PEGASYSTEMS INC 10-Q

ITEM 1. FINANCIAL STATEMENTS PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) September 30, 2024 December 31, 2023 Assets Current assets: Cash and cash equivalents $ 287,649 $ 229,902 Marketable securities 415,341 193,436 Total cash, cash equivalents, and marketable securities 702,990 423,338 Accounts receivable, net 173,623 300,173 Unbilled receivables, net 157,281 237,379 Other current assets 85,186 68,137 Total current assets 1,119,080 1,029,027 Long-term unbilled receivables, net 77,576 85,402 Goodwill 81,568 81,611 Other long-term assets 301,008 314,696 Total assets $ 1,579,232 $ 1,510,736 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 20,103 $ 11,290 Accrued expenses 41,236 39,941 Accrued compensation and related expenses 98,033 126,640 Deferred revenue 345,574 377,845 Convertible senior notes, net 501,225 — Other current liabilities 18,372 21,343 Total current liabilities 1,024,543 577,059 Long-term convertible senior notes, net — 499,368 Long-term operating lease liabilities 66,750 66,901 Other long-term liabilities 14,916 13,570 Total liabilities 1,106,209 1,156,898 Commitments and contingencies (Note 15) Stockholders’ equity: Preferred stock, 1,000 shares authorized; none issued — — Common stock, 200,000 shares authorized; 85,808 and 83,840 shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively 858 838 Additional paid-in capital 514,173 379,584 (Accumulated deficit) ( 28,606 ) ( 8,705 ) Accumulated other comprehensive (loss) ( 13,402 ) ( 17,879 ) Total stockholders’ equity 473,023 353,838 Total liabilities and stockholders’ equity $ 1,579,232 $ 1,510,736 See notes to unaudited condensed consolidated financial statements. 3 PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Revenue Subscription services $ 224,810 $ 201,578 $ 651,143 $ 586,192 Subscription license 45,420 74,342 193,405 200,066 Consulting 54,364 55,976 160,451 167,396 Perpetual license 456 2,747 1,351 4,729 Total revenue 325,050 334,643 1,006,350 958,383 Cost of revenue Subscription services 36,868 35,906 108,930 109,553 Subscription license 384 629 1,504 1,971 Consulting 59,451 57,204 177,864 176,262 Perpetual license 3 24 12 51 Total cost of revenue 96,706 93,763 288,310 287,837 Gross profit 228,344 240,880 718,040 670,546 Operating expenses Selling and marketing 127,669 131,598 395,125 425,253 Research and development 74,157 74,955 221,695 224,262 General and administrative 35,694 27,321 84,641 73,893 Litigation settlement, net of recoveries — — 32,403 — Restructuring 2,485 17,822 3,283 21,450 Total operating expenses 240,005 251,696 737,147 744,858 (Loss) from operations ( 11,661 ) ( 10,816 ) ( 19,107 ) ( 74,312 ) Foreign currency transaction (loss) gain ( 4,405 ) 1,994 ( 7,230 ) ( 3,971 ) Interest income 6,769 2,532 18,835 5,831 Interest expense ( 1,639 ) ( 1,533 ) ( 5,047 ) ( 5,229 ) (Loss) on capped call transactions ( 689 ) ( 2,294 ) ( 667 ) ( 449 ) Other income, net — 6,383 1,684 18,668 (Loss) before provision for income taxes ( 11,625 ) ( 3,734 ) ( 11,532 ) ( 59,462 ) Provision for income taxes 2,765 3,545 8,369 15,395 Net (loss) $ ( 14,390 ) $ ( 7,279 ) $ ( 19,901 ) $ ( 74,857 ) (Loss) per share Basic $ ( 0.17 ) $ ( 0.09 ) $ ( 0.23 ) $ ( 0.90 ) Diluted $ ( 0.17 ) $ ( 0.09 ) $ ( 0.23 ) $ ( 0.90 ) Weighted-average number of common shares outstanding Basic 85,625 83,336 85,018 82,996 Diluted 85,625 83,336 85,018 82,996 See notes to unaudited condensed consolidated financial statements. 4 PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) (in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Net (loss) $ ( 14,390 ) $ ( 7,279 ) $ ( 19,901 ) $ ( 74,857 ) Other comprehensive income (loss), net of tax Unrealized gain (loss) on available-for-sale securities 660 ( 40 ) ( 158 ) ( 281 ) Foreign currency translation adjustments 10,204 ( 3,687 ) 4,635 ( 1,737 ) Total other comprehensive income (loss), net of tax 10,864 ( 3,727 ) 4,477 ( 2,018 ) Comprehensive (loss) $ ( 3,526 ) $ ( 11,006 ) $ ( 15,424 ) $ ( 76,875 ) See notes to unaudited condensed consolidated financial statements. 5 PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except per share amounts) Common Stock Additional paid-in capital (Accumulated deficit) Accumulated other comprehensive (loss) Total stockholders’ equity Number of shares Amount December 31, 2022 82,436 $ 824 $ 229,602 $ ( 76,513 ) $ ( 23,070 ) $ 130,843 Issuance of common stock for stock compensation plans 452 4 668 — — 672 Issuance of common stock under the employee stock purchase plan 52 1 2,142 — — 2,143 Stock-based compensation — — 42,557 — — 42,557 Cash dividends declared ($ 0.03 per share) — — ( 2,488 ) — — ( 2,488 ) 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 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 Issuance of common stock for stock compensation plans 257 3 2,447 — — 2,450 Issuance of common stock under the employee stock purchase plan 54 — 2,003 — — 2,003 Stock-based compensation — — 31,299 — — 31,299 Cash dividends declared ($ 0.03 per share) — — ( 2,506 ) — — ( 2,506 ) Other comprehensive (loss) — — — — ( 3,727 ) ( 3,727 ) Net (loss) — — — ( 7,279 ) — ( 7,279 ) September 30, 2023 83,523 $ 835 $ 343,259 $ ( 151,370 ) $ ( 25,088 ) $ 167,636 6 PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except per share amounts) Common Stock Additional paid-in capital (Accumulated deficit) Accumulated other comprehensive (loss) Total stockholders’ equity Number of shares Amount 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 Issuance of common stock under the employee stock purchase plan 32 — 1,758 — — 1,758 Stock-based compensation — — 34,781 — — 34,781 Cash dividends declared ($ 0.03 per share) — — ( 2,550 ) — — ( 2,550 ) Other comprehensive (loss) — — — — ( 4,173 ) ( 4,173 ) Net (loss) — — — ( 12,124 ) — ( 12,124 ) March 31, 2024 85,011 $ 850 $ 432,217 $ ( 20,829 ) $ ( 22,052 ) $ 390,186 Issuance of common stock for stock compensation plans 326 4 5,481 — — 5,485 Issuance of common stock under the employee stock purchase plan 32 — 1,669 — — 1,669 Stock-based compensation — — 36,224 — — 36,224 Cash dividends declared ($ 0.03 per share) — — ( 2,561 ) — — ( 2,561 ) Other comprehensive (loss) — — — — ( 2,214 ) ( 2,214 ) Net income — — — 6,613 — 6,613 June 30, 2024 85,369 $ 854 $ 473,030 $ ( 14,216 ) $ ( 24,266 ) $ 435,402 Repurchase of common stock ( 171 ) ( 2 ) ( 11,747 ) — — ( 11,749 ) Issuance of common stock for stock compensation plans 581 6 16,461 — — 16,467 Issuance of common stock under the employee stock purchase plan 29 — 1,789 — — 1,789 Stock-based compensation — — 37,213 — — 37,213 Cash dividends declared ($ 0.03 per share) — — ( 2,573 ) — — ( 2,573 ) Other comprehensive income — — — — 10,864 10,864 Net (loss) — — — ( 14,390 ) — ( 14,390 ) September 30, 2024 85,808 $ 858 $ 514,173 $ ( 28,606 ) $ ( 13,402 ) $ 473,023 See notes to unaudited condensed consolidated financial statements. 7 PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Nine Months Ended September 30, 2024 2023 Operating activities Net (loss) $ ( 19,901 ) $ ( 74,857 ) Adjustments to reconcile net (loss) to cash provided by operating activities Stock-based compensation 108,218 110,083 Amortization of deferred commissions 47,143 43,974 Amortization of intangible assets and depreciation 13,289 14,181 Lease expense 13,748 12,018 Foreign currency transaction loss 7,230 3,971 Loss on capped call transactions 667 449 Deferred income taxes ( 67 ) ( 188 ) (Gain) on investments ( 1,628 ) ( 10,841 ) (Gain) on repurchases of convertible senior notes — ( 7,855 ) Other non-cash ( 8,564 ) 2,209 Change in operating assets and liabilities, net 90,562 44,776 Cash provided by operating activities 250,697 137,920 Investing activities Purchases of investments ( 417,310 ) ( 190,466 ) Proceeds from maturities and called investments 206,232 169,836 Sales of investments — 10,725 Investment in property and equipment ( 4,921 ) ( 14,271 ) Cash (used in) investing activities ( 215,999 ) ( 24,176 ) Financing activities Repurchases of convertible senior notes — ( 88,989 ) Dividend payments to stockholders ( 7,626 ) ( 7,458 ) Proceeds from employee stock plans 48,811 12,729 Common stock repurchases for tax withholdings for net settlement of equity awards ( 2,987 ) ( 1,654 ) Common stock repurchases under stock repurchase program ( 11,249 ) — Other — 341 Cash provided by (used in) financing activities 26,949 ( 85,031 ) Effect of exchange rate changes on cash, cash equivalents, and restricted cash 4,591 ( 1,621 ) Net increase in cash, cash equivalents, and restricted cash 66,238 27,092 Cash, cash equivalents, and restricted cash, beginning of period 232,827 145,054 Cash, cash equivalents, and restricted cash, end of period $ 299,065 $ 172,146 Cash and cash equivalents $ 287,649 $ 169,023 Restricted cash included in other current assets 184 — Restricted cash included in other long-term assets 11,232 3,123 Total cash, cash equivalents, and restricted cash $ 299,065 $ 172,146 See notes to unaudited condensed consolidated financial statements. 8 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION Pegasystems Inc. (together with its subsidiaries, “the Company”) has prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all the information required by accounting principles generally accepted in the United States of America (“U.S.”) for complete financial statements and should be read in conjunction with the Company’s audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2023. In the opinion of management, the Company has prepared the accompanying unaudited condensed consolidated financial statements on the same basis as its audited financial statements, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. 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 2024. NOTE 2. MARKETABLE SECURITIES September 30, 2024 December 31, 2023 (in thousands) Amortized Cost Unrealized Gains Unrealized Losses Fair Value Amortized Cost Unrealized Gains Unrealized Losses Fair Value Government debt $ 11,659 $ 8 $ ( 1 ) $ 11,666 $ 11,471 $ 33 $ ( 1 ) $ 11,503 Corporate debt 403,427 271 ( 23 ) 403,675 181,960 200 ( 227 ) 181,933 $ 415,086 $ 279 $ ( 24 ) $ 415,341 $ 193,431 $ 233 $ ( 228 ) $ 193,436 As of September 30, 2024, marketable securities’ maturities ranged from October 2024 to January 2026, with a weighted-average remaining maturity of 0.3 years. NOTE 3. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE Receivables (in thousands) September 30, 2024 December 31, 2023 Accounts receivable, net $ 173,623 $ 300,173 Unbilled receivables, net 157,281 237,379 Long-term unbilled receivables, net 77,576 85,402 $ 408,480 $ 622,954 Unbilled receivables 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 collection date: (Dollars in thousands) September 30, 2024 1 year or less $ 157,281 67 % 1-2 years 60,501 26 % 2-5 years 17,075 7 % $ 234,857 100 % Unbilled receivables by contract effective date: (Dollars in thousands) September 30, 2024 2024 $ 78,970 34 % 2023 118,866 50 % 2022 19,775 8 % 2021 13,546 6 % 2020 and prior 3,700 2 % $ 234,857 100 % 9 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) Contract assets Contract assets are client-committed amounts for which revenue recognized exceeds the amount billed to the client, and billing is subject to conditions other than the passage of time, such as the completion of a related performance obligation. (in thousands) September 30, 2024 December 31, 2023 Contract assets $ 15,719 $ 16,238 Long-term contract assets 25,224 20,635 $ 40,943 $ 36,873 Deferred revenue Deferred revenue consists of billings made and payments received in advance of revenue recognition. (in thousands) September 30, 2024 December 31, 2023 Deferred revenue $ 345,574 $ 377,845 Long-term deferred revenue 2,183 2,478 $ 347,757 $ 380,323 Deferred revenue decreased in the nine months ended September 30, 2024, primarily due to $ 340.4 million of revenue recognized during the period included in deferred revenue as of December 31, 2023 exceeding new billings in advance of revenue recognition. NOTE 4. DEFERRED COMMISSIONS (in thousands) September 30, 2024 December 31, 2023 Deferred commissions $ 98,415 $ 114,119 Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2024 2023 2024 2023 Amortization of deferred commissions (1) $ 14,867 $ 14,947 $ 47,143 $ 43,974 (1) Included in selling and marketing. NOTE 5. GOODWILL AND OTHER INTANGIBLES Goodwill Nine Months Ended September 30, (in thousands) 2024 2023 January 1, $ 81,611 $ 81,399 Currency translation adjustments ( 43 ) 38 September 30, $ 81,568 $ 81,437 Intangibles Intangible assets are recorded at cost and amortized using the straight-line method over their estimated useful lives. September 30, 2024 (in thousands) Useful Lives Cost Accumulated Amortization Net Book Value Client-related 4 - 10 years $ 63,157 $ ( 61,101 ) $ 2,056 Technology 2 - 10 years 68,115 ( 65,638 ) 2,477 Other 1 - 5 years 5,361 ( 5,361 ) — $ 136,633 $ ( 132,100 ) $ 4,533 December 31, 2023 (in thousands) Useful Lives Cost Accumulated Amortization Net Book Value Client-related 4 - 10 years $ 63,117 $ ( 60,035 ) $ 3,082 Technology 2 - 10 years 68,138 ( 64,218 ) 3,920 Other 1 - 5 years 5,361 ( 5,361 ) — $ 136,616 $ ( 129,614 ) $ 7,002 10 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) Future estimated amortization of intangible assets: (in thousands) September 30, 2024 Remainder of 2024 $ 823 2025 2,509 2026 874 2027 327 $ 4,533 Amortization of intangible assets: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2024 2023 2024 2023 Cost of revenue $ 357 $ 622 $ 1,425 $ 1,949 Selling and marketing 343 343 1,028 1,028 $ 700 $ 965 $ 2,453 $ 2,977 NOTE 6. OTHER ASSETS AND LIABILITIES Other current assets (in thousands) September 30, 2024 December 31, 2023 Income tax receivables $ 29,264 $ 4,804 Contract assets 15,719 16,238 Insurance receivable — 1,954 Indirect tax receivable 2,647 1,924 Capped call transactions 226 — Restricted cash 184 — Other 37,146 43,217 $ 85,186 $ 68,137 Other long-term assets (in thousands) September 30, 2024 December 31, 2023 Deferred commissions $ 98,415 $ 114,119 Right of use assets 63,124 64,198 Property and equipment 42,871 47,279 Venture investments 21,172 19,450 Contract assets 25,224 20,635 Intangible assets 4,533 7,002 Capped call transactions — 893 Deferred income taxes 3,651 3,678 Restricted cash 11,232 2,925 Other 30,786 34,517 $ 301,008 $ 314,696 11 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) Accrued expenses (in thousands) September 30, 2024 December 31, 2023 Cloud hosting $ 12,840 $ 1,358 Outside professional services 12,684 10,419 Marketing and sales program 2,319 2,557 Income and other taxes 3,384 15,428 Employee related 4,607 4,486 Other 5,402 5,693 $ 41,236 $ 39,941 Other current liabilities (in thousands) September 30, 2024 December 31, 2023 Operating lease liabilities $ 14,982 $ 15,000 Dividends payable 2,573 2,515 Other 817 3,828 $ 18,372 $ 21,343 Other long-term liabilities (in thousands) September 30, 2024 December 31, 2023 Deferred revenue $ 2,183 $ 2,478 Income taxes payable 867 859 Other 11,866 10,233 $ 14,916 $ 13,570 NOTE 7. LEASES Expense Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2024 2023 2024 2023 Fixed lease costs $ 6,848 $ 4,718 $ 16,381 $ 14,979 Short-term lease costs 381 660 1,334 2,137 Variable lease costs 1,863 2,254 5,235 6,414 $ 9,092 $ 7,632 $ 22,950 $ 23,530 Right of use assets and lease liabilities (in thousands) September 30, 2024 December 31, 2023 Right of use assets $ 63,124 $ 64,198 Operating lease liabilities $ 14,982 $ 15,000 Long-term operating lease liabilities $ 66,750 $ 66,901 Weighted-average remaining lease term and discount rate for the Company’s leases were: September 30, 2024 December 31, 2023 Weighted-average remaining lease term 6.3 years 6.8 years Weighted-average discount rate (1) 4.6 % 4.0 % (1) The rates implicit in the Company’s leases are not readily determinable. Therefore, the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur to borrow an amount equal to the lease payments on a collateralized basis over the lease term in a similar economic environment. 12 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) Maturities of lease liabilities: (in thousands) September 30, 2024 Remainder of 2024 $ 4,094 2025 18,276 2026 13,754 2027 13,503 2028 12,939 2029 10,177 Thereafter 21,755 Total lease payments 94,498 Less: imputed interest (1) ( 12,766 ) $ 81,732 (1) Lease liabilities are measured at the present value of the remaining lease payments using a discount rate determined at lease commencement unless the discount rate is updated due to a lease reassessment event. Cash flow information Nine Months Ended September 30, (in thousands) 2024 2023 Cash paid for operating leases, net of tenant improvement allowances $ 13,249 $ 14,378 Right of use assets recognized for new leases and amendments (non-cash) $ 12,290 $ 1,782 NOTE 8. DEBT Convertible senior notes and capped calls Convertible senior notes In February 2020, the Company issued Convertible Senior Notes (the "Notes") with an aggregate principal of $ 600 million, due March 1, 2025, in a private placement. 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 September 1, 2020. In the nine months ended September 30, 2023, the Company recognized a gain of $ 7.9 million, in other income, net from repurchases of Notes representing $ 97.7 million in aggregate principal amount. Conversion rights The conversion rate is 7.4045 shares of common stock per $1,000 principal amount of the Notes, representing an initial conversion price of $ 135.05 per share of common stock. The conversion rate will be adjusted upon certain events, including spin-offs, tender offers, exchange offers, and certain stockholder distributions. The Company will settle conversions by paying or delivering cash, shares of its common stock, or a combination of cash and shares of its common stock, at the Company’s election, based on the applicable conversion rate. Beginning on September 1, 2024, noteholders may convert their Notes at any time at their election. Before September 1, 2024, noteholders could convert their Notes in the following circumstances: • 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. • 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). Repurchase rights On or after March 1, 2023 and on or before the 40 th scheduled trading day immediately before the maturity date, the Company may redeem for cash all or part of the Notes at a repurchase price equal to 100 % of the principal amount, plus accrued and unpaid interest, if the last reported sale price of the Company’s common stock exceeded 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides a redemption notice. 13 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) If certain corporate events that constitute a “Fundamental Change” occur, each noteholder will have the right to require the Company to repurchase for cash all of such noteholder’s Notes, or any portion of the principal thereof that is equal to $1,000 or a multiple of $1,000, at a repurchase price equal to 100 % of the principal amount thereof, plus accrued and unpaid interest. A Fundamental Change relates to mergers, changes in control of the Company, liquidation/dissolution of the Company, or the delisting of the Company’s common stock. Carrying value of the Notes: (in thousands) September 30, 2024 December 31, 2023 Principal $ 502,270 $ 502,270 Unamortized issuance costs ( 1,045 ) ( 2,902 ) Convertible senior notes, net $ 501,225 $ 499,368 Interest expense related to the Notes: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2024 2023 2024 2023 Contractual interest expense ( 0.75 % coupon) $ 941 $ 827 $ 2,825 $ 2,949 Amortization of issuance costs 621 613 1,857 1,988 $ 1,562 $ 1,440 $ 4,682 $ 4,937 The average interest rate on the Notes in the nine months ended September 30, 2024 and 2023 was 1.2 %. Future payments: September 30, 2024 (in thousands) Principal Interest Total 2025 $ 502,270 $ 1,884 $ 504,154 $ 502,270 $ 1,884 $ 504,154 Capped call transactions In February 2020, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”) with certain financial institutions. 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 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, 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. 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 remeasured to fair value each reporting period, resulting in a non-operating gain or loss. 14 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) Change in capped call transactions: Nine Months Ended September 30, (in thousands) 2024 2023 January 1, $ 893 $ 2,582 Settlements — ( 341 ) Fair value adjustment ( 667 ) ( 449 ) September 30, $ 226 $ 1,792 Credit facility In November 2019, and as since amended, the Company entered into a five-year $ 100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association. The Company may use borrowings for general corporate purposes and to finance working capital needs. Subject to specific conditions and the agreement of the financial institutions lending the additional amount, the aggregate commitment may be increased to $ 200 million. The commitments were originally scheduled to expire on November 4, 2024, and any outstanding loans would have been payable on such date. However 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 September 30, 2024 and December 31, 2023, the Company had $ 27.3 million in outstanding letters of credit under the Credit Facility, reducing available borrowing capacity, but no outstanding cash borrowings. NOTE 9. RESTRUCTURING The Company has undertaken the following restructuring activities as it optimizes its go-to-market strategy and reassesses its office space needs: (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 office space reduction September 30, 2023 $ 17,236 Office space reduction December 31, 2023 $ 1,497 Office space reduction June 30, 2024 $ 1,257 Office space reduction September 30, 2024 $ 2,882 Accrued employee severance and related benefits: Change for all restructuring actions: Nine Months Ended September 30, (in thousands) 2024 2023 January 1, $ 8,095 $ 18,573 Costs incurred ( 634 ) 19,921 Cash disbursements ( 4,214 ) ( 21,576 ) Currency translation adjustments ( 93 ) ( 203 ) September 30, $ 3,154 $ 16,715 Note: Accrued employee severance and related benefits is included in accrued compensation and related expenses. NOTE 10. FAIR VALUE MEASUREMENTS Assets and liabilities measured at fair value on a recurring basis The Company records its cash equivalents, marketable securities, Capped Call Transactions, and venture investments at fair value on a recurring basis. 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. 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: • Level 1 - observable inputs, such as quoted prices in active markets for identical assets or liabilities; 15 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) • Level 2 - significant other inputs that are observable either directly or indirectly; and • 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. The fair value of the Capped Call Transactions at the end of each reporting period is determined using a Black-Scholes option-pricing model. The valuation model uses various market-based inputs, including stock price, remaining contractual term, expected volatility, risk-free interest rate, and expected dividend yield. The Company applies judgment when determining expected volatility. The Company considers 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. Assets and liabilities measured at fair value on a recurring basis: September 30, 2024 December 31, 2023 (in thousands) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Cash equivalents $ 16,760 $ — $ — $ 16,760 $ 54,357 $ — $ — $ 54,357 Marketable securities $ — $ 415,341 $ — $ 415,341 $ — $ 193,436 $ — $ 193,436 Capped Call Transactions $ — $ 226 $ — $ 226 $ — $ 893 $ — $ 893 Venture investments (1) $ — $ — $ 21,172 $ 21,172 $ — $ — $ 19,450 $ 19,450 (1) Investments in privately-held companies Changes in venture investments: Nine Months Ended September 30, (in thousands) 2024 2023 January 1, $ 19,450 $ 13,069 New investments 350 400 Sales of investments — ( 2,773 ) Changes in foreign exchange rates 106 27 Changes in fair value: included in other income, net 1,628 10,886 included in other comprehensive (loss) ( 362 ) ( 2,261 ) September 30, $ 21,172 $ 19,348 The carrying value of certain financial instruments, including receivables and accounts payable, approximates fair value due to their short maturities. Fair value of the Convertible Senior Notes The fair value of the Notes outstanding (including the embedded conversion feature) was $ 492.5 million as of September 30, 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. NOTE 11. REVENUE Geographic revenue Three Months Ended September 30, Nine Months Ended September 30, (Dollars in thousands) 2024 2023 2024 2023 U.S. $ 156,135 48 % $ 154,741 47 % $ 526,332 53 % $ 489,645 51 % Other Americas 28,836 9 % 23,497 7 % 71,936 7 % 58,013 6 % United Kingdom (“U.K.”) 37,593 12 % 41,622 12 % 108,338 11 % 112,751 12 % Europe (excluding U.K.), Middle East, and Africa 60,048 18 % 67,880 20 % 175,255 17 % 173,551 18 % Asia-Pacific 42,438 13 % 46,903 14 % 124,489 12 % 124,423 13 % $ 325,050 100 % $ 334,643 100 % $ 1,006,350 100 % $ 958,383 100 % 16 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) Revenue streams Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2024 2023 2024 2023 Subscription license $ 45,420 $ 74,342 $ 193,405 $ 200,066 Perpetual license 456 2,747 1,351 4,729 Revenue recognized at a point in time 45,876 77,089 194,756 204,795 Maintenance 80,702 83,538 242,047 245,210 Pega Cloud 144,108 118,040 409,096 340,982 Consulting 54,364 55,976 160,451 167,396 Revenue recognized over time 279,174 257,554 811,594 753,588 Total revenue $ 325,050 $ 334,643 $ 1,006,350 $ 958,383 Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2024 2023 2024 2023 Pega Cloud $ 144,108 $ 118,040 $ 409,096 $ 340,982 Maintenance 80,702 83,538 242,047 245,210 Subscription services 224,810 201,578 651,143 586,192 Subscription license 45,420 74,342 193,405 200,066 Subscription 270,230 275,920 844,548 786,258 Consulting 54,364 55,976 160,451 167,396 Perpetual license 456 2,747 1,351 4,729 $ 325,050 $ 334,643 $ 1,006,350 $ 958,383 Remaining performance obligations ("Backlog") Expected future revenue from existing non-cancellable contracts: As of September 30, 2024: (Dollars in thousands) Subscription services Subscription license Perpetual license Consulting Total Pega Cloud Maintenance 1 year or less $ 495,637 $ 188,905 $ 38,175 $ 2,252 $ 54,203 $ 779,172 53 % 1-2 years 310,020 63,701 9,686 317 3,062 386,786 26 % 2-3 years 146,877 26,436 3,046 — 2,008 178,367 12 % Greater than 3 years 112,002 18,854 102 — — 130,958 9 % $ 1,064,536 $ 297,896 $ 51,009 $ 2,569 $ 59,273 $ 1,475,283 100 % As of September 30, 2023: (Dollars in thousands) Subscription services Subscription license Perpetual license Consulting Total Pega Cloud Maintenance 1 year or less $ 391,324 $ 202,610 $ 48,427 $ 4,567 $ 39,335 $ 686,263 54 % 1-2 years 239,787 58,610 4,356 2,696 3,662 309,111 24 % 2-3 years 121,778 28,585 8,518 — 1,100 159,981 13 % Greater than 3 years 89,870 17,478 2,664 — — 110,012 9 % $ 842,759 $ 307,283 $ 63,965 $ 7,263 $ 44,097 $ 1,265,367 100 % 17 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 12. STOCKHOLDERS' EQUITY Stock-based compensation Expense Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2024 2023 2024 2023 Cost of revenue $ 6,894 $ 6,410 $ 20,558 $ 22,497 Selling and marketing 14,169 10,401 41,621 43,410 Research and development 7,308 7,375 22,779 24,286 General and administrative 8,842 7,113 23,260 19,890 $ 37,213 $ 31,299 $ 108,218 $ 110,083 Income tax benefit $ ( 512 ) $ ( 316 ) $ ( 1,377 ) $ ( 1,569 ) As of September 30, 2024, the Company had $ 119.6 million of unrecognized stock-based compensation expense, net of estimated forfeitures, which is expected to be recognized over a weighted-average period of 1.6 years. Grants Nine Months Ended September 30, 2024 (in thousands) Quantity Total Fair Value Restricted stock units (1) 1,306 $ 80,642 Non-qualified stock options 1,789 $ 46,365 Performance stock options (2) 566 $ 13,921 Common stock 11 $ 750 (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. For the performance stock options granted in the nine months ended September 30, 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. Stock repurchase program On April 23, 2024, the Company’s Board of Directors extended the expiration date of the share repurchase program from June 30, 2024 to June 30, 2025. On October 22, 2024, the Company’s Board of Directors extended the expiration date of the share repurchase program from June 30, 2025 to December 31, 2025 and increased the authorized repurchase by $ 250 million to $ 310 million as of that date. During the nine months ended September 30, 2024, the Company repurchased 0.2 million of its common stock for $ 11.7 million at an average price per share of $ 68.84 . All purchases under this program have been made on the open market. As of September 30, 2024, the Company was authorized to purchase an additional $ 48.3 million of its common stock under the share repurchase program. NOTE 13. INCOME TAXES Effective income tax rate Nine Months Ended September 30, (Dollars in thousands) 2024 2023 Provision for income taxes $ 8,369 $ 15,395 Effective income tax rate ( 73 ) % ( 26 ) % The Company’s effective income tax rate for the nine months ended September 30, 2024, is impacted by the jurisdictional mix and timing of the actual compared to projected earnings (losses). It is also impacted by the valuation allowance on its deferred tax assets in the U.S. and U.K. and a near break-even year-to-date pretax loss resulting in a not meaningful effective income tax rate. The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. 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. 18 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) The Company intends to maintain a valuation allowance on its U.S. and U.K. net deferred tax assets until sufficient evidence exists to support their realization. NOTE 14. (LOSS) PER SHARE Basic (loss) per share is calculated using the weighted-average number of common shares outstanding during the period. 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. Calculation of (loss) per share: Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except per share amounts) 2024 2023 2024 2023 Net (loss) $ ( 14,390 ) $ ( 7,279 ) $ ( 19,901 ) $ ( 74,857 ) Weighted-average common shares outstanding 85,625 83,336 85,018 82,996 (Loss) per share, basic $ ( 0.17 ) $ ( 0.09 ) $ ( 0.23 ) $ ( 0.90 ) Net (loss) $ ( 14,390 ) $ ( 7,279 ) $ ( 19,901 ) $ ( 74,857 ) Weighted-average common shares outstanding, assuming dilution (1) (2) (3) 85,625 83,336 85,018 82,996 (Loss) per share, diluted $ ( 0.17 ) $ ( 0.09 ) $ ( 0.23 ) $ ( 0.90 ) Outstanding anti-dilutive stock options and RSUs (4) 4,528 2,255 3,682 1,652 (1) All dilutive securities are excluded when 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, 2024. (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, 2024. 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 Capped Call Transactions are excluded from weighted-average common shares outstanding, assuming dilution, in all periods as their effect would be anti-dilutive. (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. These awards may be dilutive in the future. NOTE 15. COMMITMENTS AND CONTINGENCIES Commitments See "Note 7. Leases" for additional information. Legal proceedings In addition to the matters below, the Company is or may become involved in a variety of claims, demands, suits, investigations, and proceedings that arise from time to time relating to matters incidental to the ordinary course of the Company’s business, including actions concerning contracts, intellectual property, employment, benefits, and securities matters. Regardless of the outcome, legal disputes can have a material effect on the Company because of defense and settlement costs, diversion of management resources, and other factors. In addition, as the Company is a party to ongoing litigation, it is at least reasonably possible that the Company’s estimates will change in the near term, and the effect may be material. The Company had no accrued losses for litigation for the below matters as of September 30, 2024 and December 31, 2023. 19 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) Appian Corp. v. Pegasystems Inc. & Youyong Zou The Company is a defendant in litigation brought by Appian in the Circuit Court of Fairfax County, Virginia (the “Court”) titled Appian Corp. v. Pegasystems Inc. & Youyong Zou, No. 2020-07216 (Fairfax Cty. Ct.). On May 9, 2022, the jury rendered its verdict finding that the Company had misappropriated one or more of Appian’s trade secrets, that the Company had violated the Virginia Computer Crimes Act, and that the trade secret misappropriation was willful and malicious. The jury awarded damages of $ 2,036,860,045 for trade secret misappropriation and $ 1.00 for violating the Virginia Computer Crimes Act. On September 15, 2022, the circuit court of Fairfax County entered judgment of $ 2,060,479,287 , consisting of the damages previously awarded by the jury plus attorneys’ fees and costs, and stating that the judgment is subject to post-judgment interest at a rate of 6.0 % per annum, from the date of the jury verdict (May 9, 2022) as to the amount of the jury verdict and from September 15, 2022 as to the amount of the award of attorneys’ fees and costs. On September 15, 2022, the Company filed a notice of appeal from the judgment. On September 29, 2022, the circuit court of Fairfax County approved a $ 25,000,000 letter of credit obtained by the Company to secure the judgment and entered an order suspending the judgment during the pendency of the Company’s appeal. A panel of the Court of Appeals of Virginia heard oral arguments on November 15, 2023, and issued a written opinion on July 30, 2024. The Court of Appeals reversed the judgment on Appian’s Virginia Uniform Trade Secrets Act claim and ordered a new trial on that claim. Appian filed a petition for appeal with the Supreme Court of Virginia on August 29, 2024, and the Company filed a response to the petition on October 21, 2024. 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. City of Fort Lauderdale Police and Firefighters’ Retirement System, Individually and on Behalf of All Others Similarly Situated v. Pegasystems Inc., Alan Trefler, and Kenneth Stillwell On May 19, 2022, a lawsuit was filed against the Company, the Company’s chief executive officer, and the Company’s chief operating and financial officer in the United States District Court for the Eastern District of Virginia Alexandria Division, captioned City of Fort Lauderdale Police and Firefighters’ Retirement System, Individually and on Behalf of All Others Similarly Situated v. Pegasystems Inc., Alan Trefler, and Kenneth Stillwell (Case 1:22-cv-00578-LMB-IDD). The complaint generally alleges, among other things, that the defendants violated Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 promulgated thereunder and that the individual defendants violated Section 20(a) of the Exchange Act, in each case by allegedly making materially false and/or misleading statements, as well as allegedly failing to disclose material adverse facts about the Company’s business, operations, and prospects, which caused the Company’s securities to trade at artificially inflated prices. The complaint seeks unspecified damages on behalf of a class of purchasers of the Company’s securities between May 29, 2020 and May 9, 2022. The litigation has since been transferred to the United States District Court for the District of Massachusetts (Case 1:22-cv-11220-WGY), and lead plaintiff class representatives - Central Pennsylvania Teamsters Pension Fund - Defined Benefit Plan, Central Pennsylvania Teamsters Pension Fund - Retirement Income Plan 1987, and Construction Industry Laborers Pension Fund - have been appointed. On October 18, 2022, a consolidated amended complaint was filed that does not add any new parties or legal claims, is based upon the same general factual allegations as the original complaint, and now seeks unspecified damages on behalf of a class of purchasers of the Company’s securities between June 16, 2020 and May 9, 2022. The Company moved to dismiss the consolidated amended complaint on December 19, 2022. 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. Stillwell. 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. On May 15, 2024, the Court granted plaintiffs’ motion for preliminary approval of the settlement. On September 6, 2024, the Company received notice that certain shareholders, representing approximately 3% of the settlement class, would be excluded from the settlement. On September 19, 2024, the Court approved the settlement, including an award of attorneys’ fees and the plan of allocation, and thereafter, on September 25, 2024, entered Final Judgment. 20 PEGASYSTEMS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) 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. v. 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 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. On June 28, 2024, a lawsuit was filed against members of the Company’s board of directors, certain employees of the Company and the Company in the Business Litigation Section of the Superior Court in Suffolk County, Massachusetts, captioned John Dwyer and Ray Gerber, Plaintiffs, v. Alan Trefler, Peter Gyenes, Richard Jones, Christopher Lafond, Dianne Ledingham, Sharon Rowlands, Larry Weber, Leon Trefler, Don Schuerman, Kerim Akgonul, and Benjamin Baril, Defendants, Pegasystems Inc., Nominal Defendant (Case 2484CV01734). The complaint generally alleges the defendants breached their fiduciary duties in connection with alleged misconduct by Company employees alleged in the litigation brought by Appian in the Circuit Court of Fairfax County, Virginia, described above, and alleges damages from the approximately $ 2 billion verdict in the litigation brought by Appian in the Circuit Court of Fairfax County, Virginia, described above, the recent class action settlement, and litigation costs from various proceedings. On October 18, 2024 the defendants served a motion to dismiss the complaint. The Company is unable to reasonably estimate possible damages or a range of possible damages in these matters given the stage of the lawsuits and there being no specified quantum of damages sought in the complaints. SEC Inquiry 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. By letter dated September 9, 2024, the Staff of the Division of Enforcement of the SEC (“Staff”) notified the Company that the Staff had concluded its investigation of the Company commenced March 2023 and that, based on the information that it had as of September 9, 2024, the Staff did not intend to recommend any enforcement action against the Company. 21