What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2024-04-24 compared with 2023-10-25 · 159 added, 212 removed, 509 unchanged (42% of the section changed)

3 unchanged sentences

(in thousands)

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

Current assets:

8 unchanged sentences

Total current assets 1,059,587 1,029,027

Unbilled receivables, net

Long-term unbilled receivables, net

72,814 85,402

8 unchanged sentences

Deferred revenue 382,765 377,845

Convertible senior notes, net 499,985 —

Other current liabilities 19,096 21,343

Total current liabilities 1,044,279 577,059

Convertible senior notes, net 498,753 593,609

Operating lease liabilities 68,874 79,152

Long-term convertible senior notes, net

Long-term operating lease liabilities

63,645 66,901

Other long-term liabilities 13,618 13,570

5 unchanged sentences

85,011 and 83,840 shares issued and outstanding at

September 30, 2023 and December 31, 2022, respectively

March 31, 2024 and December 31, 2023, respectively

Additional paid-in capital 432,217 379,584

(Accumulated deficit) ( 20,829 ) ( 8,705 )

( 151,370 ) ( 76,513 )

Accumulated other comprehensive (loss) ( 22,052 ) ( 17,879 )

6 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

2023 2022 2023 2022

Subscription services $ 211,903 $ 187,509

14 unchanged sentences

General and administrative 23,527 23,110

Litigation settlement, net of recoveries

Restructuring 163 1,461

1 unchanged sentence

(Loss) from operations ( 20,412 ) ( 22,206 )

Foreign currency transaction gain (loss) 1,994 3,826 ( 3,971 ) 8,415

Foreign currency transaction (loss) ( 3,262 ) ( 2,675 )

Interest income 5,281 1,485

Interest expense ( 1,752 ) ( 1,918 )

(Loss) on capped call transactions ( 2,294 ) ( 6,876 ) ( 449 ) ( 56,381 )

Other income (loss), net 6,383 ( 29 ) 18,668 6,497

(Loss) before provision for income taxes ( 3,734 ) ( 81,772 ) ( 59,462 ) ( 189,956 )

Provision for income taxes 3,545 11,748 15,395 190,239

Gain on capped call transactions 3,299 3,206

Other income, net 1,684 6,583

(Loss) before (benefit from) provision for income taxes ( 15,162 ) ( 15,525 )

(Benefit from) provision for income taxes ( 3,038 ) 5,249

Net (loss) $ ( 12,124 ) $ ( 20,774 )

10 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

2023 2022 2023 2022

Net (loss) $ ( 12,124 ) $ ( 20,774 )

Other comprehensive (loss), net of tax

Other comprehensive (loss) income, net of tax

Unrealized (loss) on available-for-sale securities ( 746 ) ( 46 )

Foreign currency translation adjustments ( 3,427 ) 1,589

Total other comprehensive (loss), net of tax ( 3,727 ) ( 6,773 ) ( 2,018 ) ( 21,936 )

Total other comprehensive (loss) income, net of tax ( 4,173 ) 1,543

Comprehensive (loss) $ ( 16,297 ) $ ( 19,231 )

3 unchanged sentences

(in thousands, except per share amounts)

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

Stockholders’ Equity

of Shares Amount

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

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

Issuance of common stock for stock compensation plans 297 3 ( 12,131 ) — — ( 12,128 )

Issuance of common stock under the employee stock purchase plan 35 — 2,446 — — 2,446

Stock-based compensation — — 28,227 — — 28,227

Cash dividends declared ($ 0.03 per share)

— — — ( 2,455 ) — ( 2,455 )

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

Net (loss) — — — ( 379 ) — ( 379 )

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

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

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)

Common Stock Additional paid-in capital

Retained earnings (accumulated deficit)

Accumulated other comprehensive (loss) Total

stockholders’ equity

of Shares Amount

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

December 31, 2023 83,840 $ 838 $ 379,584 $ ( 8,705 ) $ ( 17,879 ) $ 353,838

Issuance of common stock for stock compensation plans 1,139 12 18,644 — — 18,656

5 unchanged sentences

Net (loss) — — — ( 12,124 ) — ( 12,124 )

September 30, 2023 83,523 $ 835 $ 343,259 $ ( 151,370 ) $ ( 25,088 ) $ 167,636

March 31, 2024 85,011 $ 850 $ 432,217 $ ( 20,829 ) $ ( 22,052 ) $ 390,186

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) $ ( 12,124 ) $ ( 20,774 )

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

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

Stock-based compensation 34,781 42,557

Deferred income taxes ( 188 ) 169,489

Loss on capped call transactions 449 56,381

Amortization of deferred commissions 17,282 14,277

Lease expense 12,018 11,500

Amortization of intangible assets and depreciation 4,254 4,724

Foreign currency transaction loss (gain) 3,971 ( 8,415 )

Lease expense 3,472 4,594

Foreign currency transaction (loss) 3,262 2,675

(Gain) on capped call transactions ( 3,299 ) ( 3,206 )

Deferred income taxes ( 646 ) ( 126 )

(Gain) on investments ( 1,628 ) ( 3,802 )

(Gain) on repurchases of convertible senior notes — ( 2,781 )

Other non-cash ( 1,886 ) 854

Change in operating assets and liabilities, net 136,678 29,115

Cash provided by (used in) operating activities 137,920 ( 13,446 )

Cash provided by operating activities 180,146 68,107

Investing activities

1 unchanged sentence

Proceeds from maturities and called investments 29,643 36,475

Sales of investments 10,725 18,415

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

Investment in property and equipment ( 604 ) ( 11,487 )

Cash (used in) provided by investing activities ( 24,176 ) 10,104

Cash (used in) investing activities ( 132,399 ) ( 14,413 )

Financing activities

1 unchanged sentence

Dividend payments to stockholders ( 2,515 ) ( 2,474 )

Proceeds from employee stock purchase plan 6,127 7,166

Proceeds from stock option exercises 6,602 —

Common stock repurchases ( 1,654 ) ( 43,282 )

Cash (used in) financing activities ( 85,031 ) ( 43,484 )

Proceeds from employee stock plans 22,419 3,922

Common stock repurchases for tax withholdings for net settlement of equity awards ( 2,005 ) ( 1,107 )

Cash provided by (used in) financing activities 17,899 ( 29,372 )

Effect of exchange rate changes on cash, cash equivalents, and restricted cash ( 2,803 ) 782

Net increase (decrease) in cash, cash equivalents, and restricted cash 27,092 ( 52,339 )

Net increase in cash, cash equivalents, and restricted cash 62,843 25,104

Cash, cash equivalents, and restricted cash, beginning of period 232,827 145,054

1 unchanged sentence

Cash and cash equivalents $ 291,905 $ 168,318

Restricted cash included in other current assets 775 —

Restricted cash included in other long-term assets 2,990 1,840

12 unchanged sentences

MARKETABLE SECURITIES

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

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

2 unchanged sentences

$ 327,590 $ 27 $ ( 573 ) $ 327,044 $ 193,431 $ 233 $ ( 228 ) $ 193,436

As of September 30, 2023, marketable securities’ maturities ranged from October 2023 to January 2026, with a weighted average remaining maturity of 0.5 years.

As of March 31, 2024, marketable securities’ maturities ranged from April 2024 to January 2026, with a weighted-average remaining maturity of 0.5 years.

RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE

(in thousands)

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

Accounts receivable, net $ 191,987 $ 300,173

8 unchanged sentences

(Dollars in thousands)

September 30, 2023

March 31, 2024

1 year or less $ 170,458 70 %

4 unchanged sentences

(Dollars in thousands)

September 30, 2023

March 31, 2024

2024 $ 19,018 8 %

6 unchanged sentences

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Major clients

Clients that represented 10% or more of the Company’s total accounts receivable and unbilled receivables:

March 31, 2024 December 31, 2023

Accounts receivable 10 % *

Unbilled receivables 12 % *

Total receivables 11 % *

* Client accounted for less than 10% of receivables.

Contract assets

1 unchanged sentence

(in thousands)

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

Contract assets (1)

8 unchanged sentences

(in thousands)

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

Deferred revenue $ 382,765 $ 377,845

2 unchanged sentences

(1) Included in other long-term liabilities.

Deferred revenue decreased in the nine months ended September 30, 2023, primarily due to $ 292.3 million of revenue recognized during the period included in deferred revenue as of December 31, 2022 exceeded new billings in advance of revenue recognition.

The increase in deferred revenue in the three months ended March 31, 2024, was primarily due to new billings in advance of revenue recognized.

In the three months ended March 31, 2024, $ 168.3 million in revenue was recognized from deferred revenue as of December 31, 2023.

DEFERRED COMMISSIONS

(in thousands)

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

Deferred commissions (1)

2 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

(in thousands) 2024 2023

2 unchanged sentences

(1) Included in selling and marketing.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

GOODWILL AND OTHER INTANGIBLES

Nine Months Ended

September 30,

Three Months Ended

(in thousands)

1 unchanged sentence

Currency translation adjustments ( 144 ) 35

September 30, $ 81,437 $ 81,201

March 31, $ 81,467 $ 81,434

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

September 30, 2023

March 31, 2024

(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, 2023

8 unchanged sentences

(1) Included in other long-term assets.

Future estimated intangibles assets amortization:

Future estimated amortization of intangible assets:

(in thousands)

September 30, 2023

March 31, 2024

Remainder of 2024 $ 2,208

1 unchanged sentence

Three Months Ended

September 30, Nine Months Ended

September 30,

(in thousands) 2024 2023

Cost of revenue

$ 622 $ 705 $ 1,949 $ 2,017

Selling and marketing

$ 964 $ 1,049

$ 965 $ 1,048 $ 2,977 $ 3,045

OTHER ASSETS AND LIABILITIES

Other current assets

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

(in thousands) March 31, 2024 December 31, 2023

Income tax receivables $ 9,058 $ 4,804

Contract assets 10,853 16,238

Insurance receivable 8,305 1,954

Capped call transactions 4,192 —

Restricted cash 775 —

Other 45,010 45,141

$ 78,193 $ 68,137

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Other long-term assets

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

(in thousands) March 31, 2024 December 31, 2023

Deferred commissions $ 102,855 $ 114,119

9 unchanged sentences

$ 297,860 $ 314,696

Accrued expenses

(in thousands) March 31, 2024 December 31, 2023

Litigation settlements $ 35,000 $ —

Cloud hosting 12,736 1,358

Outside professional services 13,352 10,419

Marketing and sales program 3,888 2,557

Income and other taxes 6,676 15,428

Employee related 4,466 4,486

Other 4,524 5,693

$ 80,642 $ 39,941

Other current liabilities

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

(in thousands) March 31, 2024 December 31, 2023

Operating lease liabilities $ 14,184 $ 15,000

Dividends payable 2,550 2,515

Other 2,362 3,828

$ 19,096 $ 21,343

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Other long-term liabilities

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

(in thousands) March 31, 2024 December 31, 2023

Deferred revenue $ 1,784 $ 2,478

3 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

(in thousands) 2024 2023

3 unchanged sentences

$ 6,414 $ 8,522

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Right of use assets and lease liabilities

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

(in thousands) March 31, 2024 December 31, 2023

Right of use assets (1)

6 unchanged sentences

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

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

Weighted-average remaining lease term 6.7 years 6.8 years

4 unchanged sentences

Maturities of lease liabilities:

(in thousands) September 30, 2023

(in thousands) March 31, 2024

Remainder of 2024 $ 12,700

4 unchanged sentences

Cash flow information

Nine Months Ended

September 30,

Three Months Ended

(in thousands) 2024 2023

1 unchanged sentence

Right of use assets recognized for new leases and amendments (non-cash) $ 1,095 $ 721

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 September 1, 2020.

In the nine months ended September 30, 2023, the Company recognized a gain of $ 7.9 million in other income (loss), net from repurchases of Notes representing $ 97.7 million in aggregate principal amount.

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

4 unchanged sentences

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

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

• 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.

1 unchanged sentence

• 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, 2023, the Notes were not eligible for conversion.

As of March 31, 2024, the Notes were not eligible for conversion.

Repurchase rights

3 unchanged sentences

Carrying value of the Notes:

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

(in thousands) March 31, 2024 December 31, 2023

Principal $ 502,270 $ 502,270

3 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

(in thousands) 2024 2023

3 unchanged sentences

$ 1,559 $ 1,853

$ 1,440 $ 1,849 $ 4,937 $ 5,538

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

The average interest rate on the Notes in the three months ended March 31, 2024 and 2023 was 1.2 %.

Future payments:

September 30, 2023

March 31, 2024

(in thousands) Principal Interest Total

2024 $ — $ 3,767 $ 3,767

Remainder of 2024 $ — $ 1,883 $ 1,883

2025 502,270 1,884 504,154

2 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 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 nine months ended September 30, 2023, Capped Call Transactions covering approximately 0.7 million shares were settled for proceeds of $ 0.3 million.

As of September 30, 2023, Capped Call Transactions covering approximately 3.7 million shares were outstanding.

The Capped Call Transactions initially 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 2023, Capped Call Transactions covering approximately 0.7 million shares were settled for proceeds of $ 0.3 million.

As of March 31, 2024, Capped Call Transactions covering 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 .

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 calculated following the governing documents may not represent a fair value measurement.

The Capped Call Transactions are classified as other long-term assets and remeasured to fair value each reporting period, resulting in a non-operating gain or loss.

The Capped Call Transactions are remeasured to fair value each reporting period, resulting in a non-operating gain or loss.

Change in capped call transactions:

Nine Months Ended

September 30,

Three Months Ended

(in thousands) 2024 2023

2 unchanged sentences

Fair value adjustment 3,299 3,206

September 30, $ 1,792 $ 3,583

March 31, $ 4,192 $ 5,600

Credit facility

3 unchanged sentences

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

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 required to comply with financial covenants, including:

• 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

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, 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.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

On April 23, 2024, the Credit Facility was amended to extend the expiration date to February 4, 2025.The Credit Facility, as amended, contains customary covenants, including, but not limited to, those relating to additional indebtedness, liens, asset divestitures, and affiliate transactions.

Beginning with the fiscal quarter ended March 31, 2024, the Company must maintain 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.

As of March 31, 2024 and December 31, 2023, the Company had $ 27.3 million in outstanding letters of credit, reducing available borrowing capacity under the Credit Facility, but no outstanding cash borrowings.

RESTRUCTURING

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

(in thousands) Three months ended Expense

Office space reduction March 31, 2023 $ 1,241

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

Employee severance and related benefits and closure of a foreign office September 30, 2023 $ 17,236

Employee severance and related benefits and office space reduction

September 30, 2023 $ 17,236

Office space reduction December 31, 2023 $ 1,497

Accrued employee severance and related benefits:

Change for all restructuring actions:

Nine Months Ended

September 30,

Three Months Ended

(in thousands) 2024 2023

3 unchanged sentences

Currency translation adjustments ( 131 ) 181

September 30, $ 16,715

March 31, $ 5,001 $ 4,516

Accrued employee severance and related benefits is included in accrued compensation and related expenses.

3 unchanged sentences

Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants based on assumptions that market participants would use in pricing an asset or liability.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

As a basis for classifying the fair value measurements, a three-tier fair value hierarchy, which classifies the fair value measurements based on the inputs used in measuring fair value, was established as follows:

9 unchanged sentences

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

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

(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) 2024 2023

1 unchanged sentence

New investments 250 400

Sales of investments ( 2,773 ) ( 3,954 )

Changes in foreign exchange rates ( 20 ) 58

Changes in fair value:

included in other income (loss), net

included in other income, net

included in other comprehensive (loss)

( 362 ) ( 1,064 )

September 30, $ 19,348 $ 11,910

March 31, $ 20,946 $ 16,265

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

Fair value of the Notes

The fair value of the Notes outstanding (including the embedded conversion feature) was $ 460.3 million as of September 30, 2023 and $ 521.1 million as of December 31, 2022.

In the nine months ended September 30, 2023 the Company repurchased Notes representing $ 97.7 million in aggregate principal amount.

Fair value of the Convertible Senior Notes

The fair value of the Notes outstanding (including the embedded conversion feature) was $ 481.7 million as of March 31, 2024, and $ 466.5 million as of December 31, 2023.

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)

$ 180,983 54 % $ 184,519 56 %

$ 154,741 47 % $ 148,200 55 % $ 489,645 51 % $ 513,197 56 %

Other Americas 21,786 7 % 15,011 5 %

3 unchanged sentences

$ 330,147 100 % $ 325,472 100 %

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Revenue streams

Three Months Ended

September 30, Nine Months Ended

September 30,

(in thousands)

2023 2022 2023 2022

Perpetual license $ 2,747 $ 9,223 $ 4,729 $ 18,929

Subscription license $ 63,338 $ 84,527

Perpetual license 859 403

Revenue recognized at a point in time 64,197 84,930

4 unchanged sentences

Total revenue $ 330,147 $ 325,472

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Three Months Ended

September 30, Nine Months Ended

September 30,

(in thousands) 2024 2023

9 unchanged sentences

Expected future revenue from existing non-cancellable contracts:

As of September 30, 2023:

As of March 31, 2024:

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

Maintenance Pega Cloud

Pega Cloud Maintenance

1 year or less

5 unchanged sentences

$ 991,113 $ 345,160 $ 46,994 $ 2,727 $ 38,748 $ 1,424,742 100 %

As of September 30, 2022:

As of March 31, 2023:

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

Maintenance Pega Cloud

Pega Cloud Maintenance

1 year or less

5 unchanged sentences

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

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

STOCK-BASED COMPENSATION

Three Months Ended

September 30, Nine Months Ended

September 30,

(in thousands) 2024 2023

4 unchanged sentences

Research and development

7,375 7,724 24,286 22,425

General and administrative

$ 34,781 $ 42,557

$ 31,299 $ 33,774 $ 110,083 $ 93,301

Income tax benefit

$ ( 311 ) $ ( 672 )

As of September 30, 2023, the Company had $ 137.5 million of unrecognized stock-based compensation expense, net of estimated forfeitures, which is expected to be recognized over a weighted-average period of 1.8 years.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Nine Months Ended

September 30, 2023

(in thousands) Shares Total Fair Value

As of March 31, 2024, the Company had $ 184.1 million of unrecognized stock-based compensation expense, net of estimated forfeitures, which is expected to be recognized over a weighted-average period of 1.8 years.

Three Months Ended

March 31, 2024

(in thousands) Quantity

Total Fair Value

Restricted stock units (1)

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Non-qualified stock options

1,718 $ 44,377

Performance stock options (2)

(1) Includes units issued when employees 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.

(2) 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.

For the performance stock options granted in three months ended March 31, 2024, 25 % can vest on the first anniversary of the grant date, and 75 % can vest on the second anniversary of the grant date, based on the achievement of specific performance conditions.

The options expire ten years from the grant date.

Effective income tax rate

Three Months Ended

September 30, Nine Months Ended

September 30,

(Dollars in thousands) 2024 2023

Provision for income taxes $ 3,545 $ 11,748 $ 15,395 $ 190,239

(Benefit from) provision for income taxes $ ( 3,038 ) $ 5,249

Effective income tax rate 20 % ( 34 ) %

The Company’s effective income tax rate in the nine months ended September 30, 2023 was primarily driven by the valuation allowance on the Company’s deferred tax assets in the U.S.

and projected taxable income in the U.S., partially offset by available tax credits and losses in the U.S.

The Company’s effective income tax rate in the three months ended March 31, 2024, was primarily driven by the valuation allowance on the Company’s deferred tax assets in the U.S.

and U.K., and forecasted taxable income, offset by an income tax benefit for discrete items in the three months ended March 31, 2024.

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

1 unchanged sentence

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.

The Company intends to maintain a valuation allowance on its U.S.

net deferred tax assets until sufficient evidence exists to support their realization.

(LOSS) PER SHARE

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Diluted (loss) per share is calculated using the weighted-average number of common shares outstanding during the period, plus the dilutive effect of outstanding stock options, RSUs, and convertible senior notes.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Calculation of (loss) per share:

Three Months Ended

September 30, Nine Months Ended

September 30,

(in thousands, except per share amounts) 2024 2023

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Outstanding anti-dilutive stock options and RSUs (4)

2,255 3,019 1,652 3,589

(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 3.7 million shares as of September 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 convertible) as of September 30, 2023.

If the outstanding conversion options were fully exercised, the Company would issue approximately 3.7 million shares as of March 31, 2024.

The Capped Call Transactions are excluded from weighted-average common shares outstanding, assuming dilution, in all periods as their effect would be anti-dilutive.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(4) Outstanding stock options and RSUs that were anti-dilutive under the treasury stock method in the period were excluded from the computation of diluted (loss) per share.

6 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 September 30, 2023 and December 31, 2022.

In the three months ended March 31, 2024 the Company recorded a $ 32.4 million litigation settlement net of insurance recoveries, which is comprised of an agreed in principle $ 35 million litigation settlement reduced by $ 2.6 million of expected insurance coverage recovery.

The Company had no accrued loss for litigation as of December 31, 2023.

Pegasystems Inc.

& Youyong Zou

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.

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.

6 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 in the Court of Appeals of Virginia is completed.

The Court of Appeals of Virginia has set November 15, 2023 as the date for oral arguments in the appeal.

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

A panel of the Court of Appeals of Virginia heard oral arguments on November 15, 2023, and will issue a written opinion in the future.

Although it is not possible to predict timing, the entirety of the 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.

11 unchanged sentences

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)

On March 4, 2024, the parties agreed in principle to a proposed settlement of the litigation for an aggregate sum of $ 35 million.

On April 23, 2024, the parties executed a stipulation of settlement.

On April 23, 2024, the plaintiffs filed a motion seeking preliminary approval of the settlement.

The parties are awaiting a ruling by the court on that motion and thereafter final approval of the settlement, which will not be heard until after a notice period to the proposed class of shareholders during which they have the opportunity to object to the proposed settlement.

Although the outcome of the litigation is not certain until final disposition, the Company has recorded a $ 35 million accrued loss as of March 31, 2024, for the proposed settlement, the substantial majority of which the Company anticipates will be paid for directly by the Company and not reimbursed by insurance.

However, it is possible that actual future losses related to the litigation could exceed the accrual amount if and to the extent that the court does not approve the proposed settlement.

In re Pegasystems Inc., Derivative Litigation

2 unchanged sentences

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 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 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.

7 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