.

(2) For additional information, see "Note 12.

(3) Investments in privately held companies.

11 unchanged sentences

Fair value of the Notes

The Notes’ fair value (inclusive of the conversion feature embedded in the Notes) was $ 642.0 million as of December 31, 2021 and $ 706.5 million as of December 31, 2020.

The Notes’ fair value (including the conversion feature embedded in the Notes) was $ 521.1 million as of December 31, 2022 and $ 642.0 million as of December 31, 2021.

The fair value was determined based on the Notes’ quoted price in an over-the-counter market on the last trading day of the reporting period and classified within Level 2 in the fair value hierarchy.

See "Note 11.

Debt" for additional information.

For additional information, see "Note 12.

In addition to receivables, the Company is potentially subject to concentrations of credit risk from the Company’s cash, cash equivalents, and marketable securities.

31 unchanged sentences

As of December 31, 2022:

(Dollars in thousands) Subscription services Subscription

products Perpetual

license Consulting Total

(Dollars in thousands) Subscription services Subscription license Perpetual license Consulting Total

Maintenance Pega Cloud

7 unchanged sentences

As of December 31, 2021:

(Dollars in thousands) Subscription services Subscription

products Perpetual

license Consulting Total

(Dollars in thousands) Subscription services Subscription license Perpetual license Consulting Total

Maintenance Pega Cloud

15 unchanged sentences

The Company periodically grants employees stock options and restricted stock units (“RSUs”) and non-employee Directors common stock and stock options.

Most of the Company’s stock-based compensation arrangements vest over five years , with 20 % vesting after one year and the remaining 80 % vesting in equal quarterly installments over the remaining four years .

Most of the Company’s stock-based compensation arrangements vest over five years , with 20 % vesting after one year and 80 % vesting in equal quarterly installments over the remaining four years .

The Company’s stock options have a term of ten years .

The Company recognizes stock-based compensation using the accelerated attribution method, treating each vesting tranche as if it were an individual grant.

The Company recognizes stock-based compensation using the accelerated attribution method, treating each vesting tranche as an individual grant.

The stock-based compensation expense recognized during a period is based on the value of the awards that are expected to vest.

2 unchanged sentences

Employees may elect to receive 50 % of the employee’s target incentive compensation under the Company’s Corporate Incentive Compensation Plan (the “CICP”) in the form of RSUs instead of cash.

If elected by an employee, the equity amount is equal in value on the date of grant to 50 % of the employee’s target incentive opportunity, based on the employee’s base salary.

If elected by an employee, the equity amount is equal in value on the grant date to 50 % of the employee’s target incentive opportunity, based on the employee’s base salary.

The number of RSUs granted is determined by dividing 50 % of the employee’s target incentive opportunity by 85 % of the closing price of the Company’s common stock on the grant date, less the present value of expected dividends during the vesting period.

2 unchanged sentences

if threshold funding does not occur, the RSUs will not vest.

The Company considers vesting to be probable on the grant date and recognizes the associated stock-based compensation expense over the requisite service period beginning on the grant date and ending on the vesting date.

The Company considers vesting probable on the grant date and recognizes the associated stock-based compensation expense over the requisite service period beginning on the grant date and ending on the vesting date.

The Company grants awards that allow for the settlement of vested stock options and RSUs on a net share basis (“net settled awards”).

4 unchanged sentences

2004 Long-Term Incentive Plan (as amended and restated)

In 2004, the Company adopted the 2004 Long-Term Incentive Plan (as amended and restated, the “2004 Plan”) to provide employees, non-employee Directors, and consultants with opportunities to purchase stock through incentive stock options and non-qualified stock options.

Subsequent amendments to the plan increased the number of shares authorized for issuance under the plan to 36 million, extended the term of the plan to 2030, and limited annual compensation to any non-employee Director to $ 0.5 million.

9 unchanged sentences

Shares issued and available for issuance

During 2021 , the Company issued 1.3 million shares to its employees and directors under the Company’s stock-based compensation plans.

In 2022, the Company issued 1.0 million shares to its employees and directors under the Company’s stock-based compensation plans.

As of December 31, 2022, there were 1.4 million shares available for issuance for future equity grants under the Company’s stock plans, consisting of 1.2 million shares under the 2004 Plan and 0.2 million shares under the 2006 ESPP.

27 unchanged sentences

Forfeited ( 1,153 ) 87.71

Expired ( 278 ) $ 82.83

Options outstanding as of December 31, 2022 14,911 $ 59.67

4 unchanged sentences

As of December 31, 2022, the Company had unrecognized stock-based compensation expense related to the unvested portion of stock options of $ 101.6 million that is expected to be recognized as expense over a weighted-average period of 2.0 years.

RSUs deliver to the recipient a right to receive a specified number of shares of the Company’s common stock upon vesting.

RSUs provide the recipient a right to receive a specified number of shares of the Company’s common stock upon vesting.

The Company values its RSUs at the fair value of its common stock on the grant date, which is the closing price of its common stock on the grant date less the present value of expected dividends during the vesting period, as the recipient is not entitled to dividends during the requisite service period.

21 unchanged sentences

$ 30,135 $ 29,659 $ 24,241

The components of (loss) before (benefit from) income taxes are:

The components of (loss) before provision for (benefit from) income taxes are:

(in thousands) 2022 2021 2020

2 unchanged sentences

$ ( 161,797 ) $ ( 131,987 ) $ ( 124,889 )

The components of (benefit from) income taxes are:

The components of provision for (benefit from) income taxes are:

(in thousands) 2022 2021 2020

6 unchanged sentences

Foreign ( 842 ) ( 23,709 ) ( 17,085 )

Total deferred (benefit) ( 75,336 ) ( 59,777 ) ( 49,317 )

Total deferred provision (benefit) 168,890 ( 75,336 ) ( 59,777 )

$ 183,785 $ ( 68,947 ) $ ( 63,516 )

7 unchanged sentences

Tax effects of foreign activities 3,770 3,599 3,050

Tax-exempt income — — ( 91 )

GILTI, FDII, and BEAT 16,390 — —

Provision to return adjustments ( 6,317 ) ( 2,016 ) 3,416

17 unchanged sentences

Tax credit carryforwards 39,122 40,590

Research and development capitalization 38,425 —

Other 622 1,015

9 unchanged sentences

$ 3,718 $ 180,656

The Company regularly assesses the need for a valuation allowance against its deferred tax assets.

In making that assessment, the Company considers both positive and negative evidence related to the likelihood of realizing the deferred tax assets to determine, based on the weight of available evidence, whether it is more-likely-than-not that some or all of the deferred tax assets will not be realized.

This determination requires significant judgment, including assumptions about future taxable income based on historical and projected information.

There were no material changes in the valuation allowance in 2021.

In 2020, the change was $ 6 million due to expiring acquisition net operating losses with a valuation allowance.

The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized.

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

The Company’s deferred tax valuation allowance requires significant judgment and has uncertainties, including assumptions about future taxable income based on historical and projected information.

On a quarterly basis, the Company reassesses the need for a valuation allowance on its existing net deferred tax assets by tax-paying jurisdiction, weighing positive and negative evidence to assess its recoverability.

In making such a determination, the Company considers all available and objectively verifiable negative and positive evidence, including future reversals of existing taxable temporary differences, committed contractual backlog (“Backlog”), projected future taxable income inclusive of the impact of enacted legislation, tax-planning strategies, and results of recent operations.

The weight given to the potential effect of negative and positive evidence is commensurate with the extent to which it can be objectively verified.

As of June 30, 2022, the Company’s Backlog balance was not sufficient to recover the Company’s net deferred tax assets.

The Backlog balance and other unsettled circumstances, impacting the Company’s operations, reduced the Backlog’s weight as objectively verifiable positive evidence to generate sufficient taxable income to recover its net deferred tax assets.

These unsettled circumstances include growing and extended geopolitical turmoil, increasing inflation, and an uncertain global economic outlook.

As of June 30, 2022, the combination of the above factors caused the Company to conclude there is not sufficient objectively verifiable positive evidence to support that it is more likely than not the Company will generate sufficient future taxable income to recover the Company’s U.S.

net deferred tax assets.

The Company intends to maintain a full valuation allowance on its U.S and U.K deferred tax assets until there is sufficient evidence to support the realization of these deferred tax assets.

Accordingly, the Company recorded a valuation allowance of $ 188.3 million in income tax expense in 2022.

As of December 31, 2022, the Company’s net operating losses and credit carryforwards are:

13 unchanged sentences

The tax holiday reduces or eliminates income tax in India.

The tax holiday in the Hyderabad SEZ is scheduled to expire in 2024.

The tax holiday in the Bengaluru SEZ is scheduled to expire in 2022.

The tax holiday in the Hyderabad SEZ is expected to expire in 2023.

The tax holiday in the Bengaluru SEZ is expected to expire in 2027.

Uncertain tax benefits

12 unchanged sentences

The Company files federal and state income tax returns in the U.S.

and in various foreign jurisdictions.

and various foreign jurisdictions.

In the ordinary course of business, the Company and its subsidiaries are examined by various tax authorities, including the Internal Revenue Service in the U.S.

3 unchanged sentences

The Company does not expect the results of these audits to have a material effect on the Company’s financial condition, results of operations, or cash flows.

With few exceptions, the statute of limitations remains open in all jurisdictions for the tax years 2016 to the present.

With few exceptions, the statute of limitations remains open in all jurisdictions for all tax years since 2016 to the present.

(LOSS) PER SHARE

7 unchanged sentences

Net (loss) $ ( 345,582 ) $ ( 63,040 ) $ ( 61,373 )

Stock options — — —

Effect of dilutive securities — — —

Weighted-average common shares outstanding, assuming dilution (1) (2) (3)

3 unchanged sentences

3,367 5,862 6,278

(1) The shares underlying the conversion options in the Company’s Notes are included using the if-converted method, if dilutive in the period.

If the outstanding conversion options were fully exercised, the Company would issue an additional 4.4 million shares.

(1) In periods of loss, all dilutive securities are excluded as their inclusion would be anti-dilutive.

(3) The Company’s Capped Call Transactions convert to 4.4 million shares of the Company’s common stock (representing the number of shares for which the Notes are initially convertible).

(2) The shares underlying the conversion options in the Company’s Notes are included using the if-converted method, if dilutive in the period.

If the outstanding conversion options were fully exercised, the Company would issue an additional approximately 4.4 million shares.

(3) The Company’s Capped Call Transactions represent the equivalent of approximately 4.4 million shares of the Company’s common stock (representing the number of shares for which the Notes are initially convertible).

3 unchanged sentences

COMMITMENTS AND CONTINGENCIES

See "Note 10.

Leases" for additional information.

For additional information, see "Note 11.

Legal Proceedings

In addition to the matters below, the Company is, or may become, involved in a variety of claims, demands, suits, investigations, and proceedings that arise from time to time relating to matters incidental to the ordinary course of the Company’s business, including actions with respect to contracts, intellectual property, employment, benefits, and securities matters.

In addition to the matters below, the Company is or may become involved in a variety of claims, demands, suits, investigations, and proceedings that arise from time to time relating to matters incidental to the ordinary course of the Company’s business, including actions concerning contracts, intellectual property, employment, benefits, and securities matters.

Regardless of the outcome, legal disputes can have a material effect on the Company because of defense and settlement costs, diversion of management resources, and other factors.

In addition, as the Company is a party to ongoing litigation it is at least reasonably possible that our estimates will change in the near term and the effect may be material.

As of December 31, 2021, the Company has not accrued a loss with respect to any litigation matter.

In addition, as the Company is a party to ongoing litigation, it is at least reasonably possible that the Company’s estimates will change in the near term, and the effect may be material.

The Company had no accrued losses for litigation as of December 31, 2022 and December 31, 2021.

Pegasystems Inc.

4 unchanged sentences

Pegasystems Inc.

& Business Process Management Inc.

& Business Process Management Inc., No.

1:19-cv-11461 (D.

The Company’s complaint alleges that the report and Appian’s marketing of it include false and misleading statements about the Company.

The Company asked the court to order Appian to stop using the report, and Appian subsequently agreed to stop using the report.

The Company also asked the court to award damages for false advertising, deceptive business practices, and commercial disparagement.

On December 17, 2019, Appian asserted counterclaims against the Company seeking unspecified monetary damages and alleging certain of the Company’s past marketing materials included false and misleading statements, one of the marketing reports failed to disclose that the report’s author was paid by the Company, and that the Company defamed Appian in a LinkedIn post.

On May 22, 2020, the court allowed in part the Company’s motion to dismiss the counterclaims brought by Appian, but denied the motion as to the third party report and the defamation count.

As described below, on May 29, 2020, Appian then sued the Company in Virginia.

On June 17, 2021, Appian asserted additional counterclaims against the Company seeking unspecified monetary damages and alleging that certain additional marketing materials used by the Company contained false or misleading statements.

The Company believes the counterclaims brought by Appian against the Company are without merit, and the Company intends to vigorously pursue its claims against Appian and defend against the counterclaims brought against the Company in this matter.

The Company is unable to reasonably estimate possible damages or a range of possible damages in this matter given the Company’s belief that the damages claimed by Appian fail to satisfy the required legal standard, the status of the proceeding, and due to the uncertainty as to how a jury may rule if this ultimately proceeds to trial.

As previously indicated in the Company’s Current Report on Form 8-K filed on November 10, 2022 with the SEC, on November 9, 2022, the Company entered into a confidential settlement agreement with Appian resolving the litigation, and the parties filed a Stipulation of Dismissal with Prejudice dismissing all claims and counterclaims in this litigation.

The Company will not contain disclosure regarding this litigation in future filings it makes with the SEC.

Pegasystems Inc.

& Youyong Zou

On May 29, 2020, Appian sued the Company and an individual, Youyong Zou, in the Circuit Court of Fairfax County, Virginia in a matter titled Appian Corp.

As previously reported, the Company is a defendant in litigation brought by Appian in the Circuit Court of Fairfax County, Virginia (the “Court”) titled Appian Corp.

Pegasystems Inc.

1 unchanged sentence

2020-07216 (Fairfax Cty.

Appian’s complaint alleges a relationship between the Company and a consultant in approximately 2013 and sets forth claims for misappropriation of trade secrets under the Virginia Uniform Trade Secrets Act, violation of the Virginia Computer Crimes Act, tortious interference with contract and business expectancy, and statutory and common law conspiracy.

The court allowed Appian to file an amended complaint on November 4, 2021, alleging that, in the 2019 time frame, employees of the Company accessed free Appian product trials under false pretenses.

The amended complaint withdrew the claim for tortious interference with contract.

After Appian filed the amended complaint, the Company successfully moved to dismiss Appian’s conspiracy claims, which are no longer a part of the case.

A jury trial with respect to the merits of the dispute is scheduled to begin on March 21, 2022.

The Company believes the claims brought by Appian against the Company are without merit, that the Company has strong defenses to these claims and that, among other things, even were the jury to find that the Company misappropriated Appian’s alleged trade secrets, any alleged damages claimed by Appian are not supported by the necessary legal standard of proximate cause.

The Company is unable to reasonably estimate possible damages or a range of possible damages given the Company’s belief that the damages claimed by Appian fail to satisfy the required legal standard and due to the uncertainty as to how a jury may rule.

On May 9, 2022, the jury rendered its verdict finding that the Company had misappropriated one or more of Appian’s trade secrets, that the Company had violated the Virginia Computer Crimes Act, and that the trade secret misappropriation was willful and malicious.

The jury awarded damages of $ 2,036,860,045 for trade secret misappropriation and $ 1.00 for violating the Virginia Computer Crimes Act.

On September 15, 2022, the circuit court of Fairfax County entered judgment of $ 2,060,479,287 , consisting of the damages previously awarded by the jury plus attorneys’ fees and costs, and stating that the judgment is subject to post-judgment interest at a rate of 6.0 % per annum, from the date of the jury verdict (May 9, 2022) as to the amount of the jury verdict and from September 15, 2022 as to the amount of the award of attorneys’ fees and costs.

On September 15, 2022, the Company filed a notice of appeal from the judgment.

On September 29, 2022, the circuit court of Fairfax County approved a $ 25,000,000 letter of credit obtained by the Company to secure the judgment and entered an order suspending the judgment during the pendency of the Company’s appeal.

Appellate briefing is currently in process.

Although it is not possible to predict timing, this appeals process could potentially take years to complete.

The Company continues to believe that it did not misappropriate any alleged trade secrets and that its sales of the Company’s products at issue were not caused by, or the result of, any alleged misappropriation of trade secrets.

The Company is unable to reasonably estimate possible damages because of, among other things, uncertainty as to the outcome of appellate proceedings and/or any potential new trial resulting from the appellate proceedings.

City of Fort Lauderdale Police and Firefighters’ Retirement System, Individually and on Behalf of All Others Similarly Situated v.

Pegasystems Inc., Alan Trefler, and Kenneth Stillwell

On May 19, 2022, a lawsuit was filed against the Company, the Company’s chief executive officer and the Company’s chief operating and financial officer in the United States District Court for the Eastern District of Virginia Alexandria Division, captioned City of Fort Lauderdale Police and Firefighters’ Retirement System, Individually and on Behalf of All Others Similarly Situated v.

Pegasystems Inc., Alan Trefler, and Kenneth Stillwell (Case 1:22-cv-00578-LMB-IDD).

The complaint generally alleges, among other things, that the defendants violated Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 promulgated thereunder and that the individual defendants violated Section 20(a) of the Exchange Act, in each case by allegedly making materially false and/or misleading statements, as well as allegedly failing to disclose material adverse facts about the Company’s business, operations, and prospects, which caused the Company’s securities to trade at artificially inflated prices.

The complaint seeks unspecified damages on behalf of a class of purchasers of the Company’s securities between May 29, 2020 and May 9, 2022.

The litigation has since been transferred to the United States District Court for the District of Massachusetts (Case 1:22-cv-11220-WGY), and lead plaintiff class representatives—Central Pennsylvania Teamsters Pension Fund - Defined Benefit Plan, Central Pennsylvania Teamsters Pension Fund - Retirement Income Plan 1987, and Construction Industry Laborers Pension Fund—have been appointed.

On October 18, 2022, a consolidated amended complaint was filed that does not add any new parties or legal claims, is based upon the same general factual allegations as the original complaint, and now seeks unspecified damages on behalf of a class of purchasers of the Company’s securities between June 16, 2020 and May 9, 2022.

The Company believes the claims brought against the defendants are without merit and intends to defend against these claims vigorously.

The Company is unable to reasonably estimate possible damages or a range of possible damages in this matter given the stage of the lawsuit, the Company’s belief that the claims are without merit, and there being no specified quantum of damages sought in the complaint.

Mary Larkin, derivatively on behalf of nominal defendant Pegasystems Inc.

Peter Gyenes, Richard Jones, Christopher Lafond, Dianne Ledingham, Sharon Rowlands, Alan Trefler, Larry Weber, and Kenneth Stillwell, defendants, and Pegasystems Inc., nominal defendant

On November 21, 2022, a lawsuit was filed against the members of the Company’s board of directors, the Company’s chief operating and financial officer and the Company in the United States District Court for the District of Massachusetts, captioned Mary Larkin, derivatively on behalf of nominal defendant Pegasystems Inc.

Peter Gyenes, Richard Jones, Christopher Lafond, Dianne Ledingham, Sharon Rowlands, Alan Trefler, Larry Weber, and Kenneth Stillwell, defendants, and Pegasystems Inc., nominal defendant (Case 1:22-cv-11985).

The complaint generally alleges the defendants sold shares of the Company while in possession of material nonpublic information relating to (i) the litigation brought by Appian in the Circuit Court of Fairfax County, Virginia, described above, and (ii) alleged misconduct by Company employees alleged in that litigation.

The Company believes the claims brought against the defendants are without merit and intends to defend against these claims vigorously.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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 8. Financial Statements and Supplementary Data