What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2023-04-26 compared with 2022-10-26 · 151 added, 243 removed, 480 unchanged (45% of the section changed)

3 unchanged sentences

(in thousands)

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Current assets:

28 unchanged sentences

82,940 and 82,436 shares issued and outstanding at

September 30, 2022 and December 31, 2021, respectively

March 31, 2023 and December 31, 2022, respectively

Additional paid-in capital 272,481 229,602

(Accumulated deficit) retained earnings

Accumulated deficit

( 97,287 ) ( 76,513 )

7 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

Subscription services $ 187,509 $ 170,033

Subscription license 84,527 137,533

Perpetual license 9,223 2,874 18,929 20,922

Consulting 53,033 61,301

Perpetual license 403 7,440

Total revenue 325,472 376,307

2 unchanged sentences

Subscription license 719 622

Perpetual license 103 50 173 151

Consulting 60,348 55,511

Perpetual license 3 34

Total cost of revenue 97,934 88,197

4 unchanged sentences

General and administrative 23,110 35,764

Restructuring 1,461 —

Total operating expenses 249,744 269,490

(Loss) from operations ( 77,221 ) ( 65,337 ) ( 143,641 ) ( 62,544 )

Foreign currency transaction gain (loss) 3,826 518 8,415 ( 4,983 )

(Loss) income from operations ( 22,206 ) 18,620

Foreign currency transaction (loss) gain ( 2,675 ) 2,876

Interest income 1,485 207

Interest expense ( 1,918 ) ( 1,946 )

(Loss) on capped call transactions ( 6,876 ) ( 14,735 ) ( 56,381 ) ( 7,543 )

Other (loss) income, net ( 29 ) 2 6,497 108

Gain (loss) on capped call transactions 3,206 ( 30,560 )

Other income, net 6,583 2,741

(Loss) before provision for (benefit from) income taxes ( 15,525 ) ( 8,062 )

12 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

Net (loss) $ ( 20,774 ) $ ( 379 )

Other comprehensive (loss), net of tax

Other comprehensive income (loss), net of tax

Unrealized (loss) gain on available-for-sale securities ( 46 ) 222

Foreign currency translation adjustments 1,589 ( 2,770 )

Total other comprehensive (loss), net of tax $ ( 6,773 ) $ ( 4,347 ) $ ( 21,936 ) $ ( 2,485 )

Total other comprehensive income (loss), net of tax 1,543 ( 2,548 )

Comprehensive (loss) $ ( 19,231 ) $ ( 2,927 )

7 unchanged sentences

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

Cumulative-effect adjustment from adoption of ASU 2020-06 , net

— — ( 61,604 ) 9,399 — ( 52,205 )

Repurchase of common stock ( 242 ) ( 2 ) ( 22,581 ) — — ( 22,583 )

4 unchanged sentences

— — — ( 2,455 ) — ( 2,455 )

Other comprehensive income — — — — 280 280

Net (loss) — — — ( 6,617 ) — ( 6,617 )

March 31, 2021 81,246 $ 812 $ 140,558 $ 340,223 $ ( 2,668 ) $ 478,925

Repurchase of common stock ( 81 ) ( 1 ) ( 10,245 ) — — ( 10,246 )

Issuance of common stock for stock compensation plans 267 3 ( 16,199 ) — — ( 16,196 )

Issuance of common stock under the employee stock purchase plan 24 1 2,858 — — 2,859

Stock-based compensation — — 30,698 — — 30,698

Cash dividends declared ($ 0.03 per share)

— — — ( 2,445 ) — ( 2,445 )

Other comprehensive income — — — — 1,582 1,582

Net income — — — 37,291 — 37,291

June 30, 2021 81,456 $ 815 $ 147,670 $ 375,069 $ ( 1,086 ) $ 522,468

Repurchase of common stock ( 96 ) ( 1 ) ( 12,795 ) — — ( 12,796 )

Issuance of common stock for stock compensation plans 286 3 ( 18,117 ) — — ( 18,114 )

Issuance of common stock under the employee stock purchase plan 24 — 2,639 — — 2,639

Stock-based compensation — — 28,701 — — 28,701

Cash dividends declared ($ 0.03 per share)

— — — ( 2,451 ) — ( 2,451 )

Other comprehensive (loss) — — — — ( 2,548 ) ( 2,548 )

Net (loss) — — — ( 379 ) — ( 379 )

September 30, 2021 81,670 $ 817 $ 148,098 $ 316,150 $ ( 5,433 ) $ 459,632

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except per share amounts)

Paid-In Capital Retained Earnings (Accumulated Deficit) Accumulated Other Comprehensive (Loss)

Stockholders’ Equity

of Shares Amount

March 31, 2022 81,802 $ 818 $ 141,771 $ 273,615 $ ( 9,536 ) $ 406,668

December 31, 2022 82,436 $ 824 $ 229,602 $ ( 76,513 ) $ ( 23,070 ) $ 130,843

Repurchase of common stock ( 242 ) ( 2 ) ( 22,581 ) — — ( 22,583 )

Issuance of common stock for stock compensation plans 452 4 668 — — 672

3 unchanged sentences

— — ( 2,488 ) — — ( 2,488 )

Other comprehensive (loss) — — — — ( 2,548 ) ( 2,548 )

Other comprehensive income — — — — 1,543 1,543

Net (loss) — — — ( 20,774 ) — ( 20,774 )

March 31, 2023 82,940 $ 829 $ 272,481 $ ( 97,287 ) $ ( 21,527 ) $ 154,496

Repurchase of common stock ( 38 ) — ( 1,925 ) — — ( 1,925 )

Issuance of common stock for stock compensation plans 117 1 ( 3,252 ) — — ( 3,251 )

Issuance of common stock under the employee stock purchase plan 59 — 2,357 — — 2,357

Stock-based compensation — — 31,300 — — 31,300

Cash dividends declared ($ 0.03 per share)

— — — ( 2,459 ) — ( 2,459 )

Other comprehensive (loss) — — — — ( 12,615 ) ( 12,615 )

Net (loss) — — — ( 286,296 ) — ( 286,296 )

June 30, 2022 81,940 $ 819 $ 170,251 $ ( 15,140 ) $ ( 22,151 ) $ 133,779

Issuance of common stock for stock compensation plans 138 2 ( 2,198 ) — — ( 2,196 )

Issuance of common stock under the employee stock purchase plan 86 1 2,362 — — 2,363

Stock-based compensation — — 33,774 — — 33,774

Cash dividends declared ($ 0.03 per share)

— — — ( 2,466 ) — ( 2,466 )

Other comprehensive (loss) — — — — ( 6,773 ) ( 6,773 )

Net (loss) — — — ( 93,520 ) — ( 93,520 )

September 30, 2022 82,164 $ 822 $ 204,189 $ ( 111,126 ) $ ( 28,924 ) $ 64,961

See notes to unaudited condensed consolidated financial statements.

2 unchanged sentences

(in thousands)

Nine Months Ended

September 30,

Three Months Ended

Operating activities

Net (loss) $ ( 20,774 ) $ ( 379 )

Adjustments to reconcile net (loss) to cash (used in) operating activities

Adjustments to reconcile net (loss) to cash provided by operating activities

Stock-based compensation 42,557 28,227

Deferred income taxes ( 126 ) ( 9,295 )

Loss on capped call transactions 56,381 7,543

(Gain) loss on capped call transactions ( 3,206 ) 30,560

Amortization of deferred commissions 14,277 17,221

1 unchanged sentence

Amortization of intangible assets and depreciation 4,724 4,171

Foreign currency transaction (gain) loss ( 8,415 ) 4,983

Foreign currency transaction loss (gain) 2,675 ( 2,876 )

Other non-cash ( 5,729 ) ( 1,100 )

Change in operating assets and liabilities, net 29,115 ( 55,332 )

Cash (used in) operating activities ( 13,446 ) ( 5,321 )

Cash provided by operating activities 68,107 15,116

Investing activities

2 unchanged sentences

Sales of investments — 13,350

Payments for acquisitions, net of cash acquired ( 922 ) ( 4,993 )

Investment in property and equipment ( 11,487 ) ( 6,657 )

Cash provided by investing activities 10,104 42,730

Cash (used in) investing activities ( 14,413 ) ( 6,082 )

Financing activities

Proceeds from employee stock purchase plan 7,166 7,786

Repurchases of convertible senior notes ( 29,901 ) —

Proceeds from settlement of capped calls transactions 188 —

Dividend payments to stockholders ( 2,474 ) ( 2,454 )

Proceeds from employee stock purchase plan 2,143 2,446

Proceeds from stock option exercises 1,779 —

Common stock repurchases ( 1,107 ) ( 35,910 )

Cash (used in) financing activities ( 29,372 ) ( 35,918 )

Effect of exchange rate changes on cash and cash equivalents ( 5,513 ) ( 1,466 )

Net (decrease) in cash and cash equivalents ( 52,339 ) ( 55,488 )

Cash and cash equivalents, beginning of period 159,965 171,899

Cash and cash equivalents, end of period $ 107,626 $ 116,411

Effect of exchange rate changes on cash, cash equivalents, and restricted cash 782 ( 310 )

Net increase (decrease) in cash, cash equivalents, and restricted cash 25,104 ( 27,194 )

Cash, cash equivalents, and restricted cash, beginning of period 145,054 159,965

Cash, cash equivalents, and restricted cash, end of period $ 170,158 $ 132,771

Cash and cash equivalents $ 168,318 $ 132,771

Restricted cash included in other long-term assets 1,840 —

Total cash, cash equivalents and restricted cash $ 170,158 $ 132,771

See notes to unaudited condensed consolidated financial statements.

9 unchanged sentences

The operating results for the interim periods presented do not necessarily indicate the expected results for the full year 2023.

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

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

MARKETABLE SECURITIES

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

(in thousands) Amortized Cost Unrealized Gains Unrealized Losses Fair Value Amortized Cost Unrealized Gains Unrealized Losses Fair Value

2 unchanged sentences

$ 157,269 $ 8 $ ( 1,713 ) $ 155,564 $ 154,866 $ — $ ( 2,699 ) $ 152,167

As of September 30, 2022, marketable securities’ maturities ranged from November 2022 to November 2024, with a weighted-average remaining maturity of 0.7 years.

As of March 31, 2023, marketable securities’ maturities ranged from April 2023 to January 2026, with a weighted-average remaining maturity of 0.5 years.

RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE

(in thousands)

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Accounts receivable $ 201,585 $ 255,150

6 unchanged sentences

(Dollars in thousands)

September 30, 2022

March 31, 2023

1 year or less $ 196,279 71 %

4 unchanged sentences

(Dollars in thousands)

September 30, 2022

March 31, 2023

2023 $ 51,895 19 %

6 unchanged sentences

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Major clients

Clients accounting for 10% or more of the Company’s total receivables:

September 30, 2022 December 31, 2021

Accounts receivable * 1 %

Unbilled receivables * 15 %

Total receivables * 10 %

* Client accounted for less than 10% of receivables.

Contract assets

1 unchanged sentence

(in thousands)

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Contract assets (1)

8 unchanged sentences

(in thousands)

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Deferred revenue $ 342,591 $ 325,212

2 unchanged sentences

(1) Included in other long-term liabilities.

The change in deferred revenue in the nine months ended September 30, 2022 was primarily due to new billings in advance of revenue recognition offset by $ 252.8 million of revenue recognized during the period that was included in deferred revenue as of December 31, 2021.

The increase in deferred revenue in the three months ended March 31, 2023 was primarily due to new billings in advance of revenue recognition exceeding the $ 139.7 million of revenue recognized during the period that was included in deferred revenue as of December 31, 2022.

DEFERRED COMMISSIONS

(in thousands)

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Deferred commissions (1)

2 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

(in thousands) 2023 2022

2 unchanged sentences

(1) Included in selling and marketing expense .

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

GOODWILL AND OTHER INTANGIBLES

Change in goodwill:

Nine Months Ended

September 30,

Three Months Ended

(in thousands)

January 1, $ 81,399 $ 81,923

Acquisition — 2,701

Currency translation adjustments 35 108

September 30, $ 81,201 $ 81,954

March 31, $ 81,434 $ 82,031

Intangible assets are recorded at cost and amortized using the straight-line method over their estimated useful lives.

September 30, 2022

March 31, 2023

(in thousands) Useful Lives Cost Accumulated Amortization Net Book Value (1)

5 unchanged sentences

(1) Included in other long-term assets.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2022

8 unchanged sentences

(1) Included in other long-term assets.

Future estimated intangibles assets amortization:

(in thousands)

March 31, 2023

Remainder of 2023 $ 2,884

Amortization of intangible assets:

Three Months Ended

September 30, Nine Months Ended

September 30,

(in thousands) 2023 2022

Cost of revenue

$ 705 $ 629 $ 2,017 $ 1,887

Selling and marketing

$ 1,049 $ 972

$ 1,048 $ 1,002 $ 3,045 $ 3,006

Future estimated intangibles assets amortization:

(in thousands)

September 30, 2022

Remainder of 2022 $ 1,048

OTHER ASSETS AND LIABILITIES

Other current assets

(in thousands) September 30, 2022 December 31, 2021

(in thousands) March 31, 2023 December 31, 2022

Income tax receivables $ 22,344 $ 25,354

2 unchanged sentences

$ 73,982 $ 80,388

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Other long-term assets

(in thousands) September 30, 2022 December 31, 2021

Deferred income taxes $ 6,041 $ 180,656

(in thousands) March 31, 2023 December 31, 2022

Deferred commissions $ 124,069 $ 130,195

Right of use assets 72,549 76,114

Capped call transactions 3,583 59,964

Property and equipment 55,775 55,056

Venture investments 16,265 13,069

Intangible assets 11,921 14,063

Contract assets 11,323 16,470

Intangible assets 9,861 10,888

Capped call transactions 5,600 2,582

Deferred income taxes 4,827 4,795

Restricted cash 1,840 —

Other 22,866 24,820

1 unchanged sentence

Other current liabilities

(in thousands) September 30, 2022 December 31, 2021

(in thousands) March 31, 2023 December 31, 2022

Operating lease liabilities $ 15,314 $ 14,976

1 unchanged sentence

$ 17,802 $ 17,450

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Other long-term liabilities

(in thousands) September 30, 2022 December 31, 2021

(in thousands) March 31, 2023 December 31, 2022

Deferred revenue $ 3,323 $ 3,552

Income taxes payable 3,578 3,207

Other 7,743 8,369

$ 14,644 $ 15,128

Corporate headquarters

In February 2021, the Company agreed to accelerate its exit from its previous corporate headquarters to October 1, 2021, in exchange for a one-time payment from its landlord of $ 18 million, which was amortized over the remaining lease term.

The exit accelerated depreciation on the related leasehold improvements and reduced the Company’s future lease liabilities by $ 21.1 million and right of use assets by $ 20.3 million.

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

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

New Waltham office

On July 6, 2021, the Company 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 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.

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

Three Months Ended

September 30, Nine Months Ended

September 30,

(in thousands) 2023 2022

Fixed lease costs $ 5,766 $ 5,093

$ 4,688 $ ( 3,108 ) $ 14,747 $ ( 6,780 )

Short-term lease costs 781 806

1 unchanged sentence

$ 8,522 $ 6,663

(1) The lower fixed lease costs in the nine months ended September 30, 2021 was due to the modification of the corporate headquarters lease.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Right of use assets and lease liabilities

(in thousands) September 30, 2022 December 31, 2021

(in thousands) March 31, 2023 December 31, 2022

Right of use assets (1)

3 unchanged sentences

Long-term operating lease liabilities $ 76,082 $ 79,152

(1) Represents the Company’s right to use the leased asset during the lease term.

(1) Included in other long-term assets.

1 unchanged sentence

Weighted-average remaining lease term and discount rate for the Company’s leases were:

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Weighted-average remaining lease term 7.3 years 7.5 years

4 unchanged sentences

Maturities of lease liabilities:

(in thousands) September 30, 2022

(in thousands) March 31, 2023

Remainder of 2023 $ 14,003

2027 and thereafter 48,397

Thereafter 30,090

Total lease payments 106,367

2 unchanged sentences

Cash flow information

Nine Months Ended

September 30,

Three Months Ended

(in thousands) 2023 2022

Cash paid for leases $ 11,628 $ 14,403

Cash paid for operating leases, net of tenant improvement allowances $ 5,038 $ 3,650

Right of use assets recognized for new leases and amendments (non-cash) $ 721 $ 3,854

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Convertible senior notes and capped calls

3 unchanged sentences

The Notes accrue interest at an annual rate of 0.75 %, payable semi-annually in arrears on March 1 and September 1, beginning on September 1, 2020.

In the three months ended March 31, 2023, the Company recorded a gain of $ 2.8 million in other income, net from the repurchase of Notes representing $ 33 million in aggregate principal amount.

Conversion rights

5 unchanged sentences

• During any calendar quarter beginning after June 30, 2020 (and only during such calendar quarter), if the last reported sale price per share of the Company’s common stock exceeds 130 % of the conversion price for each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

• During the five consecutive business days immediately after any five consecutive trading day period (the “Measurement Period”), if the trading price per $1,000 principal amount of Notes for each trading day of the Measurement Period was less than 98 % of the product of the last reported sale price per share of common stock on such trading day and the conversion rate on such trading day.

• 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).

As of September 30, 2022, the Notes were not eligible for conversion.

As of March 31, 2023, the Notes were not eligible for conversion.

Repurchase rights

3 unchanged sentences

Carrying value of the Notes:

(in thousands) September 30, 2022 December 31, 2021

(in thousands) March 31, 2023 December 31, 2022

Principal $ 567,000 $ 600,000

3 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

(in thousands) 2023 2022

3 unchanged sentences

$ 1,853 $ 1,844

$ 1,849 $ 1,802 $ 5,538 $ 5,400

The effective interest rate for the Notes:

Nine Months Ended

September 30,

Weighted-average effective interest rate 1.2 % 1.2 %

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The average interest rate on the Notes in the three months ended March 31, 2023 and 2022 was 1.2 %.

Future payments of principal and contractual interest:

September 30, 2022

March 31, 2023

(in thousands) Principal Interest Total

2023 $ — $ 4,500 $ 4,500

Remainder of 2023 $ — $ 1,772 $ 1,772

2024 — 4,253 4,253

3 unchanged sentences

In February 2020, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”) with certain financial institutions.

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

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

In the three months ended March 31, 2023, Capped Call Transactions covering approximately 0.2 million shares were settled for proceeds of $ 0.2 million.

As of March 31, 2023, Capped Call Transactions representing approximately 4.2 million shares were outstanding.

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 specified extraordinary events affecting the Company, including mergers and tender offers.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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.

1 unchanged sentence

Change in capped call transactions:

Nine Months Ended

September 30,

Three Months Ended

(in thousands) 2023 2022

January 1, $ 2,582 $ 59,964

Settlements ( 188 ) —

Fair value adjustment 3,206 ( 30,560 )

September 30, $ 3,583 $ 76,054

March 31, $ 5,600 $ 29,404

Credit facility

1 unchanged sentence

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.

Subject to specific conditions and the agreement of the financial institutions lending the additional amount, the aggregate commitment may be increased to $ 200 million.

The commitments expire on November 4, 2024, and any outstanding loans will be payable on such date.

3 unchanged sentences

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

• Beginning with the fiscal quarter ended March 31, 2023 and ending with the fiscal year ended December 31, 2023, maintain

(in thousands) March 31, 2023 June 30, 2023 September 30, 2023 December 31, 2023

Minimum Consolidated EBITDA (as defined in the Credit Facility) $ 38,862 $ 59,894 $ 95,597 $ 214,590

• Beginning with the fiscal quarter ended March 31, 2024, 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 September 30, 2022 and December 31, 2021, the Company had no outstanding cash borrowings under the Credit Facility.

As of September 30, 2022, the Company had $ 27.3 million in outstanding letters of credit which reduce the available borrowing capacity under the Credit Facility.

As of March 31, 2023 and December 31, 2022, the Company had no outstanding cash borrowings under the Credit Facility.

As of March 31, 2023, the Company had $ 27.3 million in outstanding letters of credit, which reduce the Company’s available borrowing capacity under the Credit Facility.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

RESTRUCTURING

Go-to-market plan and Salem office

During the fourth quarter of 2022, management committed to a restructuring plan aligned with the Company’s target organization go-to-market strategy.

The plan resulted in a restructuring expense of $ 21.7 million, 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.

Accrued employee severance and related benefits:

(in thousands) 2023

January 1, $ 18,573

Costs incurred 220

Cash disbursements ( 14,458 )

Currency translation adjustments 181

March 31, $ 4,516

2023 office space closure

In the three months ended March 31, 2023, the Company recognized an impairment of $ 1.2 million on its operating lease right of use assets primarily due to the closure of leased office space in Poland.

FAIR VALUE MEASUREMENTS

10 unchanged sentences

The Company applies judgment when determining expected volatility.

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

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.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Assets and liabilities measured at fair value on a recurring basis:

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

(in thousands) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total

7 unchanged sentences

(2) Investments in privately-held companies.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Changes in venture investments:

Nine Months Ended

September 30,

Three Months Ended

(in thousands) 2023 2022

1 unchanged sentence

New investments 400 —

Sales of investments ( 3,954 ) ( 400 )

Changes in foreign exchange rates 58 ( 61 )

Changes in fair value:

included in other income 5,989 100

included in other comprehensive income 2,502 1,220

September 30, $ 11,910 $ 9,713

included in other income, net

included in other comprehensive (loss)

( 1,064 ) 2,502

March 31, $ 16,265 $ 12,830

The carrying value of certain other financial instruments, including receivables and accounts payable, approximates fair value due to these items’ short maturities.

Fair value of the Notes

The Notes’ fair value (including the conversion feature embedded in the Notes) was $ 488.3 million as of September 30, 2022 and $ 642.0 million as of December 31, 2021.

The fair value of the Notes outstanding (including the embedded conversion feature) was $ 507.8 million as of March 31, 2023 and $ 521.1 million as of December 31, 2022.

In the three months ended March 31, 2023 the Company repurchased Notes representing $ 33 million in aggregate principal amount.

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.

1 unchanged sentence

Three Months Ended

September 30, Nine Months Ended

September 30,

(Dollars in thousands)

$ 184,519 56 % $ 217,272 58 %

$ 148,200 55 % $ 132,016 52 % $ 513,197 56 % $ 515,881 58 %

Other Americas 15,011 5 % 45,751 12 %

5 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

(in thousands)

2022 2021 2022 2021

Perpetual license $ 403 $ 7,440

9 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

(in thousands) 2023 2022

9 unchanged sentences

Expected future revenue from existing non-cancellable contracts:

As of September 30, 2022:

As of March 31, 2023:

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

7 unchanged sentences

$ 338,361 $ 866,723 $ 45,338 $ 7,514 $ 50,148 $ 1,308,084 100 %

As of September 30, 2021:

As of March 31, 2022:

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

9 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

(in thousands) 2023 2022

4 unchanged sentences

Research and development

7,724 6,231 22,425 19,343

General and administrative

$ 42,557 $ 28,227

$ 33,774 $ 28,695 $ 93,301 $ 89,483

Income tax benefit

$ ( 672 ) $ ( 5,311 )

As of September 30, 2022, the Company had $ 161.0 million of unrecognized stock-based compensation expense, net of estimated forfeitures, which is expected to be recognized over a weighted-average period of 2.1 years.

Nine Months Ended

September 30, 2022

As of March 31, 2023, the Company had $ 178.6 million of unrecognized stock-based compensation expense, net of estimated forfeitures, which is expected to be recognized over a weighted-average period of 2 years.

Three Months Ended

March 31, 2023

(in thousands) Shares Total Fair Value

2 unchanged sentences

Non-qualified stock options

4,529 $ 102,332

Common stock 14 $ 600

PEGASYSTEMS INC.

2 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

(Dollars in thousands) 2023 2022

Provision for (benefit from) income taxes $ 5,249 $ ( 7,683 )

Effective income tax rate (benefit rate) 100 % ( 68 ) %

The change in the effective income tax rate (benefit rate) in the nine months ended September 30, 2022 was primarily due to the recognition of a $ 191.9 million valuation allowance recognized at June 30, 2022, on the Company’s U.S.

and U.K deferred tax assets.

As a result of recording the valuation allowance, the Company is no longer recording any income tax benefit on its U.S and U.K losses.

The $ 11.7 million provision for (benefit from) income taxes for the three months ended September 30, 2022 primarily represents non-U.K.

foreign income taxes.

Effective income tax rate ( 34 ) % 95 %

The effective income tax rate in the three months ended March 31, 2023 was impacted by the valuation allowance on the Company’s U.S.

deferred tax assets and current taxes payable in the U.S.

as a result of projecting taxable income that cannot be fully offset by net operating losses and available tax credits.

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

4 unchanged sentences

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 our 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.

Accordingly, the Company recorded a valuation allowance of $ 191.9 million in income tax expense during the three months ended June 30, 2022.

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

The Company intends to continue maintaining a full valuation allowance on the Company’s U.S and U.K.

deferred tax assets until there is sufficient evidence to support the realization of these deferred tax assets.

(LOSS) PER SHARE

3 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

(in thousands, except per share amounts) 2023 2022

7 unchanged sentences

Outstanding anti-dilutive stock options and RSUs (4)

3,019 5,815 3,589 6,136

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

(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.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(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).

If the outstanding conversion options were fully exercised, the Company would issue approximately 4.2 million shares as of March 31, 2023.

(3) The Company’s Capped Call Transactions represent the equivalent of approximately 4.2 million shares of the Company’s common stock (representing the number of shares for which the Notes are initially convertible) as of March 31, 2023.

4 unchanged sentences

Leases" for additional information.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Legal proceedings

1 unchanged sentence

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 September 30, 2022 and December 31, 2021, the Company has no accrued losses for litigation.

Pegasystems Inc.

& Business Process Management Inc.

On July 3, 2019, the Company filed suit in Massachusetts federal court against Appian Corp.

(“Appian”) and Business Process Management, Inc.

(“BPM”) relating to a BPM “Market Report” that Appian had used to promote itself against the Company.

Pegasystems Inc.

& Business Process Management Inc., No.

1:19-cv-11461 (D.

On April 15, 2022, each of the parties filed motions for summary judgment with the court.

On September 30, 2022, the court entered an order allowing in part and denying in part each party’s motion for summary judgment, thereby narrowing the potential issues for trial.

On October 24, 2022, the court entered an order setting a trial date of January 3, 2023.

The Company continues to believe 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.

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 March 31, 2023 and December 31, 2022.

Pegasystems Inc.

5 unchanged sentences

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 in the amount of $ 2,036,860,045 for trade secret misappropriation and $ 1.00 for the violation of the Virginia Computer Crimes Act.

On September 15, 2022, the circuit court of Fairfax County entered judgment in the amount 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.

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.

This appeals process could potentially take years to complete.

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.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

6 unchanged sentences

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 vigorously defend against these claims.

The Company moved to dismiss the consolidated amended complaint on December 19, 2022.

The hearing on the motion to dismiss is scheduled for May 17, 2023.

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.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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.

On January 10, 2023, the Court entered an order staying the matter until after a final judgment dismissing the City of Fort Lauderdale matter referenced above, the denial of a motion to dismiss in the City of Fort Lauderdale action, or if any related derivative complaint is filed and not stayed for the same or longer duration.

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

Beginning in March 2023, the U.S.

Securities and Exchange Commission (“SEC”) has requested certain information relating to, among other things, the accounting treatment of the Company’s above-described litigation with Appian Corporation.

The Company is fully cooperating with the SEC’s requests.

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-Q

Item 1. Financial Statements