What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2023-07-26 compared with 2023-04-26 · 145 added, 97 removed, 534 unchanged (31% of the section changed)

3 unchanged sentences

(in thousands)

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Current assets:

28 unchanged sentences

83,212 and 82,436 shares issued and outstanding at

March 31, 2023 and December 31, 2022, respectively

June 30, 2023 and December 31, 2022, respectively

Additional paid-in capital 310,016 229,602

9 unchanged sentences

Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

Subscription services $ 197,105 $ 171,832 $ 384,614 $ 341,865

16 unchanged sentences

Total operating expenses 243,418 264,262 493,162 533,752

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

(Loss) from operations ( 41,290 ) ( 85,040 ) ( 63,496 ) ( 66,420 )

Foreign currency transaction (loss) gain ( 3,290 ) 1,713 ( 5,965 ) 4,589

1 unchanged sentence

Interest expense ( 1,778 ) ( 1,944 ) ( 3,696 ) ( 3,890 )

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

(Loss) income on capped call transactions ( 1,361 ) ( 18,945 ) 1,845 ( 49,505 )

Other income, net 5,702 3,785 12,285 6,526

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

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

(Loss) before provision for income taxes ( 40,203 ) ( 100,122 ) ( 55,728 ) ( 108,184 )

Provision for income taxes 6,601 186,174 11,850 178,491

Net (loss) $ ( 46,804 ) $ ( 286,296 ) $ ( 67,578 ) $ ( 286,675 )

10 unchanged sentences

Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

Net (loss) $ ( 46,804 ) $ ( 286,296 ) $ ( 67,578 ) $ ( 286,675 )

Other comprehensive income (loss), net of tax

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

Unrealized (loss) on available-for-sale securities ( 195 ) ( 1,149 ) ( 241 ) ( 927 )

Foreign currency translation adjustments 361 ( 11,466 ) 1,950 ( 14,236 )

18 unchanged sentences

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

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

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

7 unchanged sentences

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

Issuance of common stock for stock compensation plans 225 2 1,824 — — 1,826

Issuance of common stock under the employee stock purchase plan 47 1 1,980 — — 1,981

Stock-based compensation — — 36,227 — — 36,227

Cash dividends declared ($ 0.03 per share)

— — ( 2,496 ) — — ( 2,496 )

Other comprehensive income — — — — 166 166

Net (loss) — — — ( 46,804 ) — ( 46,804 )

June 30, 2023 83,212 $ 832 $ 310,016 $ ( 144,091 ) $ ( 21,361 ) $ 145,396

See notes to unaudited condensed consolidated financial statements.

2 unchanged sentences

(in thousands)

Three Months Ended

Six Months Ended

Operating activities

Net (loss) $ ( 67,578 ) $ ( 286,675 )

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

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

Stock-based compensation 78,784 59,527

7 unchanged sentences

Change in operating assets and liabilities, net 61,959 ( 32,625 )

Cash provided by operating activities 68,107 15,116

Cash provided by (used in) operating activities 113,752 ( 5,069 )

Investing activities

2 unchanged sentences

Sales of investments 10,725 14,839

Payments for acquisitions, net of cash acquired — ( 922 )

Investment in property and equipment ( 13,933 ) ( 11,863 )

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

Cash provided by (used in) investing activities 15,979 ( 1,523 )

Financing activities

23 unchanged sentences

All intercompany transactions and balances were eliminated in consolidation.

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

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

MARKETABLE SECURITIES

March 31, 2023 December 31, 2022

June 30, 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

$ 126,855 $ — $ ( 916 ) $ 125,939 $ 154,866 $ — $ ( 2,699 ) $ 152,167

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.

As of June 30, 2023, marketable securities’ maturities ranged from July 2023 to January 2026, with a weighted average remaining maturity of 0.4 years.

RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE

(in thousands)

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Accounts receivable $ 163,915 $ 255,150

3 unchanged sentences

Unbilled receivables

Unbilled receivables are client-committed amounts for which revenue recognition precedes billing, and billing is solely subject to the passage of time.

Unbilled receivables are client-committed amounts for which revenue recognition precedes billing.

Billing is solely subject to the passage of time.

Unbilled receivables by expected billing date:

(Dollars in thousands)

March 31, 2023

June 30, 2023

1 year or less $ 182,257 72 %

4 unchanged sentences

(Dollars in thousands)

March 31, 2023

June 30, 2023

2023 $ 62,243 25 %

9 unchanged sentences

(in thousands)

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Contract assets (1)

8 unchanged sentences

(in thousands)

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Deferred revenue $ 311,330 $ 325,212

2 unchanged sentences

(1) Included in other long-term liabilities.

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 revenue decreased in the six months ended June 30, 2023 primarily due to $ 230.3 million of revenue recognized during the period included in deferred revenue as of December 31, 2022 exceeded new billings in advance of revenue recognition.

DEFERRED COMMISSIONS

(in thousands)

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Deferred commissions (1)

2 unchanged sentences

Three Months Ended

June 30, Six Months Ended

(in thousands) 2023 2022 2023 2022

1 unchanged sentence

$ 14,750 $ 10,934 $ 29,027 $ 28,155

(1) Included in selling and marketing expense .

(1) Included in selling and marketing.

GOODWILL AND OTHER INTANGIBLES

Three Months Ended

Six Months Ended

(in thousands)

1 unchanged sentence

Currency translation adjustments 194 ( 206 )

March 31, $ 81,434 $ 82,031

June 30, $ 81,593 $ 81,717

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

March 31, 2023

June 30, 2023

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

19 unchanged sentences

(in thousands)

March 31, 2023

June 30, 2023

Remainder of 2023 $ 1,932

1 unchanged sentence

Three Months Ended

June 30, Six Months Ended

(in thousands) 2023 2022 2023 2022

Cost of revenue

$ 621 $ 683 $ 1,327 $ 1,312

Selling and marketing

342 342 685 685

$ 963 $ 1,025 $ 2,012 $ 1,997

OTHER ASSETS AND LIABILITIES

Other current assets

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

(in thousands) June 30, 2023 December 31, 2022

Income tax receivables $ 21,383 $ 25,354

3 unchanged sentences

Other long-term assets

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

(in thousands) June 30, 2023 December 31, 2022

Deferred commissions $ 114,406 $ 130,195

10 unchanged sentences

Other current liabilities

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

(in thousands) June 30, 2023 December 31, 2022

Operating lease liabilities $ 14,773 $ 14,976

4 unchanged sentences

Other long-term liabilities

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

(in thousands) June 30, 2023 December 31, 2022

Deferred revenue $ 3,020 $ 3,552

3 unchanged sentences

Three Months Ended

June 30, Six Months Ended

(in thousands) 2023 2022 2023 2022

4 unchanged sentences

Right of use assets and lease liabilities

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

(in thousands) June 30, 2023 December 31, 2022

Right of use assets (1)

6 unchanged sentences

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

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Weighted-average remaining lease term 7.1 years 7.5 years

4 unchanged sentences

Maturities of lease liabilities:

(in thousands) March 31, 2023

(in thousands) June 30, 2023

Remainder of 2023 $ 8,596

4 unchanged sentences

Cash flow information

Three Months Ended

Six Months Ended

(in thousands) 2023 2022

7 unchanged sentences

No principal payments are due before maturity.

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.

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

In the three and six months ended June 30, 2023, the Company recognized gains of $ 5.1 million and $ 7.9 million, respectively, in other income, net from repurchases of Notes representing $ 64.7 million and $ 97.7 million, respectively, in aggregate principal amount.

Conversion rights

7 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).

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

As of June 30, 2023, the Notes were not eligible for conversion.

Repurchase rights

3 unchanged sentences

Carrying value of the Notes:

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

(in thousands) June 30, 2023 December 31, 2022

Principal $ 502,270 $ 600,000

3 unchanged sentences

Three Months Ended

June 30, Six Months Ended

(in thousands) 2023 2022 2023 2022

3 unchanged sentences

647 720 1,375 1,439

$ 1,644 $ 1,845 $ 3,497 $ 3,689

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:

March 31, 2023

The average interest rate on the Notes in the six months ended June 30, 2023 and 2022 was 1.2 %.

Future payments:

June 30, 2023

(in thousands) Principal Interest Total

6 unchanged sentences

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.

In the three and six months ended June 30, 2023, Capped Call Transactions covering approximately 0.5 million and 0.7 million shares, respectively, were settled for proceeds of $ 0.1 million and $ 0.3 million, respectively.

As of June 30, 2023, Capped Call Transactions representing approximately 3.7 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 .

3 unchanged sentences

Change in capped call transactions:

Three Months Ended

Six Months Ended

(in thousands) 2023 2022

2 unchanged sentences

Fair value adjustment 1,845 ( 49,505 )

March 31, $ 5,600 $ 29,404

June 30, $ 4,086 $ 10,459

Credit facility

5 unchanged sentences

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

• Beginning with the fiscal quarter ended March 31, 2022 and ending with the fiscal quarter ended December 31, 2023, Pegasystems Inc.

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

• Through December 31, 2023, the parent company must maintain at least $ 200 million in cash, investments, and availability under the Credit Facility and the Company must maintain:

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

1 unchanged sentence

• 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 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.

As of June 30, 2023 and December 31, 2022, the Company had $ 27.3 million in outstanding letters of credit, which reduced the Company’s available borrowing capacity under the Credit Facility and no outstanding cash borrowings under the Credit Facility.

PEGASYSTEMS INC.

1 unchanged sentence

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.

The Company has undertaken the following restructuring activities as it optimizes its go-to-market strategy and reassesses its office space needs:

Three months ended Expense

Employee severance and related benefits and closure of a US office December 31, 2022 $ 21,743

Office space reduction March 31, 2023 $ 1,241

Employee severance and related benefits June 30, 2023 $ 1,581

Accrued employee severance and related benefits:

Change for all restructuring actions:

Six Months Ended

(in thousands) 2023

3 unchanged sentences

Currency translation adjustments 185

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.

June 30, $ 3,624

FAIR VALUE MEASUREMENTS

5 unchanged sentences

• Level 2 - significant other inputs that are observable either directly or indirectly;

• Level 3 - significant unobservable inputs on which there is little or no market data, which require the Company to develop its own assumptions.

• Level 3 - significant unobservable inputs with little or no market data, which require the Company to develop its own assumptions.

This hierarchy requires the Company to use observable market data when available and minimize unobservable inputs when determining fair value.

5 unchanged sentences

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

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

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

10 unchanged sentences

Changes in venture investments:

Three Months Ended

Six Months Ended

(in thousands) 2023 2022

1 unchanged sentence

New investments 400 400

Sales of investments ( 2,773 ) ( 165 )

Changes in foreign exchange rates 119 ( 290 )

3 unchanged sentences

( 1,908 ) 2,502

March 31, $ 16,265 $ 12,830

June 30, $ 13,382 $ 16,073

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 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 of the Notes outstanding (including the embedded conversion feature) was $ 460.8 million as of June 30, 2023 and $ 521.1 million as of December 31, 2022.

In the six months ended June 30, 2023 the Company repurchased Notes representing $ 97.7 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

June 30, Six Months Ended

(Dollars in thousands)

2023 2022 2023 2022

$ 150,385 50 % $ 147,725 54 % $ 334,904 54 % $ 364,997 55 %

Other Americas 19,505 7 % 16,261 6 % 34,516 6 % 62,012 10 %

5 unchanged sentences

Three Months Ended

June 30, Six Months Ended

(in thousands)

2023 2022 2023 2022

Perpetual license $ 1,579 $ 2,266 $ 1,982 $ 9,706

9 unchanged sentences

Three Months Ended

June 30, Six Months Ended

(in thousands) 2023 2022 2023 2022

4 unchanged sentences

Subscription 238,302 213,432 510,338 520,998

Perpetual license 403 7,440

Consulting 58,387 58,639 111,420 119,940

Perpetual license 1,579 2,266 1,982 9,706

$ 298,268 $ 274,337 $ 623,740 $ 650,644

1 unchanged sentence

Expected future revenue from existing non-cancellable contracts:

As of March 31, 2023:

As of June 30, 2023:

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

7 unchanged sentences

$ 305,825 $ 861,984 $ 45,406 $ 7,231 $ 45,650 $ 1,266,096 100 %

As of March 31, 2022:

As of June 30, 2022:

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

9 unchanged sentences

Three Months Ended

June 30, Six Months Ended

(in thousands) 2023 2022 2023 2022

4 unchanged sentences

Research and development

7,851 7,355 16,911 14,701

General and administrative

5,853 4,733 12,777 8,278

$ 36,227 $ 31,300 $ 78,784 $ 59,527

Income tax benefit

$ ( 581 ) $ ( 543 ) $ ( 1,253 ) $ ( 905 )

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

As of June 30, 2023, the Company had $ 171.0 million of unrecognized stock-based compensation expense, net of estimated forfeitures, which is expected to be recognized over a weighted-average period of 1.9 years.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Six Months Ended

June 30, 2023

(in thousands) Shares Total Fair Value

2 unchanged sentences

Non-qualified stock options

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Performance stock options (1)

(1) Performance stock options allow the holder to purchase a specified number of common stock shares at an exercise price equal to or greater than the shares' fair market value at the grant date.

The options usually vest over two years and expire ten years from the grant date, subject to specific performance conditions.

Effective income tax rate

Three Months Ended

June 30, Six Months Ended

(Dollars in thousands) 2023 2022 2023 2022

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

Provision for income taxes $ 6,601 $ 186,174 $ 11,850 $ 178,491

Effective income tax rate ( 21 ) % ( 165 ) %

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’s effective income tax rate in the six months ended June 30, 2023 was impacted by the valuation allowance on the Company’s deferred tax assets in the U.S.

Also, impacted by current taxes payable in the U.S.

due to projected taxable income partially 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.

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 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.

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.

A deferred tax valuation allowance requires significant judgment and uncertainties, including assumptions about future taxable income.

Quarterly, the Company reassesses the need for a valuation allowance on its net deferred tax assets by weighting all available and objectively verifiable negative and positive evidence, including projected future reversals of existing taxable temporary differences, committed contractual backlog (“Backlog”), projected future taxable income, including the impact of enacted legislation, tax-planning strategies, and recent operating results.

The Company intends to maintain a valuation allowance on the Company’s U.S.

net deferred tax assets until sufficient evidence exists to support the realization of these deferred tax assets.

(LOSS) PER SHARE

3 unchanged sentences

Three Months Ended

June 30, Six Months Ended

(in thousands, except per share amounts) 2023 2022 2023 2022

7 unchanged sentences

Outstanding anti-dilutive stock options and RSUs (4)

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

1,354 3,569 1,351 3,873

(1) All dilutive securities are excluded in periods of loss 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 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.

If the outstanding conversion options were fully exercised, the Company would issue approximately 3.7 million shares as of June 30, 2023.

(3) The Company’s Capped Call Transactions represent the equivalent of approximately 3.7 million shares of the Company’s common stock (representing the number of shares for which the Notes are initially convertible) as of June 30, 2023.

2 unchanged sentences

These awards may be dilutive in the future.

COMMITMENTS AND CONTINGENCIES

Leases" for additional information.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

COMMITMENTS AND CONTINGENCIES

Leases" for additional information.

Legal proceedings

2 unchanged sentences

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.

The Company had no accrued losses for litigation as of June 30, 2023 and December 31, 2022.

Pegasystems Inc.

9 unchanged sentences

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.

Appellate briefing in the Court of Appeals of Virginia is completed.

The Court of Appeals of Virginia has not yet set a date for oral arguments in the appeal.

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

10 unchanged sentences

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.

The hearing on the Company’s motion to dismiss took place on May 17, 2023.

After hearing argument from both sides, the Court denied the Company’s motion from the bench and stated that a written opinion would follow.

On June 30, 2023, the Company filed its Answer to the complaint.

On July 24, 2023, the Court issued its written opinion denying the motion to dismiss as to the Company and Defendant Trefler but granting the motion without prejudice as to Mr.

The Company believes it has strong defenses to the claims brought against the defendants 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 it has strong defenses to the claims asserted, its intent to defend against these claims, 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

In re Pegasystems Inc., Derivative Litigation

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.

1 unchanged sentence

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.

On April 28, 2023, a lawsuit was filed in the United States District Court for the District of Massachusetts by Dag Sagfors, derivatively on behalf of nominal defendant Pegasystems Inc.

asserting breach of fiduciary duty and related claims relating to the Virginia Appian litigation against the same defendants as the Larkin lawsuit.

On May 17, 2023, the Larkin and Sagfors cases were consolidated and a joint motion to stay the consolidated case is pending before the Court.

The Company also has received confidential demand letters raising substantially the same allegations set forth in the foregoing derivative complaints.

On April 12, 2023, the Company’s board of directors (other than Mr.

Trefler, who recused himself), formed a committee consisting solely of independent directors, to review, analyze, and investigate the matters raised in the demands and to determine in good faith what actions (if any) are reasonably believed to be appropriate under similar circumstances and reasonably believed to be in the best interests of the Company in response to the demand letters.

The Company is unable to reasonably estimate possible damages or a range of possible damages in this matter given the stage of the lawsuit and there being no specified quantum of damages sought in the complaint.

Beginning in March 2023, the U.S.

2 unchanged sentences

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