UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________

FORM 10-Q


☒			Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
			For the quarterly period ended ~~September 30, 2022~~March 31, 2023


☐			Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 1-11859

____________________________

PEGASYSTEMS INC.

(Exact name of Registrant as specified in its charter)

____________________________


Massachusetts			04-2787865
(State or other jurisdiction of incorporation or organization)			(IRS Employer Identification No.)

One Main Street, Cambridge, MA 02142

(Address of principal executive offices, including zip code)

(617) 374-9600

(Registrant’s telephone number, including area code)

____________________________

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, $.01 par value per share	PEGA	NASDAQ Global Select Market

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes x No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

There were ~~82,190,957~~82,961,204 shares of the Registrant’s common stock, $0.01 par value per share, outstanding on ~~October~~April 19, ~~2022.~~2023.

Table of Contents

PEGASYSTEMS INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS


			Page
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022			3
Unaudited Condensed Consolidated Statements of Operations for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~			4
Unaudited Condensed Consolidated Statements of Comprehensive (Loss) for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~			5
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~			6
Unaudited Condensed Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~			87
Notes to Unaudited Condensed Consolidated Financial Statements			98
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			2120
Item 3. Quantitative and Qualitative Disclosures About Market Risk			2728
Item 4. Controls and Procedures			28

PART II - OTHER INFORMATION

Item 1. Legal Proceedings			29
Item 1A. Risk Factors			29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			3029
Item 5. Other Information			29
Item 6. Exhibits			3130

Signature			3231

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)	PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)					PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
		September 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022
Assets	Assets					Assets
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	107,626	$	159,965	Cash and cash equivalents	$	168,318	$	145,054
Marketable securities	Marketable securities	168,085		202,814		Marketable securities	155,564		152,167
Total cash, cash equivalents, and marketable securities	Total cash, cash equivalents, and marketable securities	275,711		362,779		Total cash, cash equivalents, and marketable securities	323,882		297,221
Accounts receivable	Accounts receivable	139,670		182,717		Accounts receivable	201,585		255,150
Unbilled receivables	Unbilled receivables	182,403		226,714		Unbilled receivables	196,279		213,719
Other current assets	Other current assets	62,457		68,008		Other current assets	73,982		80,388
Total current assets	Total current assets	660,241		840,218		Total current assets	795,728		846,478
Unbilled receivables	Unbilled receivables	108,285		129,789		Unbilled receivables	79,704		95,806
Goodwill	Goodwill	81,201		81,923		Goodwill	81,434		81,399
Other long-term assets	Other long-term assets	316,731		541,601		Other long-term assets	324,975		333,989
Total assets	Total assets	$	1,166,458	$	1,593,531	Total assets	$	1,281,841	$	1,357,672
Liabilities and stockholders’ equity	Liabilities and stockholders’ equity					Liabilities and stockholders’ equity
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	13,562	$	15,281	Accounts payable	$	12,565	$	18,195
Accrued expenses	Accrued expenses	61,012		63,890		Accrued expenses	45,432		50,355
Accrued compensation and related expenses	Accrued compensation and related expenses	85,999		120,946		Accrued compensation and related expenses	56,574		127,728
Deferred revenue	Deferred revenue	245,146		275,844		Deferred revenue	342,591		325,212
Other current liabilities	Other current liabilities	8,253		9,443		Other current liabilities	17,802		17,450
Total current liabilities	Total current liabilities	413,972		485,404		Total current liabilities	474,964		538,940
Convertible senior notes, net	Convertible senior notes, net	592,884		590,722		Convertible senior notes, net	561,655		593,609
Operating lease liabilities	Operating lease liabilities	82,705		87,818		Operating lease liabilities	76,082		79,152
Other long-term liabilities	Other long-term liabilities	11,936		13,499		Other long-term liabilities	14,644		15,128
Total liabilities	Total liabilities	1,101,497		1,177,443		Total liabilities	1,127,345		1,226,829
Commitments and contingencies (Note 14)
Commitments and contingencies (Note 15)						Commitments and contingencies (Note 15)
Stockholders’ equity:	Stockholders’ equity:					Stockholders’ equity:
Preferred stock, 1,000 shares authorized; none issued	Preferred stock, 1,000 shares authorized; none issued	—		—		Preferred stock, 1,000 shares authorized; none issued	—		—
Common stock, 200,000 shares authorized; 82,164 and 81,712 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively		822		817
Common stock, 200,000 shares authorized; 82,940 and 82,436 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively						Common stock, 200,000 shares authorized; 82,940 and 82,436 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively	829		824
Additional paid-in capital	Additional paid-in capital	204,189		145,810		Additional paid-in capital	272,481		229,602
(Accumulated deficit) retained earnings		(111,126)		276,449
Accumulated deficit						Accumulated deficit	(97,287)		(76,513)
Accumulated other comprehensive (loss)	Accumulated other comprehensive (loss)	(28,924)		(6,988)		Accumulated other comprehensive (loss)	(21,527)		(23,070)
Total stockholders’ equity	Total stockholders’ equity	64,961		416,088		Total stockholders’ equity	154,496		130,843
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	1,166,458	$	1,593,531	Total liabilities and stockholders’ equity	$	1,281,841	$	1,357,672

See notes to unaudited condensed consolidated financial statements.


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)	PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)									PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2022		2021		2022		2021				2023		2022
Revenue	Revenue									Revenue
Subscription services	Subscription services	$	174,885	$	161,557	$	516,750	$	457,051	Subscription services		$	187,509	$	170,033
Subscription license	Subscription license	31,112		35,421		210,245		251,226		Subscription license		84,527		137,533
Consulting										Consulting		53,033		61,301
Perpetual license	Perpetual license	9,223		2,874		18,929		20,922		Perpetual license		403		7,440
Consulting		55,511		56,416		175,451		166,270
Total revenue	Total revenue	270,731		256,268		921,375		895,469		Total revenue		325,472		376,307
Cost of revenue	Cost of revenue									Cost of revenue
Subscription services	Subscription services	34,541		30,817		103,104		88,206		Subscription services		36,864		32,030
Subscription license	Subscription license	628		606		1,923		1,811		Subscription license		719		622
Consulting										Consulting		60,348		55,511
Perpetual license	Perpetual license	103		50		173		151		Perpetual license		3		34
Consulting		57,778		52,749		171,162		161,032
Total cost of revenue	Total cost of revenue	93,050		84,222		276,362		251,200		Total cost of revenue		97,934		88,197
Gross profit	Gross profit	177,681		172,046		645,013		644,269		Gross profit		227,538		288,110
Operating expenses	Operating expenses									Operating expenses
Selling and marketing	Selling and marketing	153,517		152,479		472,951		457,641		Selling and marketing		149,797		162,236
Research and development	Research and development	75,342		64,728		221,173		191,565		Research and development		75,376		71,490
General and administrative	General and administrative	26,043		20,176		94,530		57,607		General and administrative		23,110		35,764
Restructuring										Restructuring		1,461		—
Total operating expenses	Total operating expenses	254,902		237,383		788,654		706,813		Total operating expenses		249,744		269,490
(Loss) from operations		(77,221)		(65,337)		(143,641)		(62,544)
Foreign currency transaction gain (loss)		3,826		518		8,415		(4,983)
(Loss) income from operations										(Loss) income from operations		(22,206)		18,620
Foreign currency transaction (loss) gain										Foreign currency transaction (loss) gain		(2,675)		2,876
Interest income	Interest income	520		166		1,036		555		Interest income		1,485		207
Interest expense	Interest expense	(1,992)		(1,908)		(5,882)		(5,747)		Interest expense		(1,918)		(1,946)
(Loss) on capped call transactions		(6,876)		(14,735)		(56,381)		(7,543)
Other (loss) income, net		(29)		2		6,497		108
Gain (loss) on capped call transactions										Gain (loss) on capped call transactions		3,206		(30,560)
Other income, net										Other income, net		6,583		2,741
(Loss) before provision for (benefit from) income taxes	(Loss) before provision for (benefit from) income taxes	(81,772)		(81,294)		(189,956)		(80,154)		(Loss) before provision for (benefit from) income taxes		(15,525)		(8,062)
Provision for (benefit from) income taxes	Provision for (benefit from) income taxes	11,748		(24,826)		190,239		(54,360)		Provision for (benefit from) income taxes		5,249		(7,683)
Net (loss)	Net (loss)	$	(93,520)	$	(56,468)	$	(380,195)	$	(25,794)	Net (loss)		$	(20,774)	$	(379)
(Loss) per share	(Loss) per share									(Loss) per share
Basic	Basic	$	(1.14)	$	(0.69)	$	(4.65)	$	(0.32)	Basic		$	(0.25)	$	—
Diluted	Diluted	$	(1.14)	$	(0.69)	$	(4.65)	$	(0.32)	Diluted		$	(0.25)	$	—
Weighted-average number of common shares outstanding	Weighted-average number of common shares outstanding									Weighted-average number of common shares outstanding
Basic	Basic	81,996		81,526		81,842		81,284		Basic		82,604		81,680
Diluted	Diluted	81,996		81,526		81,842		81,284		Diluted		82,604		81,680

See notes to unaudited condensed consolidated financial statements.


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) (in thousands)	PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) (in thousands)									PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) (in thousands)
		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2022		2021		2022		2021				2023		2022
Net (loss)	Net (loss)	$	(93,520)	$	(56,468)	$	(380,195)	$	(25,794)	Net (loss)		$	(20,774)	$	(379)
Other comprehensive (loss), net of tax
Other comprehensive income (loss), net of tax										Other comprehensive income (loss), net of tax
Unrealized (loss) gain on available-for-sale securities	Unrealized (loss) gain on available-for-sale securities	(73)		53		(1,000)		1,184		Unrealized (loss) gain on available-for-sale securities		(46)		222
Foreign currency translation adjustments	Foreign currency translation adjustments	(6,700)		(4,400)		(20,936)		(3,669)		Foreign currency translation adjustments		1,589		(2,770)
Total other comprehensive (loss), net of tax		$	(6,773)	$	(4,347)	$	(21,936)	$	(2,485)
Total other comprehensive income (loss), net of tax										Total other comprehensive income (loss), net of tax		1,543		(2,548)
Comprehensive (loss)	Comprehensive (loss)	$	(100,293)	$	(60,815)	$	(402,131)	$	(28,279)	Comprehensive (loss)		$	(19,231)	$	(2,927)

See notes to unaudited condensed consolidated financial statements.


PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except per share amounts)	PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except per share amounts)																		PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except per share amounts)
		Common Stock			Additional Paid-In Capital				Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive (Loss)				Total Stockholders’ Equity				Common Stock					Additional Paid-In Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive (Loss)			Total Stockholders’ Equity
		Number of Shares	Amount								Number of Shares								Amount
December 31, 2020		80,890	$	809			$	204,432						$	339,879			$	(2,948)		$	542,172
Cumulative-effect adjustment from adoption of ASU 2020-06, net		—	—		(61,604)				9,399			—				(52,205)
Repurchase of common stock		(70)	(1)		(9,145)				—			—				(9,146)
Issuance of common stock for stock compensation plans		402	4		(25,513)				—			—				(25,509)
Issuance of common stock under the employee stock purchase plan		24	—		2,288				—			—				2,288
Stock-based compensation		—	—		30,100				—			—				30,100
Cash dividends declared ($0.03 per share)		—	—		—				(2,438)			—				(2,438)
Other comprehensive income		—	—		—				—			280				280
Net (loss)		—	—		—				(6,617)			—				(6,617)
March 31, 2021		81,246	$	812	$	140,558			$	340,223		$	(2,668)			$	478,925
Repurchase of common stock		(81)	(1)		(10,245)				—			—				(10,246)
Issuance of common stock for stock compensation plans		267	3		(16,199)				—			—				(16,196)
Issuance of common stock under the employee stock purchase plan		24	1		2,858				—			—				2,859
Stock-based compensation		—	—		30,698				—			—				30,698
Cash dividends declared ($0.03 per share)		—	—		—				(2,445)			—				(2,445)
Other comprehensive income		—	—		—				—			1,582				1,582
Net income		—	—		—				37,291			—				37,291
June 30, 2021		81,456	$	815	$	147,670			$	375,069		$	(1,086)			$	522,468
December 31, 2021																			December 31, 2021	81,712			$	817		$	145,810		$	276,449		$	(6,988)		$	416,088
Repurchase of common stock	Repurchase of common stock	(96)	(1)		(12,795)				—			—				(12,796)			Repurchase of common stock	(242)			(2)		(22,581)			—			—			(22,583)
Issuance of common stock for stock compensation plans	Issuance of common stock for stock compensation plans	286	3		(18,117)				—			—				(18,114)			Issuance of common stock for stock compensation plans	297			3		(12,131)			—			—			(12,128)
Issuance of common stock under the employee stock purchase plan	Issuance of common stock under the employee stock purchase plan	24	—		2,639				—			—				2,639			Issuance of common stock under the employee stock purchase plan	35			—		2,446			—			—			2,446
Stock-based compensation	Stock-based compensation	—	—		28,701				—			—				28,701			Stock-based compensation	—			—		28,227			—			—			28,227
Cash dividends declared ($0.03 per share)	Cash dividends declared ($0.03 per share)	—	—		—				(2,451)			—				(2,451)			Cash dividends declared ($0.03 per share)	—			—		—			(2,455)			—			(2,455)
Other comprehensive (loss)	Other comprehensive (loss)	—	—		—				—			(4,347)				(4,347)			Other comprehensive (loss)	—			—		—			—			(2,548)			(2,548)
Net (loss)	Net (loss)	—	—		—				(56,468)			—				(56,468)			Net (loss)	—			—		—			(379)			—			(379)
September 30, 2021		81,670	$	817	$	148,098			$	316,150		$	(5,433)			$	459,632
March 31, 2022																			March 31, 2022	81,802			$	818	$	141,771		$	273,615		$	(9,536)		$	406,668

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

Issuance of common stock for stock compensation plans																			Issuance of common stock for stock compensation plans	452			4		668			—			—			672
Issuance of common stock under the employee stock purchase plan																			Issuance of common stock under the employee stock purchase plan	52			1		2,142			—			—			2,143
Stock-based compensation																			Stock-based compensation	—			—		42,557			—			—			42,557
Cash dividends declared ($0.03 per share)																			Cash dividends declared ($0.03 per share)	—			—		(2,488)			—			—			(2,488)
Other comprehensive income																			Other comprehensive income	—			—		—			—			1,543			1,543
Net (loss)																			Net (loss)	—			—		—			(20,774)			—			(20,774)
March 31, 2023																			March 31, 2023	82,940			$	829	$	272,481		$	(97,287)		$	(21,527)		$	154,496

See notes to unaudited condensed consolidated financial statements.

PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except per share amounts)
Common Stock Additional
Paid-In Capital Retained Earnings (Accumulated Deficit)
Accumulated Other Comprehensive (Loss)
Total
Stockholders’ Equity
Number
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 CASH FLOWS (in thousands)
	Three Months Ended March 31,
	2023		2022
Operating activities
Net (loss)	$	(20,774)	$	(379)
Adjustments to reconcile net (loss) to cash provided by operating activities
Stock-based compensation	42,557		28,227
Deferred income taxes	(126)		(9,295)
(Gain) loss on capped call transactions	(3,206)		30,560
Amortization of deferred commissions	14,277		17,221
Lease expense	4,594		3,919
Amortization of intangible assets and depreciation	4,724		4,171
Foreign currency transaction loss (gain)	2,675		(2,876)
Other non-cash	(5,729)		(1,100)
Change in operating assets and liabilities, net	29,115		(55,332)
Cash provided by operating activities	68,107		15,116
Investing activities
Purchases of investments	(39,401)		(33,690)
Proceeds from maturities and called investments	36,475		20,915
Sales of investments	—		13,350

Investment in property and equipment	(11,487)		(6,657)
Cash (used in) investing activities	(14,413)		(6,082)
Financing activities
Repurchases of convertible senior notes	(29,901)		—
Proceeds from settlement of capped calls transactions	188		—
Dividend payments to stockholders	(2,474)		(2,454)
Proceeds from employee stock purchase plan	2,143		2,446
Proceeds from stock option exercises	1,779		—


Common stock repurchases	(1,107)		(35,910)
Cash (used in) financing activities	(29,372)		(35,918)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash	782		(310)
Net increase (decrease) in cash, cash equivalents, and restricted cash	25,104		(27,194)
Cash, cash equivalents, and restricted cash, beginning of period	145,054		159,965
Cash, cash equivalents, and restricted cash, end of period	$	170,158	$	132,771

Cash and cash equivalents	$	168,318	$	132,771
Restricted cash included in other long-term assets	1,840		—
Total cash, cash equivalents and restricted cash	$	170,158	$	132,771

See notes to unaudited condensed consolidated financial statements.

PEGASYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended
September 30,
2022 2021
Operating activities
Net (loss) $ (380,195) $ (25,794)
Adjustments to reconcile net (loss) to cash (used in) operating activities
Stock-based compensation 93,301 89,483
Deferred income taxes 169,489 (53,638)
Loss on capped call transactions 56,381 7,543
Amortization of deferred commissions 39,752 31,388
Lease expense 11,500 9,274
Amortization of intangible assets and depreciation 12,381 24,030
Foreign currency transaction (gain) loss (8,415) 4,983
Other non-cash (1,705) 5,246
Change in operating assets and liabilities, net (5,935) (97,836)
Cash (used in) operating activities (13,446) (5,321)
Investing activities
Purchases of investments (39,056) (67,170)
Proceeds from maturities and called investments 53,952 96,859
Sales of investments 18,415 25,123
Payments for acquisitions, net of cash acquired (922) (4,993)
Investment in property and equipment (22,285) (7,089)
Cash provided by investing activities 10,104 42,730
Financing activities
Proceeds from employee stock purchase plan 7,166 7,786
Dividend payments to stockholders (7,368) (7,310)
Common stock repurchases (43,282) (91,907)
Cash (used in) financing activities (43,484) (91,431)
Effect of exchange rate changes on cash and cash equivalents (5,513) (1,466)
Net (decrease) in cash and cash equivalents (52,339) (55,488)
Cash and cash equivalents, beginning of period 159,965 171,899
Cash and cash equivalents, end of period $ 107,626 $ 116,411

~~See notes to unaudited condensed consolidated financial statements.~~

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, ~~2021.~~2022.

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 the full year ~~2022.~~

Certain prior period amounts reported in our condensed consolidated financial statements and notes thereto have been reclassified to conform to the current year’s presentation. Such reclassifications did not affect total revenues, operating income, or net income.2023.

NOTE 2. MARKETABLE SECURITIES


		September 30, 2022								December 31, 2021									March 31, 2023								December 31, 2022
(in thousands)	(in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value		(in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Government debt	Government debt	$	2,992	$	—	$	(67)	$	2,925	$	2,000	$	—	$	(10)	$	1,990	Government debt	$	2,970	$	—	$	(33)	$	2,937	$	2,960	$	—	$	(52)	$	2,908
Corporate debt	Corporate debt	168,894		—		(3,734)		165,160		201,659		2		(837)		200,824		Corporate debt	154,299		8		(1,680)		152,627		151,906		—		(2,647)		149,259
		$	171,886	$	—	$	(3,801)	$	168,085	$	203,659	$	2	$	(847)	$	202,814		$	157,269	$	8	$	(1,713)	$	155,564	$	154,866	$	—	$	(2,699)	$	152,167

As of ~~September 30, 2022,~~March 31, 2023, marketable securities’ maturities ranged from ~~November 2022~~April 2023 to ~~November 2024,~~January 2026, with a weighted-average remaining maturity of ~~0.7~~0.5 years.

NOTE 3. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE

Receivables


(in thousands)	(in thousands)	September 30, 2022		December 31, 2021		(in thousands)	March 31, 2023		December 31, 2022
Accounts receivable	Accounts receivable	$	139,670	$	182,717	Accounts receivable	$	201,585	$	255,150
Unbilled receivables	Unbilled receivables	182,403		226,714		Unbilled receivables	196,279		213,719
Long-term unbilled receivables	Long-term unbilled receivables	108,285		129,789		Long-term unbilled receivables	79,704		95,806
		$	430,358	$	539,220		$	477,568	$	564,675

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 by expected billing date:


(Dollars in thousands)	(Dollars in thousands)	September 30, 2022				(Dollars in thousands)	March 31, 2023
1 year or less	1 year or less	$	182,403	63	%	1 year or less	$	196,279	71	%
1-2 years	1-2 years	78,893		27	%	1-2 years	64,812		24	%
2-5 years	2-5 years	29,392		10	%	2-5 years	14,892		5	%
		$	290,688	100	%		$	275,983	100	%

Unbilled receivables by contract effective date:


(Dollars in thousands)	(Dollars in thousands)	September 30, 2022				(Dollars in thousands)	March 31, 2023
2023						2023	$	51,895	19	%
2022	2022	$	87,874	30	%	2022	96,349		34	%
2021	2021	130,196		45	%	2021	87,278		32	%
2020	2020	45,589		16	%	2020	27,755		10	%
2019		15,747		5	%
2018 and prior		11,282		4	%
2019 and prior						2019 and prior	12,706		5	%
		$	290,688	100	%		$	275,983	100	%

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

~~Major clients~~

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


	~~September 30, 2022~~	~~December 31, 2021~~
~~Client A~~
~~Accounts receivable~~	*	1	%
~~Unbilled receivables~~	*	15	%
~~Total receivables~~	*	10	%

* Client accounted for less than 10% of receivables.

Contract assets

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


(in thousands)	(in thousands)	September 30, 2022		December 31, 2021		(in thousands)	March 31, 2023		December 31, 2022
Contract assets (1)	Contract assets (1)	$	12,429	$	12,530	Contract assets (1)	$	14,463	$	17,546
Long-term contract assets (2)	Long-term contract assets (2)	10,541		10,643		Long-term contract assets (2)	11,323		16,470
		$	22,970	$	23,173		$	25,786	$	34,016

(1) Included in other current assets. (2) Included in other long-term assets.

Deferred revenue

Deferred revenue consists of billings and payments received in advance of revenue recognition.


(in thousands)	(in thousands)	September 30, 2022		December 31, 2021		(in thousands)	March 31, 2023		December 31, 2022
Deferred revenue	Deferred revenue	$	245,146	$	275,844	Deferred revenue	$	342,591	$	325,212
Long-term deferred revenue (1)	Long-term deferred revenue (1)	3,949		5,655		Long-term deferred revenue (1)	3,323		3,552
		$	249,095	$	281,499		$	345,914	$	328,764

(1) Included in other long-term liabilities.

The ~~change~~increase in deferred revenue in the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 was primarily due to new billings in advance of revenue recognition ~~offset by $252.8~~exceeding the $139.7 million of revenue recognized during the period that was included in deferred revenue as of December 31, ~~2021.~~2022.

NOTE 4. DEFERRED COMMISSIONS


(in thousands)	(in thousands)	September 30, 2022		December 31, 2021		(in thousands)	March 31, 2023		December 31, 2022
Deferred commissions (1)	Deferred commissions (1)	$	122,673	$	135,911	Deferred commissions (1)	$	124,069	$	130,195

(1) Included in other long-term assets.


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
(in thousands)	(in thousands)	2022		2021		2022		2021		(in thousands)		2023		2022
Amortization of deferred commissions (1)	Amortization of deferred commissions (1)	$	11,597	$	10,186	$	39,752	$	31,388	Amortization of deferred commissions (1)		$	14,277	$	17,221

(1) Included in selling and marketing expense.

~~PEGASYSTEMS INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

NOTE 5. GOODWILL AND OTHER INTANGIBLES

Goodwill

~~Change in goodwill:~~


		Nine Months Ended September 30,					Three Months Ended March 31,
(in thousands)	(in thousands)	2022		2021		(in thousands)	2023		2022
January 1,	January 1,	$	81,923	$	79,231	January 1,	$	81,399	$	81,923
Acquisition		—		2,701

Currency translation adjustments	Currency translation adjustments	(722)		22		Currency translation adjustments	35		108
September 30,		$	81,201	$	81,954
March 31,						March 31,	$	81,434	$	82,031

Intangibles

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


			September 30, 2022								March 31, 2023
(in thousands)	(in thousands)	Useful Lives	Cost		Accumulated Amortization		Net Book Value (1)		(in thousands)	Useful Lives	Cost		Accumulated Amortization		Net Book Value (1)
Client-related	Client-related	4-10 years	$	63,007	$	(58,211)	$	4,796	Client-related	4-10 years	$	63,094	$	(58,983)	$	4,111
Technology	Technology	2-10 years	68,038		(60,913)		7,125		Technology	2-10 years	68,085		(62,335)		5,750
Other	Other	1-5 years	5,361		(5,361)		—		Other	1-5 years	5,361		(5,361)		—
			$	136,406	$	(124,485)	$	11,921			$	136,540	$	(126,679)	$	9,861

(1) Included in other long-term assets.

December 31, 2021
(in thousands) Useful Lives Cost Accumulated Amortization
Net Book Value (1)
Client-related 4-10 years $ 63,165 $ (57,342) $ 5,823
Technology 2-10 years 67,142 (58,902) 8,240
Other 1-5 years 5,361 (5,361) —
$ 135,668 $ (121,605) $ 14,063

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


		December 31, 2022
(in thousands)	Useful Lives	Cost		Accumulated Amortization		Net Book Value (1)
Client-related	4-10 years	$	63,076	$	(58,623)	$	4,453
Technology	2-10 years	68,056		(61,621)		6,435
Other	1-5 years	5,361		(5,361)		—
		$	136,493	$	(125,605)	$	10,888

(1) Included in other long-term assets.

~~Amortization of intangible assets:~~

Three Months Ended
September 30, Nine Months Ended
September 30,
(in thousands) 2022 2021 2022 2021
Cost of revenue $ 705 $ 629 $ 2,017 $ 1,887
Selling and marketing 343 373 1,028 1,119
$ 1,048 $ 1,002 $ 3,045 $ 3,006

Future estimated intangibles assets amortization:


(in thousands)	(in thousands)	September 30, 2022		(in thousands)	March 31, 2023
Remainder of 2022		$	1,048
2023		3,917
Remainder of 2023				Remainder of 2023	$	2,884
2024	2024	3,147		2024	3,163
2025	2025	2,608		2025	2,613
2026	2026	874		2026	874
2027	2027	327		2027	327
		$	11,921
					$	9,861

Amortization of intangible assets:


	Three Months Ended March 31,
(in thousands)		2023		2022
Cost of revenue		$	706	$	629
Selling and marketing		343		343

		$	1,049	$	972

NOTE 6. OTHER ASSETS AND LIABILITIES

Other current assets


(in thousands)	(in thousands)	September 30, 2022		December 31, 2021		(in thousands)	March 31, 2023		December 31, 2022
Income tax receivables	Income tax receivables	$	11,948	$	25,691	Income tax receivables	$	22,344	$	25,354
Contract assets	Contract assets	12,429		12,530		Contract assets	14,463		17,546
Other	Other	38,080		29,787		Other	37,175		37,488
		$	62,457	$	68,008		$	73,982	$	80,388

Other long-term assets


(in thousands)	March 31, 2023		December 31, 2022
Deferred commissions	$	124,069	$	130,195
Right of use assets	72,549		76,114
Property and equipment	55,775		55,056
Venture investments	16,265		13,069
Contract assets	11,323		16,470
Intangible assets	9,861		10,888
Capped call transactions	5,600		2,582
Deferred income taxes	4,827		4,795
Restricted cash	1,840		—
Other	22,866		24,820
	$	324,975	$	333,989

Other current liabilities


(in thousands)	March 31, 2023		December 31, 2022
Operating lease liabilities	$	15,314	$	14,976
Dividends payable	2,488		2,474
	$	17,802	$	17,450

1110

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Other long-term ~~assets~~

(in thousands) September 30, 2022 December 31, 2021
Deferred income taxes $ 6,041 $ 180,656
Deferred commissions 122,673 135,911
Right of use assets 80,163 87,521
Capped call transactions 3,583 59,964
Property and equipment 45,350 26,837
Venture investments 11,910 7,648
Intangible assets 11,921 14,063
Contract assets 10,541 10,643
Other 24,549 18,358
$ 316,731 $ 541,601

~~Other current~~ liabilities

(in thousands) September 30, 2022 December 31, 2021
Operating lease liabilities $ 5,787 $ 6,989
Dividends payable 2,466 2,454
$ 8,253 $ 9,443

~~Other long-term liabilities~~


(in thousands)	(in thousands)	September 30, 2022		December 31, 2021		(in thousands)	March 31, 2023		December 31, 2022
Deferred revenue	Deferred revenue	$	3,949	$	5,655	Deferred revenue	$	3,323	$	3,552
Income taxes payable						Income taxes payable	3,578		3,207
Other	Other	7,987		7,844		Other	7,743		8,369
		$	11,936	$	13,499		$	14,644	$	15,128

NOTE 7. LEASES

~~Corporate headquarters~~

In February 2021, the Company agreed to accelerate its exit from its previous corporate headquarters to October 1, 2021, in exchange for a one-time payment from its landlord of $18 million, which was amortized over the remaining lease term. The exit accelerated depreciation on the related leasehold improvements and reduced the Company’s future lease liabilities by $21.1 million and right of use assets by $20.3 million. On March 31, 2021, the Company leased office space at One Main Street, Cambridge, Massachusetts, to serve as its corporate headquarters. The 4.5 year lease includes a base rent of $2 million per year.

~~New Waltham office~~

On July 6, 2021, the Company entered into an office space lease for 131 thousand square feet in Waltham, Massachusetts. The lease term of 11 years began on August 1, 2021. The annual rent equals the base rent plus a portion of building operating costs and real estate taxes. Rent first became payable on August 1, 2022. Base rent for the first year is approximately $6 million and will increase by 3% annually. In addition, the Company will receive an improvement allowance from the landlord of up to $11.8 million. This lease increased the Company’s lease liabilities and lease-related right of use assets by $42.1 million on August 1, 2021.

Expense

Three Months Ended
September 30, Nine Months Ended
September 30,
(in thousands) 2022 2021 2022 2021
Fixed lease costs (1)
$ 4,688 $ (3,108) $ 14,747 $ (6,780)
Short-term lease costs 916 542 2,510 1,516
Variable lease costs 905 1,099 2,395 3,826
$ 6,509 $ (1,467) $ 19,652 $ (1,438)

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

~~PEGASYSTEMS INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~


	Three Months Ended March 31,
(in thousands)		2023		2022
Fixed lease costs		$	5,766	$	5,093
Short-term lease costs		781		806
Variable lease costs		1,975		764
		$	8,522	$	6,663

Right of use assets and lease liabilities


(in thousands)	(in thousands)	September 30, 2022		December 31, 2021		(in thousands)	March 31, 2023		December 31, 2022
Right of use assets (1)	Right of use assets (1)	$	80,163	$	87,521	Right of use assets (1)	$	72,549	$	76,114
Operating lease liabilities (2)	Operating lease liabilities (2)	$	5,787	$	6,989	Operating lease liabilities (2)	$	15,314	$	14,976
Long-term operating lease liabilities	Long-term operating lease liabilities	$	82,705	$	87,818	Long-term operating lease liabilities	$	76,082	$	79,152

(1) ~~Represents the Company’s right to use the leased asset during the lease term.~~ Included in other long-term assets.

(2) Included in other current liabilities.

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

September 30, 2022

December 31, 2021

March 31, 2023

December 31, 2022

Weighted-average remaining lease term

7.4 years

7.7 years

Weighted-average remaining lease term

7.3 years

7.5 years

Weighted-average discount rate (1)

4.2

4.4

Weighted-average discount rate (1)

4.1

(1) The rates implicit in most of 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.

Maturities of lease liabilities:


(in thousands)	(in thousands)	September 30, 2022		(in thousands)	March 31, 2023
Remainder of 2022		$	(4,717)
2023		18,804
Remainder of 2023				Remainder of 2023	$	14,003
2024	2024	16,841		2024	17,642
2025	2025	14,778		2025	14,562
2026	2026	11,257		2026	10,917
2027 and thereafter		48,397
2027				2027	9,863
2028				2028	9,290
Thereafter				Thereafter	30,090
Total lease payments	Total lease payments	105,360		Total lease payments	106,367
Less: imputed interest (1)	Less: imputed interest (1)	(16,868)		Less: imputed interest (1)	(14,971)
		$	88,492		$	91,396

(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,					Three Months Ended March 31,
(in thousands)	(in thousands)	2022		2021		(in thousands)	2023		2022
Cash paid for leases		$	11,628	$	14,403
Cash paid for operating leases, net of tenant improvement allowances						Cash paid for operating leases, net of tenant improvement allowances	$	5,038	$	3,650
Right of use assets recognized for new leases and amendments (non-cash)	Right of use assets recognized for new leases and amendments (non-cash)	$	6,618	$	54,716	Right of use assets recognized for new leases and amendments (non-cash)	$	721	$	3,854

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 on September 1, 2020.

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

Conversion rights

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

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

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

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

~~PEGASYSTEMS INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

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

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

As of ~~September 30, 2022,~~March 31, 2023, the Notes were not eligible for conversion.

Repurchase rights

On or after March 1, 2023 and on or before the 40th 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.

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)	(in thousands)	September 30, 2022		December 31, 2021		(in thousands)	March 31, 2023		December 31, 2022
Principal	Principal	$	600,000	$	600,000	Principal	$	567,000	$	600,000
Unamortized issuance costs	Unamortized issuance costs	(7,116)		(9,278)		Unamortized issuance costs	(5,345)		(6,391)
Convertible senior notes, net	Convertible senior notes, net	$	592,884	$	590,722	Convertible senior notes, net	$	561,655	$	593,609

Interest expense related to the Notes:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
(in thousands)	(in thousands)	2022		2021		2022		2021		(in thousands)		2023		2022
Contractual interest expense (0.75% coupon)	Contractual interest expense (0.75% coupon)	$	1,125	$	1,125	$	3,375	$	3,375	Contractual interest expense (0.75% coupon)		$	1,125	$	1,125
Amortization of issuance costs	Amortization of issuance costs	724		677		2,163		2,025		Amortization of issuance costs		728		719
		$	1,849	$	1,802	$	5,538	$	5,400			$	1,853	$	1,844

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The ~~effective~~average interest rate ~~for~~on the ~~Notes:~~
Nine Months Ended
September 30,
2022 2021
Weighted-average effective interest rate 1.2 % 1.2 %
Notes in the three months ended March 31, 2023 and 2022 was 1.2%.

Future payments of principal and contractual interest:


		September 30, 2022							March 31, 2023
(in thousands)	(in thousands)	Principal		Interest		Total		(in thousands)	Principal		Interest		Total

2023		$	—	$	4,500	$	4,500
Remainder of 2023								Remainder of 2023	$	—	$	1,772	$	1,772
2024	2024	—		4,500		4,500		2024	—		4,253		4,253
2025	2025	600,000		2,250		602,250		2025	567,000		2,126		569,126
		$	600,000	$	11,250	$	611,250		$	567,000	$	8,151	$	575,151

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 ~~cover~~covered approximately 4.4 million shares (representing the number of shares for which the Notes ~~are~~were initially convertible) of the Company’s common stock. In the three months ended March 31, 2023, Capped Call Transactions covering approximately 0.2 million shares were settled for proceeds of $0.2 million.

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

The Capped Call Transactions are expected to reduce common stock dilution and/or offset any potential cash payments the Company must make, other than for principal and interest, upon conversion of the Notes, with such reduction and/or offset subject to a cap of $196.44. The cap price of the Capped Call Transactions is subject to adjustment upon specified extraordinary events affecting the Company, including mergers and tender offers.

~~PEGASYSTEMS INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

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

Change in capped call transactions:


		Nine Months Ended September 30,					Three Months Ended March 31,
(in thousands)	(in thousands)	2022		2021		(in thousands)	2023		2022
January 1,	January 1,	$	59,964	$	83,597	January 1,	$	2,582	$	59,964
Settlements						Settlements	(188)		—
Fair value adjustment	Fair value adjustment	(56,381)		(7,543)		Fair value adjustment	3,206		(30,560)
September 30,		$	3,583	$	76,054
March 31,						March 31,	$	5,600	$	29,404

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 ~~Credit Facility allows~~agreement of the ~~Company to increase~~financial institutions lending the additional amount, the aggregate commitment may be increased to $200 million. The commitments expire on November 4, 2024, and any outstanding loans will be payable on such date. 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:

•Beginning with the fiscal quarter ended March 31, 2022 and ending with the fiscal quarter ended December 31, ~~2022,~~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


	Year to Date
(in thousands)	March 31, 2023		June 30, 2023		September 30, 2023		December 31, 2023
Minimum Consolidated EBITDA (as defined in the Credit Facility)	$	38,862	$	59,894	$	95,597	$	214,590

•Beginning with the fiscal quarter ended March 31, 2024, a maximum net consolidated leverage ratio of 3.5 to 1.0 (with a step-up for certain acquisitions) and a minimum consolidated interest coverage ratio of 3.5 to 1.0.

As of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the Company had no outstanding cash borrowings under the Credit Facility.

As of ~~September 30, 2022,~~March 31, 2023, the Company had $27.3 million in outstanding letters of credit, which reduce the Company’s available borrowing capacity under the Credit Facility.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9. RESTRUCTURING

Go-to-market plan and Salem office

During the fourth quarter of 2022, management committed to a restructuring plan aligned with the Company’s target organization go-to-market strategy. The plan resulted in a restructuring expense of $21.7 million, primarily associated with severance and benefits for impacted employees and expenses incurred as a result of the closure of the Company’s Salem, New Hampshire office.

Accrued employee severance and related benefits:


(in thousands)	2023
January 1,	$	18,573
Costs incurred	220
Cash disbursements	(14,458)
Currency translation adjustments	181
March 31,	$	4,516

2023 office space closure

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

NOTE 9.10. 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;

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

•Level 3 - significant unobservable inputs on which there is 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 ~~both~~the underlying equity security’s historical and implied volatility ~~levels of the underlying equity security.~~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:


	March 31, 2023								December 31, 2022
(in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Cash equivalents	$	41,088	$	—	$	—	$	41,088	$	2,526	$	—	$	—	$	2,526
Marketable securities	$	—	$	155,564	$	—	$	155,564	$	—	$	152,167	$	—	$	152,167
Capped Call Transactions (1)	$	—	$	5,600	$	—	$	5,600	$	—	$	2,582	$	—	$	2,582
Venture investments (1) (2)	$	—	$	—	$	16,265	$	16,265	$	—	$	—	$	13,069	$	13,069

(1) Included in other long-term assets. (2) Investments in privately-held companies.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

~~Assets and liabilities measured at fair value on a recurring basis:~~
September 30, 2022 December 31, 2021
(in thousands) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Cash equivalents $ 20,899 $ — $ — $ 20,899 $ 3,216 $ — $ — $ 3,216
Marketable securities $ — $ 168,085 $ — $ 168,085 $ — $ 202,814 $ — $ 202,814
Capped Call Transactions (1)
$ — $ 3,583 $ — $ 3,583 $ — $ 59,964 $ — $ 59,964
Venture investments (1) (2)
$ — $ — $ 11,910 $ 11,910 $ — $ — $ 7,648 $ 7,648

~~(1) Included in other long-term assets. (2) Investments in privately-held companies.~~

Changes in venture investments:


		Nine Months Ended September 30,					Three Months Ended March 31,
(in thousands)	(in thousands)	2022		2021		(in thousands)	2023		2022
January 1,	January 1,	$	7,648	$	8,345	January 1,	$	13,069	$	7,648
New investments	New investments	400		500		New investments	400		—
Sales of investments		(3,954)		(400)

Changes in foreign exchange rates	Changes in foreign exchange rates	(675)		(52)		Changes in foreign exchange rates	58		(61)
Changes in fair value:	Changes in fair value:					Changes in fair value:
included in other income		5,989		100
included in other comprehensive income		2,502		1,220
September 30,		$	11,910	$	9,713
included in other income, net						included in other income, net	3,802		2,741
included in other comprehensive (loss)						included in other comprehensive (loss)	(1,064)		2,502
March 31,						March 31,	$	16,265	$	12,830

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

Fair value of the Notes

The ~~Notes’~~ fair value of the Notes outstanding (including the embedded conversion ~~feature embedded in the Notes)~~feature) was ~~$488.3~~$507.8 million as of ~~September 30, 2022~~March 31, 2023 and ~~$642.0~~$521.1 million as of December 31, ~~2021.~~ 2022. In the three months ended March 31, 2023 the Company repurchased Notes representing $33 million in aggregate principal amount.

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

NOTE ~~10.~~11. REVENUE

Geographic revenue


		Three Months Ended September 30,								Nine Months Ended September 30,									Three Months Ended March 31,
(Dollars in thousands)	(Dollars in thousands)	2022				2021				2022				2021				(Dollars in thousands)		2023			2022
U.S.	U.S.	$	148,200	55	%	$	132,016	52	%	$	513,197	56	%	$	515,881	58	%	U.S.			$	184,519	56	%	$	217,272	58	%
Other Americas	Other Americas	18,546		7	%	17,510		7	%	80,558		9	%	43,469		5	%	Other Americas			15,011		5	%	45,751		12	%
United Kingdom (“U.K.”)	United Kingdom (“U.K.”)	24,074		9	%	25,982		10	%	83,837		9	%	86,747		10	%	United Kingdom (“U.K.”)			42,237		13	%	30,932		8	%
Europe (excluding U.K.), Middle East, and Africa	Europe (excluding U.K.), Middle East, and Africa	46,212		17	%	46,306		18	%	140,586		15	%	143,763		15	%	Europe (excluding U.K.), Middle East, and Africa			51,318		16	%	49,136		13	%
Asia-Pacific	Asia-Pacific	33,699		12	%	34,454		13	%	103,197		11	%	105,609		12	%	Asia-Pacific			32,387		10	%	33,216		9	%
		$	270,731	100	%	$	256,268	100	%	$	921,375	100	%	$	895,469	100	%				$	325,472	100	%	$	376,307	100	%

Revenue streams


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
(in thousands)	(in thousands)	2022		2021		2022		2021		(in thousands)		2023		2022
Perpetual license	Perpetual license	$	9,223	$	2,874	$	18,929	$	20,922	Perpetual license		$	403	$	7,440
Subscription license	Subscription license	31,112		35,421		210,245		251,226		Subscription license		84,527		137,533
Revenue recognized at a point in time	Revenue recognized at a point in time	40,335		38,295		229,174		272,148		Revenue recognized at a point in time		84,930		144,973
Maintenance	Maintenance	77,526		83,188		235,568		237,531		Maintenance		79,630		79,716
Pega Cloud	Pega Cloud	97,359		78,369		281,182		219,520		Pega Cloud		107,879		90,317
Consulting	Consulting	55,511		56,416		175,451		166,270		Consulting		53,033		61,301
Revenue recognized over time	Revenue recognized over time	230,396		217,973		692,201		623,321		Revenue recognized over time		240,542		231,334
Total revenue	Total revenue	$	270,731	$	256,268	$	921,375	$	895,469	Total revenue		$	325,472	$	376,307

1615

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
(in thousands)	(in thousands)	2022		2021		2022		2021		(in thousands)		2023		2022
Pega Cloud	Pega Cloud	$	97,359	$	78,369	$	281,182	$	219,520	Pega Cloud		$	107,879	$	90,317
Maintenance	Maintenance	77,526		83,188		235,568		237,531		Maintenance		79,630		79,716
Subscription services	Subscription services	174,885		161,557		516,750		457,051		Subscription services		187,509		170,033
Subscription license	Subscription license	31,112		35,421		210,245		251,226		Subscription license		84,527		137,533
Subscription	Subscription	205,997		196,978		726,995		708,277		Subscription		272,036		307,566
Perpetual license	Perpetual license	9,223		2,874		18,929		20,922		Perpetual license		403		7,440
Consulting	Consulting	55,511		56,416		175,451		166,270		Consulting		53,033		61,301
		$	270,731	$	256,268	$	921,375	$	895,469			$	325,472	$	376,307

Remaining performance obligations ("Backlog")

Expected future revenue from existing non-cancellable contracts:

As of ~~September 30, 2022:~~March 31, 2023:


(Dollars in thousands)	(Dollars in thousands)	Subscription services				Subscription license				Perpetual license			Consulting		Total				(Dollars in thousands)		Subscription services						Subscription license				Perpetual license				Consulting				Total
		Maintenance		Pega Cloud								Maintenance									Pega Cloud
1 year or less	1 year or less	$	191,045	$	328,111			$	69,753				$	814	$	27,968			$	617,691		53	%	1 year or less	$	235,315			$	389,632			$	35,346			$	5,262			$	41,203		$	706,758	54	%
1-2 years	1-2 years	55,141		213,304		4,113				4,505			6,699		283,762		25	%	1-2 years		66,272				239,228		3,215				2,252				6,653				317,620		24		%
2-3 years	2-3 years	24,496		115,416		1,420				2,252			1,648		145,232		13	%	2-3 years		29,295				131,085		6,777				—				2,292				169,449		13		%
Greater than 3 years	Greater than 3 years	16,198		82,807		1,734				—			508		101,247		9	%	Greater than 3 years		7,479				106,778		—				—				—				114,257		9		%
		$	286,880	$	739,638	$	77,020			$	7,571		$	36,823	$	1,147,932	100	%			$	338,361			$	866,723	$	45,338			$	7,514			$	50,148			$	1,308,084	100		%

As of ~~September 30, 2021:~~March 31, 2022:


(Dollars in thousands)	(Dollars in thousands)	Subscription services				Subscription license				Perpetual license			Consulting		Total				(Dollars in thousands)		Subscription services						Subscription license				Perpetual license				Consulting				Total
		Maintenance		Pega Cloud								Maintenance									Pega Cloud
1 year or less	1 year or less	$	196,667	$	284,359			$	49,265				$	15,686	$	31,673			$	577,650		56	%	1 year or less	$	228,984			$	329,857			$	47,428			$	7,281			$	40,661		$	654,211	55	%
1-2 years	1-2 years	59,360		177,214		16,872				1,064			6,561		261,071		25	%	1-2 years		63,870				208,875		16,111				4,505				10,955				304,316		26		%
2-3 years	2-3 years	37,734		79,775		420				4,094			5,165		127,188		12	%	2-3 years		33,617				106,156		2,422				2,252				3,876				148,323		13		%
Greater than 3 years	Greater than 3 years	33,935		30,113		245				2,127			1,697		68,117		7	%	Greater than 3 years		22,611				44,596		1,758				—				522				69,487		6		%
		$	327,696	$	571,461	$	66,802			$	22,971		$	45,096	$	1,034,026	100	%			$	349,082			$	689,484	$	67,719			$	14,038			$	56,014			$	1,176,337	100		%

NOTE ~~11.~~12. STOCK-BASED COMPENSATION

Expense


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
(in thousands)	(in thousands)	2022		2021		2022		2021		(in thousands)		2023		2022
Cost of revenue	Cost of revenue	$	6,797	$	5,114	$	19,754	$	16,889	Cost of revenue		$	8,912	$	6,378
Selling and marketing	Selling and marketing	12,933		13,376		36,524		41,844		Selling and marketing		17,661		10,958
Research and development	Research and development	7,724		6,231		22,425		19,343		Research and development		9,060		7,346
General and administrative	General and administrative	6,320		3,974		14,598		11,407		General and administrative		6,924		3,545
		$	33,774	$	28,695	$	93,301	$	89,483			$	42,557	$	28,227
Income tax benefit	Income tax benefit	$	(600)	$	(5,845)	$	(1,505)	$	(18,028)	Income tax benefit		$	(672)	$	(5,311)

As of ~~September 30, 2022,~~March 31, 2023, the Company had ~~$161.0~~$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 ~~2.1~~2 years.

Grants


		Nine Months Ended September 30, 2022				Three Months Ended March 31, 2023
(in thousands)	(in thousands)	Shares	Total Fair Value		(in thousands)	Shares	Total Fair Value
Restricted stock units	Restricted stock units	1,436	$	112,303	Restricted stock units	1,460	$	68,352
Non-qualified stock options	Non-qualified stock options	4,529	$	102,332	Non-qualified stock options	43	$	615
Common stock		14	$	600

1716

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE ~~12.~~13. INCOME TAXES

Effective income tax rate


		Three Months Ended September 30,				Nine Months Ended September 30,							Three Months Ended March 31,
(Dollars in thousands)	(Dollars in thousands)	2022		2021		2022			2021			(Dollars in thousands)		2023			2022
Provision for (benefit from) income taxes	Provision for (benefit from) income taxes	$	11,748	$	(24,826)	$	190,239		$	(54,360)		Provision for (benefit from) income taxes		$	5,249		$	(7,683)
Effective income tax rate (benefit rate)						100		%	(68)		%
Effective income tax rate												Effective income tax rate		(34)		%	95		%

The ~~change in the~~ effective income tax rate ~~(benefit rate)~~ in the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 was ~~primarily due to~~impacted by the ~~recognition of a $191.9 million~~ valuation allowance ~~recognized at June 30, 2022,~~ on the Company’s U.S. and ~~U.K~~U.K. deferred tax ~~assets. As~~assets and current taxes payable in the U.S. as a result of ~~recording the valuation allowance, the Company is no longer recording any~~projecting taxable income that cannot be fully offset by net operating losses and available tax ~~benefit on its U.S and U.K losses. The $11.7 million provision for (benefit from) income taxes for the three months ended September 30, 2022 primarily represents non-U.K. foreign income taxes.~~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.

As of June 30, 2022, the Company’s Backlog balance was not sufficient to recover our net deferred tax assets. The Backlog balance and other unsettled circumstances, impacting the Company’s operations, reduced the Backlog’s weight as objectively verifiable positive evidence to generate sufficient taxable income to recover its net deferred tax assets. These unsettled circumstances include growing and extended geopolitical turmoil, increasing inflation, and an uncertain global economic outlook.

As of June 30, 2022, the combination of the above factors caused the Company to conclude there is not sufficient objectively verifiable positive evidence to support that it is more likely than not the Company will generate sufficient future taxable income to recover the Company’s U.S. and U.K. net deferred tax assets. Accordingly, the Company recorded a valuation allowance of $191.9 million in income tax expense during the three months ended June 30, 2022.

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

NOTE ~~13.~~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,					Three Months Ended March 31,
(in thousands, except per share amounts)	(in thousands, except per share amounts)	2022		2021		2022		2021		(in thousands, except per share amounts)		2023		2022
Net (loss)	Net (loss)	$	(93,520)	$	(56,468)	$	(380,195)	$	(25,794)	Net (loss)		$	(20,774)	$	(379)
Weighted-average common shares outstanding	Weighted-average common shares outstanding	81,996		81,526		81,842		81,284		Weighted-average common shares outstanding		82,604		81,680
(Loss) per share, basic	(Loss) per share, basic	$	(1.14)	$	(0.69)	$	(4.65)	$	(0.32)	(Loss) per share, basic		$	(0.25)	$	—

Net (loss)	Net (loss)	$	(93,520)	$	(56,468)	$	(380,195)	$	(25,794)	Net (loss)		$	(20,774)	$	(379)

Weighted-average common shares outstanding, assuming dilution (1) (2) (3)	Weighted-average common shares outstanding, assuming dilution (1) (2) (3)	81,996		81,526		81,842		81,284		Weighted-average common shares outstanding, assuming dilution (1) (2) (3)		82,604		81,680
(Loss) per share, diluted	(Loss) per share, diluted	$	(1.14)	$	(0.69)	$	(4.65)	$	(0.32)	(Loss) per share, diluted		$	(0.25)	$	—

Outstanding anti-dilutive stock options and RSUs (4)	Outstanding anti-dilutive stock options and RSUs (4)	3,019		5,815		3,589		6,136		Outstanding anti-dilutive stock options and RSUs (4)		1,348		4,178

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

(2) The shares underlying the conversion options in the Company’s Notes are included using the if-converted method, if dilutive in the period. If the outstanding conversion options were fully exercised, the Company would issue ~~an additional~~ approximately ~~4.4~~4.2 million ~~shares.~~

~~PEGASYSTEMS INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

shares as of March 31, 2023.

(3) The Company’s Capped Call Transactions represent the equivalent of approximately ~~4.4~~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. 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 ~~14.~~15. COMMITMENTS AND CONTINGENCIES

Commitments

See "Note 7. Leases" for additional information.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 ~~our~~the Company’s estimates will change in the near term, and the effect may be material.

~~As of September 30, 2022 and December 31, 2021, the~~The Company ~~has~~had no accrued losses for ~~litigation.~~

~~Pegasystems Inc. v. Appian Corp. & Business Process Management Inc.~~

~~On July 3, 2019, the Company filed suit in Massachusetts federal court against Appian Corp. (“Appian”)~~litigation as of March 31, 2023 and Business Process Management, Inc. (“BPM”) relating to a BPM “Market Report” that Appian had used to promote itself against the Company. Pegasystems Inc. v. Appian Corp. & Business Process Management Inc., No. 1:19-cv-11461 (D. Mass). On April 15, 2022, each of the parties filed motions for summary judgment with the court. On September 30, 2022, the court entered an order allowing in part and denying in part each party’s motion for summary judgment, thereby narrowing the potential issues for trial. On October 24, 2022, the court entered an order setting a trial date of January 3, 2023. The Company continues to believe the counterclaims brought by Appian against the Company are without merit, and the Company intends to vigorously pursue its claims against Appian and defend against the counterclaims brought against the Company in this matter. The Company is unable to reasonably estimate possible damages or a range of possible damages in this matter given the Company’s belief that the damages claimed by Appian fail to satisfy the required legal standard, the status of the proceeding, and due to the uncertainty as to how a jury may rule if this ultimately proceeds to trial.December 31, 2022.

Appian Corp. v. 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. 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 ~~in the amount~~ of $2,036,860,045 for trade secret misappropriation and $1.00 for ~~the violation of~~violating the Virginia Computer Crimes Act. On September 15, 2022, the circuit court of Fairfax County entered judgment ~~in the amount~~ of $2,060,479,287, consisting of the damages previously awarded by the jury plus attorneys’ fees and costs, and stating that the judgment is subject to post-judgment interest at a rate of 6.0% per annum, from the date of the jury verdict (May 9, 2022) as to the amount of the jury verdict and from September 15, 2022 as to the amount of the award of attorneys’ fees and costs. On September 15, 2022, the Company filed a notice of appeal from the judgment. On September 29, 2022, the circuit court of Fairfax County approved a $25,000,000 letter of credit obtained by the Company to secure the judgment and entered an order suspending the judgment during the pendency of the Company’s appeal. ~~This~~Appellate briefing is currently in process. Although it is not possible to predict timing, this appeals process could potentially take years to complete. The Company continues to believe that it did not misappropriate any alleged trade secrets and that its sales of the Company’s products at issue were not caused by, or the result of, any alleged misappropriation of trade secrets. The Company is unable to reasonably estimate possible damages because of, among other things, uncertainty as to the outcome of appellate proceedings and/or any potential new trial resulting from the appellate proceedings.

~~PEGASYSTEMS INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

City of Fort Lauderdale Police and Firefighters’ Retirement System, Individually and on Behalf of All Others Similarly Situated v. 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 motion to dismiss is scheduled for May 17, 2023. The Company believes the claims brought against the defendants are without merit and intends to ~~vigorously~~ defend against these ~~claims.~~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.

2018

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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 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. 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.

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

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Quarterly Report”) contains or incorporates forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Words such as expects, anticipates, intends, plans, believes, will, could, should, estimates, may, targets, strategies, projects, forecasts, guidance, likely, and usually, or variations of such words and other similar expressions identify forward-looking statements, which are based on current expectations and assumptions.

Forward-looking statements deal with future events and are subject to risks and uncertainties that are difficult to predict, including, but not limited to:

•our future financial performance and business plans;

•the adequacy of our liquidity and capital resources;

•the continued payment of our quarterly dividends;

•the timing of revenue recognition;

•management of our transition to a more subscription-based business model;

•variation in demand for our products and services, including among clients in the public sector;

•reliance on key personnel;

•global economic and political conditions and uncertainty, including ~~continued~~ impacts from ~~the ongoing COVID-19 pandemic~~public health emergencies and the war in Ukraine;

•reliance on third-party service providers, including hosting providers;

•compliance with our debt obligations and covenants;

•the potential impact of our convertible senior notes and Capped Call Transactions;

•foreign currency exchange rates;

•the potential legal and financial liabilities and damage to our reputation due to cyber-attacks;

•security breaches and security flaws;

•our ability to protect our intellectual property rights, costs associated with defending such rights, intellectual property rights claims, and other related claims by third parties against us, including related costs, damages, and other relief that may be granted against us;

•our ongoing litigation with Appian Corp.;

•our client retention rate; and

•management of our growth.

These risks and others that may cause actual results to differ materially from those expressed in such forward-looking statements are described further in Part I of our Annual Report on Form 10-K for the year ended December 31, ~~2021,~~2022, Part II of this Quarterly Report on Form 10-Q, and other filings we make with the U.S. Securities and Exchange Commission (“SEC”).

Except as required by applicable law, we do not undertake and expressly disclaim any obligation to update or revise these forward-looking statements publicly, whether due to new information, future events, or otherwise.

The forward-looking statements in this Quarterly Report represent our views as of ~~October~~April 26, ~~2022.~~2023.

BUSINESS OVERVIEW

We develop, market, license, host, and support enterprise software that helps organizations build agility into their business so they can adapt to change. Our powerful low-code platform for workflow automation and ~~AI-powered~~artificial intelligence-powered decisioning enables the world’s leading brands and government agencies to hyper-personalize customer experiences, streamline customer service, and automate mission-critical business processes and workflows. With Pega, our clients can leverage our intelligent technology and scalable architecture to accelerate their digital transformation. In addition, our client success teams, world-class partners, and clients ~~themselves~~ leverage our Pega Express™ methodology to design and deploy mission-critical applications quickly and collaboratively.

Our target clients are Global 2000 organizations and government agencies that require solutions to distinguish themselves in the markets they serve. Our solutions achieve and facilitate differentiation by increasing business agility, driving growth, improving productivity, attracting and retaining customers, and reducing risk. Along with our partners, we deliver solutions tailored to ~~our clients’~~the specific industry ~~needs.~~needs of our clients.

Subscription transition

We are transitioning our business to sell software primarily through subscription arrangements. Until we fully complete our subscription transition, which we expect will occur in 2023, our operating results may be impacted. Operating performance, ~~and the actual~~revenue mix, ~~of revenue~~ and new arrangements in each period can fluctuate based on client preferences for our perpetual and subscription offerings. See the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022 for additional information.

2120

~~Coronavirus (“COVID-19”)~~

~~As of September 30, 2022, COVID-19 has not had a material impact on our results of operations or financial condition. See “Actual or threatened public health emergencies could harm our business” in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2021 for additional information.~~

~~Ukraine~~

~~Our direct financial exposure to Ukraine, Russia, and Belarus is not material.~~

In 2021, before Russia's invasion of Ukraine, we made a business decision to stop pursuing new clients in Russia and closed our local office. For the year ended December 31, 2021, total revenue from clients located in Ukraine, Russia, and Belarus was less than $4.0 million. However, the ultimate impact of Russia’s invasion of Ukraine on our business will depend on future developments, including the duration and spread of the conflict and the impact on our people, partners, clients, and vendors in neighboring countries and globally, all of which are uncertain and unpredictable.

Performance metrics

We use performance metrics to analyze and assess our overall performance, make operating decisions, and forecast and plan for future periods, including:

Annual contract value (“ACV”)

ACV represents the annualized value of our active contracts as of the measurement date. The contract's total value is divided by its duration in years to calculate ~~ACV for subscription license and Pega Cloud contracts. Maintenance revenue for the quarter then ended is multiplied by four to calculate ACV for maintenance.~~ACV. ACV is a performance measure that we believe provides useful information to our management and ~~investors, particularly during~~investors.

In 2023, we changed our ~~subscription transition.~~ACV calculation methodology for maintenance and all contracts less than 12 months to align with other contract types. Previously disclosed ACV amounts have been updated to allow for comparability.

Constant currency ACV is calculated by applying the Q1 2022 foreign exchange rates to all periods shown.

2221

Remaining performance obligations (“Backlog”)

Reconciliation of GAAP Backlog and Constant Currency Backlog


(in millions, except percentages)	(in millions, except percentages)	Q3 2022		1 Year Growth Rate		(in millions, except percentages)	Q1 2023		1 Year Growth Rate
Backlog	Backlog	$	1,148	11	%	Backlog	$	1,308	11	%
Impact of changes in foreign exchange rates	Impact of changes in foreign exchange rates	74		7	%	Impact of changes in foreign exchange rates	28		3	%
Backlog - Constant Currency	Backlog - Constant Currency	$	1,222	18	%	Backlog - Constant Currency	$	1,336	14	%

~~Note:~~ Constant currency ~~measures are~~Backlog is calculated by applying the Q1 2022 foreign exchange rates ~~for the earliest period shown~~ to all ~~periods. The above constant currency measures reflect foreign exchange rates applicable as of Q3 2021.~~ periods shown.

We believe that non-GAAP financial measures help investors understand our core operating results and prospects, consistent with how management measures and forecasts our performance without the effect of often one-time charges and other items outside our normal operations. The supplementary non-GAAP financial measures are not meant to be superior to or a substitute for financial measures prepared under U.S. GAAP.

Free cash flow (1)


(in thousands, except percentages)	Three Months Ended March 31,
	2023			2022			Change
Cash provided by operating activities	$	68,107		$	15,116		351	%
Investment in property and equipment	(11,487)			(6,657)
Legal fees	1,515			6,887
Restructuring	14,458			—
Interest on convertible senior notes	2,250			2,250

Free cash flow	$	74,843		$	17,596		325	%

Total revenue	$	325,472		$	376,307
Free cash flow margin	23		%	5		%

(1) We believe that non-GAAP financial measures help investors understand our core operating results and prospects, consistent with how management measures and forecasts our performance without the effect of often one-time charges and other items outside our normal operations. The supplementary non-GAAP financial measures are not meant to be superior to or a substitute for financial measures prepared under U.S. GAAP. Our non-GAAP free cash flow measures reflect the following adjustments:

•Investment in property and equipment: Investment in property and equipment fluctuates in amount and frequency and is significantly affected by the timing and size of investments in our facilities. We believe excluding these amounts provides a useful comparison of our operational performance in different periods.

•Legal fees: Includes legal and related fees arising from proceedings outside of the ordinary course of business. We believe excluding these amounts from our non-GAAP financial measures is useful to investors as the disputes giving rise to them are not representative of our core business operations and ongoing operational performance.

•Restructuring: We have excluded restructuring from our non-GAAP financial measures. Restructuring fluctuates in amount and frequency and is significantly affected by the timing and size of our restructuring activities. We believe excluding the impact from our non-GAAP financial measures is useful to investors as these amounts are not representative of our core business operations and ongoing operational performance.

•Interest on convertible senior notes: In February 2020, we issued convertible senior notes, due March 1, 2025, in a private placement. We believe excluding the interest payments provides a useful comparison of our operational performance in different periods.

CRITICAL ACCOUNTING POLICIES

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our unaudited condensed consolidated financial statements, which have been prepared following accounting principles generally accepted in the United States of America (“U.S.”) and the rules and regulations of the SEC for interim financial reporting. ~~The preparation of~~Preparing these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience, knowledge of current conditions, and expectations of what could occur in the future given the available information.

For more information about our critical accounting policies, we encourage you to read the discussion in the following locations in our Annual Report on Form 10-K for the year ended December 31, ~~2021:~~2022:

•“Critical Accounting Estimates and Significant Judgments” in Item 7; and

•“Note 2. Significant Accounting Policies” in Item 8.

We recorded a valuation allowance of $191.9 million in income tax expense during the three months ended June 30, 2022. See "Note 12. Income Taxes" in Part I, Item 1 of this Quarterly Report for additional information. There have been no other significant changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022.

RESULTS OF OPERATIONS

Revenue

Subscription transition

We are transitioning our business to sell software primarily through subscription arrangements.

This transition has impacted ~~the optics of~~ revenue growth as revenue from subscription service arrangements, which includes Pega Cloud and maintenance, is typically recognized over the contract term, while revenue from license sales is recognized when the license rights become effective, typically upfront.


(Dollars in thousands)	(Dollars in thousands)	Three Months Ended September 30,								Change							Nine Months Ended September 30,														Change				(Dollars in thousands)						Three Months Ended March 31,				Change
		2022				2021									2022							2021															2023					2022
Pega Cloud	Pega Cloud	$	97,359	36	%	$	78,369	31	%			$	18,990		24	%			$	281,182		31	%			$	219,520		25	%						$	61,662	28	%	Pega Cloud									$	107,879	33	%			$	90,317	24	%	$	17,562	19	%
Maintenance	Maintenance	77,526		29	%	83,188		32	%	(5,662)		(7)		%			235,568		25		%			237,531		26		%			(1,963)		(1)	%	Maintenance								79,630		25	%	79,716			21	%		(86)			—	%
Subscription services	Subscription services	174,885		65	%	161,557		63	%	13,328		8		%			516,750		56		%			457,051		51		%			59,699		13	%	Subscription services								187,509		58	%	170,033			45	%		17,476			10	%
Subscription license	Subscription license	31,112		11	%	35,421		14	%	(4,309)		(12)		%			210,245		23		%			251,226		28		%			(40,981)		(16)	%	Subscription license								84,527		26	%	137,533			37	%		(53,006)			(39)	%
Subscription	Subscription	205,997		76	%	196,978		77	%	9,019		5		%			726,995		79		%			708,277		79		%			18,718		3	%	Subscription								272,036		84	%	307,566			82	%		(35,530)			(12)	%
Perpetual license	Perpetual license	9,223		3	%	2,874		1	%	6,349		221		%			18,929		2		%			20,922		2		%			(1,993)		(10)	%	Perpetual license								403		—	%	7,440			2	%		(7,037)			(95)	%
Consulting	Consulting	55,511		21	%	56,416		22	%	(905)		(2)		%			175,451		19		%			166,270		19		%			9,181		6	%	Consulting								53,033		16	%	61,301			16	%		(8,268)			(13)	%
		$	270,731	100	%	$	256,268	100	%	$	14,463	6		%			$	921,375	100		%			$	895,469	100		%			$	25,906	3	%									$	325,472	100	%	$	376,307		100	%		$	(50,835)		(14)	%

The revenue changes in the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 generally reflect the impact of our subscription transition. Other factors impacting our revenue include:

•The United States Dollar has strengthened against foreign currencies in the markets we operate, which reduced total revenue growth in the three and nine months ended September 30, 2022 by approximately 5 percent.

•~~The decreases~~decrease in subscription license revenue in the three ~~and nine~~ months ended ~~September 30, 2022 were~~March 31, 2023 was primarily due to several large software license contracts recognized in revenue in the three ~~and nine~~ months ended ~~September 30, 2021.~~March 31, 2022.

•The ~~decreases in maintenance revenue in the three and nine months ended September 30, 2022 were primarily due to changes in foreign currency exchange rates and the continuing shift to Pega Cloud.~~

•~~The increase~~decrease in consulting revenue in the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 was primarily due to ~~an increase~~a decrease in ~~consultant~~ billable hours ~~in North America.~~and realization rates.

Gross profit


(Dollars in thousands)	(Dollars in thousands)	Three Months Ended September 30,								Change							Nine Months Ended September 30,														Change				(Dollars in thousands)						Three Months Ended March 31,				Change
		2022				2021									2022							2021															2023					2022
Pega Cloud	Pega Cloud	$	68,673	71	%	$	52,845	67	%			$	15,828		30	%			$	194,350		69	%			$	147,388		67	%						$	46,962	32	%	Pega Cloud									$	77,629	72	%			$	63,418	70	%	$	14,211	22	%
Maintenance	Maintenance	71,671		92	%	77,895		94	%	(6,224)		(8)		%			219,296		93		%			221,457		93		%			(2,161)		(1)	%	Maintenance								73,016		92	%	74,585			94	%		(1,569)			(2)	%
Subscription services	Subscription services	140,344		80	%	130,740		81	%	9,604		7		%			413,646		80		%			368,845		81		%			44,801		12	%	Subscription services								150,645		80	%	138,003			81	%		12,642			9	%
Subscription license	Subscription license	30,484		98	%	34,815		98	%	(4,331)		(12)		%			208,322		99		%			249,415		99		%			(41,093)		(16)	%	Subscription license								83,808		99	%	136,911			100	%		(53,103)			(39)	%
Subscription	Subscription	170,828		83	%	165,555		84	%	5,273		3		%			621,968		86		%			618,260		87		%			3,708		1	%	Subscription								234,453		86	%	274,914			89	%		(40,461)			(15)	%
Perpetual license	Perpetual license	9,120		99	%	2,824		98	%	6,296		223		%			18,756		99		%			20,771		99		%			(2,015)		(10)	%	Perpetual license								400		99	%	7,406			100	%		(7,006)			(95)	%
Consulting	Consulting	(2,267)		(4)	%	3,667		6	%	(5,934)		*					4,289		2		%			5,238		3		%			(949)		(18)	%	Consulting								(7,315)		(14)	%	5,790			9	%		(13,105)			*
		$	177,681	66	%	$	172,046	67	%	$	5,635	3		%			$	645,013	70		%			$	644,269	72		%			$	744	—	%									$	227,538	70	%	$	288,110		77	%		$	(60,572)		(21)	%

* not meaningful

The gross profit percent changes in the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 were primarily due to a shift in the revenue mix.

•The ~~increases~~increase in Pega Cloud gross profit percent in the three ~~and nine~~ months ended ~~September 30, 2022 were~~March 31, 2023 was primarily due to cost-efficiency gains as Pega Cloud ~~grows~~continues to grow and ~~scales.~~scale.

•The decrease in ~~Maintenance~~maintenance gross profit percent in the three months ended ~~September 30, 2022~~March 31, 2023 was primarily due to ~~a decrease~~an increase in ~~maintenance revenue.~~compensation and benefits due to increased headcount.

•The ~~decreases~~decrease in consulting gross profit percent in the three ~~and nine~~ months ended ~~September 30, 2022 were~~March 31, 2023 was due to ~~increases~~a decrease in realization rates and consultant ~~availability.~~utilization.

Operating expenses


(Dollars in thousands)	(Dollars in thousands)	Three Months Ended September 30,								Change					Nine Months Ended September 30,										Change				(Dollars in thousands)			Three Months Ended March 31,					Change
		2022				2021								2022					2021												2023		2022
				% of Revenue				% of Revenue											% of Revenue					% of Revenue																		% of Revenue							% of Revenue
Selling and marketing	Selling and marketing	$	153,517	57	%	$	152,479	59	%	$	1,038	1	%		$	472,951	51	%		$	457,641	51	%		$	15,310	3	%		Selling and marketing						$			149,797		46		%		$	162,236		43		%		$	(12,439)	(8)	%
Research and development	Research and development	$	75,342	28	%	$	64,728	25	%	$	10,614	16	%		$	221,173	24	%		$	191,565	21	%		$	29,608	15	%	Research and development					$	75,376		23	%	$	71,490		19		%		$	3,886		5		%
General and administrative	General and administrative	$	26,043	10	%	$	20,176	8	%	$	5,867	29	%		$	94,530	10	%		$	57,607	6	%		$	36,923	64	%	General and administrative					$	23,110		7	%	$	35,764		10		%		$	(12,654)		(35)		%
Restructuring																													Restructuring					$	1,461		—		$	—		—				$	1,461		100		%

•The decrease in selling and marketing in the three months ended March 31, 2023 was primarily due to a decrease in compensation and benefits of $12.2 million.

•The increase in ~~selling~~research and ~~marketing~~development in the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 was primarily due to an increase in ~~employee travel and entertainment and marketing events of $10.7 million.~~

•~~The increases in research and development in the three and nine months ended September 30, 2022 were primarily due to increases in~~ compensation and benefits of ~~$7.5 million and $19.6~~$2.5 million, attributable to increases in headcount and incentive compensation. The ~~increases~~increase in headcount reflects additional investments in developing our solutions.

•The ~~increases~~decrease in general and administrative in the three ~~and nine~~ months ended ~~September 30, 2022 were~~March 31, 2023 was primarily due to ~~increases~~a decrease in ~~compensation and benefits of $2.9 million and $5.7 million, facilities expenses of $1.1 million and $2.8 million, and~~ legal fees and related expenses arising from litigation proceedings outside the ordinary course of business of ~~$0.4 million and $24.0~~$15.9 million. We ~~have incurred and~~ expect to continue to incur additional ~~expenses~~costs for these ~~proceedings in 2022.~~proceedings. See "Note ~~14.~~15. Commitments and Contingencies" in Part I, Item 1 of this Quarterly Report and “Risk Factors” in Part ~~II,~~I, Item 1A of ~~this Quarterly~~our Annual Report for ~~additional information.~~the year ended December 31, 2022.

•The increase in restructuring in the three months ended March 31, 2023 was primarily due to an impairment of $1.2 million on our operating lease right of use assets primarily due to the closure of leased office space in Poland.

Other income and expenses
(Dollars in thousands) Three Months Ended
September 30, Change Nine Months Ended
September 30, Change
2022 2021 2022 2021
Foreign currency transaction gain (loss) $ 3,826 $ 518 $ 3,308 639 % $ 8,415 $ (4,983) $ 13,398 *
Interest income 520 166 354 213 % 1,036 555 481 87 %
Interest expense (1,992) (1,908) (84) (4) % (5,882) (5,747) (135) (2) %
(Loss) on capped call transactions (6,876) (14,735) 7,859 53 % (56,381) (7,543) (48,838) (647) %
Other (loss) income, net (29) 2 (31) * 6,497 108 6,389 5,916 %

$ (4,551) $ (15,957) $ 11,406 71 % $ (46,315) $ (17,610) $ (28,705) (163) %


(Dollars in thousands)	Three Months Ended March 31,				Change
		2023	2022
Foreign currency transaction (loss) gain			$	(2,675)		$	2,876	$	(5,551)	*
Interest income			1,485			207		1,278		617	%
Interest expense			(1,918)			(1,946)		28		1	%
Gain (loss) on capped call transactions			3,206			(30,560)		33,766		*
Other income, net			6,583			2,741		3,842		140	%
			$	6,681		$	(26,682)	$	33,363	*

* not meaningful

•The ~~increases~~decrease in foreign currency transaction (loss) gain ~~(loss)~~ in the three ~~and nine~~ months ended ~~September 30, 2022 were~~March 31, 2023 was primarily due to the impact of fluctuations in foreign currency exchange rates associated with foreign currency-denominated cash and receivables held by our subsidiary in the United Kingdom.

•The ~~increases~~increase in interest income in the three ~~and nine~~ months ended ~~September 30, 2022 were~~March 31, 2023 was primarily due to ~~increases~~an increase in market interest rates.

•The ~~changes~~change in gain (loss) on capped call transactions in the three ~~and nine~~ months ended ~~September 30, 2022 were~~March 31, 2023 was due to fair value adjustments for our capped call transactions. ~~See "Note 9. Fair Value Measurements" in Part I, Item 1 of this Quarterly Report for additional information.~~

•The increase in other ~~(loss)~~ income, net in the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 was due to ~~gains on~~a gain from the repurchase of convertible senior notes and from our venture investments portfolio.

Provision for (benefit from) income taxes


		Three Months Ended September 30,				Nine Months Ended September 30,							Three Months Ended March 31,
(Dollars in thousands)	(Dollars in thousands)	2022		2021		2022			2021			(Dollars in thousands)		2023			2022
Provision for (benefit from) income taxes	Provision for (benefit from) income taxes	$	11,748	$	(24,826)	$	190,239		$	(54,360)		Provision for (benefit from) income taxes		$	5,249		$	(7,683)
Effective income tax rate (benefit rate)						100		%	(68)		%
Effective income tax rate												Effective income tax rate		(34)		%	95		%

~~During the nine months ended September 30, 2022, the change in our~~The effective income tax rate ~~(benefit rate)~~in the three months ended March 31, 2023 was ~~primarily due to~~impacted by the ~~recognition of a $191.9 million~~ valuation allowance ~~recognized at June 30, 2022,~~ on our U.S. and ~~U.K~~U.K. deferred tax ~~assets. As~~assets and current taxes payable in the U.S. as a result of ~~recording the valuation allowance, we are no longer recording any~~projecting taxable income that cannot be fully offset by net operating losses and available tax ~~benefit on our U.S and U.K losses. The $11.7 million provision for (benefit from) income taxes for the three months ended September 30, 2022 primarily represents non-U.K. foreign income taxes.~~credits.

LIQUIDITY AND CAPITAL RESOURCES


		Nine Months Ended September 30,					Three Months Ended March 31,
(in thousands)	(in thousands)	2022		2021		(in thousands)	2023		2022
Cash provided by (used in):	Cash provided by (used in):					Cash provided by (used in):
Operating activities	Operating activities	$	(13,446)	$	(5,321)	Operating activities	$	68,107	$	15,116
Investing activities	Investing activities	10,104		42,730		Investing activities	(14,413)		(6,082)
Financing activities	Financing activities	(43,484)		(91,431)		Financing activities	(29,372)		(35,918)
Effect of exchange rates on cash and cash equivalents		(5,513)		(1,466)
Net (decrease) in cash and cash equivalents		$	(52,339)	$	(55,488)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash						Effect of exchange rate changes on cash, cash equivalents, and restricted cash	782		(310)
Net increase (decrease) in cash, cash equivalents, and restricted cash						Net increase (decrease) in cash, cash equivalents, and restricted cash	$	25,104	$	(27,194)


(in thousands)	(in thousands)	September 30, 2022		December 31, 2021		(in thousands)	March 31, 2023		December 31, 2022
Held by U.S. entities	Held by U.S. entities	$	226,640	$	274,813	Held by U.S. entities	$	229,214	$	248,389
Held by foreign entities	Held by foreign entities	49,071		87,966		Held by foreign entities	94,668		48,832
Total cash, cash equivalents, and marketable securities	Total cash, cash equivalents, and marketable securities	$	275,711	$	362,779	Total cash, cash equivalents, and marketable securities	$	323,882	$	297,221

We believe that our current cash, cash flow from operations, borrowing capacity, and ability to engage in capital market transactions will be sufficient to fund our operations, stock repurchases, and quarterly cash dividends for at least the next 12 months and to meet our known long-term cash requirements. Whether these resources are adequate to meet our liquidity needs beyond that period will depend on our future growth, operating results, and the investments needed to support our operations. We may utilize available funds or seek ~~additional~~ external financing if we require additional capital resources.

If it becomes necessary or desirable to repatriate foreign funds, we may ~~have~~be required to pay ~~U.S.~~federal, state, and local income and foreign withholding taxes upon repatriation. However, due to the complexity of income tax laws and regulations, it is impracticable to estimate the amount of taxes we would have to pay.

Operating activities

We are transitioning our business to sell software primarily through subscription arrangements. This transition has impacted and is expected to continue impacting our billings and cash ~~collections, as subscription~~collections. Subscription licenses and services are ~~generally~~typically billed and collected over the contract term, while perpetual license arrangements are generally billed and collected upfront when the license rights become effective.

The change in cash ~~(used in)~~provided by operating activities in the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 was primarily due to our subscription transition and ~~increased costs as we made investments in research and development to support development of our offerings partially offset by strong~~improved client collections. In addition, in the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ we ~~incurred $32.4~~paid $1.5 million and ~~$8.4~~$6.9 million in legal fees and related expenses arising from proceedings that originated outside of the ordinary course of business. We expect to continue to incur additional ~~expenses~~costs for these proceedings. See "Note ~~14.~~15. Commitments and Contingencies" in Part I, Item 1 of this Quarterly Report for additional information.

Investing activities

The change in cash ~~provided by~~(used in) investing activities in the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 was primarily driven by ~~our investments in financial instruments and~~ an increase in office ~~space related~~space-related capital expenditures.

Financing activities

Debt financing

In February 2020, we issued $600 million in aggregate principal amount of convertible senior notes, which mature on March 1, 2025. In the three months ended March 31, 2023, we paid $29.9 million to repurchase $33 million in aggregate principal amount of convertible senior notes. As of March 31, 2023, we had $567 million in aggregate principal amount of convertible senior notes outstanding.

See "Note 8. Debt" in Part I, Item 1 of this Quarterly Report for additional information.

In November 2019, and as since amended, we entered into a five-year $100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association. As of ~~September 30, 2022,~~March 31, 2023, we had no outstanding cash borrowings under the Credit Facility but had $27.3 million in outstanding letters of credit which ~~reduce the~~reduces our available borrowing capacity. See "Note 8. Debt" in Part I, Item 1 of this Quarterly Report for additional information.

Stock repurchase program

Changes in the remaining stock repurchase authority:


(in thousands)	~~Nine~~Three Months Ended ~~September 30, 2022~~March 31, 2023
December 31, ~~2021~~2022	$	~~22,583~~58,075
Authorizations (1)	~~60,000~~—
~~Repurchases~~ ~~(2)~~	~~(24,508)~~
~~September 30, 2022~~March 31, 2023	$	58,075

(1) On ~~June 2, 2022, we announced that~~April 25, 2023, our Board of Directors extended the ~~current stock repurchase program’s~~ expiration date of our current share repurchase program to June 30, ~~2023.~~

~~(2) All purchases under this program have~~2024, and the amount of stock we are authorized to repurchase has been ~~made on the open market.~~

increased to $60 million.

Common stock repurchases


		Nine Months Ended September 30,							Three Months Ended March 31,
		2022			2021				2023			2022
(in thousands)	(in thousands)	Shares	Amount		Shares	Amount		(in thousands)	Shares	Amount		Shares	Amount
Repurchases paid	Repurchases paid	279	$	24,508	245	$	31,788	Repurchases paid	—	$	—	242	$	22,583
Repurchases unpaid at period end		—	—		3	400

Stock repurchase program	Stock repurchase program	279	24,508		248	32,188		Stock repurchase program	—	—		242	22,583
Tax withholdings for net settlement of equity awards	Tax withholdings for net settlement of equity awards	253	17,575		462	59,819		Tax withholdings for net settlement of equity awards	27	1,107		141	12,128
		532	$	42,083	710	$	92,007		27	$	1,107	383	$	34,711

~~During~~In the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ instead of receiving cash from the equity holders, we withheld shares with a value of ~~$11.5~~$0.6 million and ~~$47.1~~$6.1 million, respectively, for the exercise price of options. These amounts are not included in the table above.

Dividends

We intend to pay a quarterly cash dividend of $0.03 per share. However, the Board of Directors may terminate or modify the dividend program without prior notice.


		Nine Months Ended September 30,					Three Months Ended March 31,
(in thousands)	(in thousands)	2022		2021		(in thousands)	2023		2022
Dividend payments to stockholders	Dividend payments to stockholders	$	7,368	$	7,310	Dividend payments to stockholders	$	2,474	$	2,454

Contractual obligations

As of ~~September 30, 2022,~~March 31, 2023, our contractual obligations were:


		Payments due by period																	Payments due by period
(in thousands)	(in thousands)	Remainder of 2022		2023		2024		2025		2026		2027 and thereafter		Other		Total		(in thousands)	Remainder of 2023		2024		2025		2026		2027		2028 and after		Other		Total
Convertible senior notes (1)	Convertible senior notes (1)	$	—	$	4,500	$	4,500	$	602,250	$	—	$	—	$	—	$	611,250	Convertible senior notes (1)	$	1,772	$	4,253	$	569,126	$	—	$	—	$	—	$	—	$	575,151
Purchase obligations (2)	Purchase obligations (2)	7,925		14,802		15,479		17,594		14,492		14		—		70,306		Purchase obligations (2)	98,303		117,729		127,367		131,146		133,500		14		—		608,059
Operating lease obligations	Operating lease obligations	(4,717)		18,804		16,841		14,778		11,257		48,397		—		105,360		Operating lease obligations	14,003		17,642		14,562		10,917		9,863		39,380		—		106,367
Investment commitments																		Investment commitments	1,000		—		—		—		—		—		—		1,000
Liability for uncertain tax positions (3)	Liability for uncertain tax positions (3)	—		—		—		—		—		—		1,242		1,242		Liability for uncertain tax positions (3)	—		—		—		—		—		—		3,578		3,578
		$	3,208	$	38,106	$	36,820	$	634,622	$	25,749	$	48,411	$	1,242	$	788,158		$	115,078	$	139,624	$	711,055	$	142,063	$	143,363	$	39,394	$	3,578	$	1,294,155

(1) Includes principal and interest.

(2) Represents the fixed or minimum amounts due under purchase obligations for hosting services and sales and marketing programs.

(3) We ~~are unable to~~cannot reasonably estimate the timing of this cash outflow due to uncertainties in the timing of the effective settlement of tax positions.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss from adverse changes in financial market prices and rates.

Foreign currency exposure

Translation risk

Our international operations’ operating expenses are primarily denominated in foreign currencies. However, our international sales are also primarily denominated in foreign currencies, which partially offsets our foreign currency exposure.

A hypothetical 10% strengthening in the U.S. dollar against other currencies would have resulted in:


		Nine Months Ended September 30,					Three Months Ended March 31,
		2022		2021			2023		2022
(Decrease) increase in revenue	(Decrease) increase in revenue	(4)	%	(4)	%	(Decrease) increase in revenue	(4)	%	(3)	%
Increase (decrease) in net income	Increase (decrease) in net income	2	%	(9)	%	Increase (decrease) in net income	1	%	186	%

Remeasurement risk

We incur transaction gains and losses from the remeasurement of monetary assets and liabilities denominated in currencies other than the functional currency of the entities in which they are recorded.

We are primarily exposed to changes in foreign currency exchange rates associated with the Australian dollar, Euro, and U.S. dollar-denominated cash, cash equivalents, receivables, and intercompany balances held by our U.K. subsidiary, a British pound functional entity.

A hypothetical 10% strengthening in the British pound exchange rate in comparison to the Australian dollar, Euro, and U.S. dollar would have resulted in the following impact:


		Nine Months Ended September 30,					Three Months Ended March 31,
(in thousands)	(in thousands)	2022		2021		(in thousands)	2023		2022
Foreign currency gain (loss)	Foreign currency gain (loss)	$	(6,335)	$	(4,480)	Foreign currency gain (loss)	$	(9,251)	$	(7,937)

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures

Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of ~~September 30, 2022.~~March 31, 2023. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of ~~September 30, 2022.~~March 31, 2023.

(b) Changes in internal control over financial reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended ~~September 30, 2022~~March 31, 2023 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information set forth in “Note ~~14.~~15. Commitments and Contingencies”, in Part I, Item 1 of this Quarterly Report is incorporated herein by reference and updates the description of our pending legal proceedings, as described in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on February 16, 2022 and in our Quarterly Reports on Form 10-Q filed with the U.S. Securities and Exchange Commission on April 28, 2022 and July 27, 2022.reference.

ITEM 1A. RISK FACTORS

The risk factors set forth below update the risk factors in our Annual Report on Form 10-K filed with the SEC on February 16, 2022 and in our Quarterly Reports on Form 10-Q filed with the SEC on April 28, 2022 and July 27, 2022.

~~In addition to the risk factors set forth below, we~~We encourage you to carefully consider the risk factors identified in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, ~~2021,~~2022, filed with the U.S. Securities and Exchange Commission. These risk factors could materially affect our business, financial condition, and future results, and may cause our actual business and financial results to differ materially from those contained in forward-looking statements made in this Quarterly Report on Form 10-Q or elsewhere by management.

~~We face risks related to intellectual property claims or appropriation of our intellectual property rights.~~

We rely primarily on a combination of patent, copyright, trademark, and trade secrets laws, as well as intellectual property and confidentiality agreements to protect our proprietary rights. We also try to control access to and distribution of our technologies and other proprietary information. We have obtained patents in strategically important global markets relating to the architecture of our systems. We cannot be certain that such patents will not be challenged, invalidated, or circumvented, or that rights granted thereunder, or the claims contained therein will provide us with competitive advantages. Moreover, despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our software or to obtain the use of information that we regard as proprietary. Although we generally enter into intellectual property and confidentiality agreements with our employees and strategic partners, despite our efforts our former employees may seek employment with our business partners, clients, or competitors, and there can be no assurance that the confidential nature of our proprietary information will be maintained. In addition, the laws of some foreign countries do not protect our proprietary rights as effectively as they do in the U.S. There can be no assurance that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology.

Other companies or individuals have obtained proprietary rights covering a variety of designs, processes, and systems. Third parties have claimed and may in the future claim that we have infringed or otherwise violated their intellectual property. We are currently party to litigation with Appian Corp. - see Part II, Item 1 “Legal Proceedings” and Note 14 in the “Notes to Unaudited Condensed Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report; Part II, Item 1 “Legal Proceedings” and Note 14 in the “Notes to Unaudited Condensed Consolidated Financial Statements” included in Part I, Item 1 of our Quarterly Report filed with the SEC on July 27, 2022; Part II, Item 1 “Legal Proceedings” and Note 14 in the “Notes to Unaudited Condensed Consolidated Financial Statements” included in Part I, Item 1 of our Quarterly Report filed with the SEC on April 28, 2022; and Part I, Item 3 “Legal Proceedings” and Note 19 in the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of our Annual Report filed with the SEC on February 16, 2022.

Although we attempt to limit the amount and type of our contractual liability for infringement or other violation of the proprietary rights of third parties and assert ownership of work product and intellectual property rights as appropriate, there are often exceptions, and limitations may not be applicable and enforceable in all cases. Even if limitations are found to be applicable and enforceable, our liability to our clients for these types of claims could be material given the size of certain of our transactions. We expect that software product developers will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment and delivery delays, require us to enter into royalty or licensing agreements, or preclude us from making and selling the infringing software, if such proprietary rights are found to be valid. Royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all. These claims could also subject us to significant liability for damages, potentially including treble damages if we are found to have willfully infringed patents or copyrights. Even if a license were available, we could be required to pay significant royalties, which would increase our operating expenses. As a result, we may be required to develop alternative non-infringing technology, which could require substantial effort and cost. If we cannot license or develop technology for any infringing aspect of our business, we would be forced to limit or stop sales of our software and may be unable to compete effectively, which could have a material effect upon our business, operating results, and financial condition.

~~Intellectual property rights claims by third parties are extremely costly to defend, could require us to pay significant damages, and could limit our ability to use certain technologies.~~

Companies in the software and technology industries, including some of our current and potential competitors, own large numbers of patents, copyrights, trademarks, and trade secrets and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. In addition, many of these companies can dedicate greater resources to enforce their intellectual property rights and to defend claims that may be brought against them. The litigation may involve patent holding companies or other adverse patent owners that have no relevant product revenues and against which our patents may, therefore, provide little or no deterrence. Third parties have claimed and may claim in the future that we have misappropriated, misused, or infringed other parties' intellectual property rights, and, to the extent we gain greater market visibility, we face a higher risk of being the subject of intellectual property claims.

Any litigation regarding intellectual property could be costly and time-consuming and could divert the attention of our management and key personnel from our business operations. Significant judgments are required for the determination of probability and the range of the outcomes in any legal dispute, and the estimates are based only on the information available to us at the time. Due to the inherent uncertainties involved in claims, legal proceedings, and in estimating the losses that may arise, actual outcomes may differ from our estimates. Contingencies deemed not probable or for which losses were not estimable in one period may become probable, or losses may become estimable in later periods which may have a material impact on our results of operations and financial position. Intellectual property disputes could subject us to significant liabilities, require us to enter into royalty and licensing arrangements on unfavorable terms, prevent us from manufacturing or licensing certain of our products, cause severe disruptions to our operations or the markets in which we compete or require us to satisfy indemnification commitments to our customers. Any of these could seriously harm our business.

We are currently party to litigation with Appian Corp. - see Part II, Item 1 “Legal Proceedings” and Note 14 in the “Notes to Unaudited Condensed Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report; Part II, Item 1 “Legal Proceedings” and Note 14 in the “Notes to Unaudited Condensed Consolidated Financial Statements” included in Part I, Item 1 of our Quarterly Report filed with the SEC on July 27, 2022; Part II, Item 1 “Legal Proceedings” and Note 14 in the “Notes to Unaudited Condensed Consolidated Financial Statements” included in Part I, Item 1 of our Quarterly Report filed with the SEC on April 28, 2022; and Part I, Item 3 “Legal Proceedings” and Note 19 in the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of our Annual Report filed with the SEC on February 16, 2022. On September 15, 2022, the circuit court of Fairfax County entered judgment in the amount of $2,060,479,287, consisting of the jury verdict and the Court’s award of attorneys’ fees and costs to Appian, and stating that Appian will be entitled to post-judgment interest at the rate of 6% 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 portion of the judgment that is attributable to the Court’s 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 of the $25,000,000 letter of credit obtained by the Company to secure the judgment and entered an order suspending the judgment during the pendency of the Company’s appeal. This appeals process could potentially take years to complete. Notwithstanding the circuit court of Fairfax County having entered this judgment, we are unable to reasonably estimate possible damages in that matter because, among other things, of the uncertainty as to the outcome of appellate proceedings, and/or any potential new trial resulting from the appellate proceedings. If we are ultimately unsuccessful in prevailing in the matter in its entirety or in obtaining a substantially smaller jury verdict, we may be required to incur debt or otherwise engage in capital market transactions to finance the final judgment, together with interest and any awards of attorneys’ fees and costs. In addition, if we do not satisfy the judgment within 60 days following the expiration of the right to appeal, there may be an acceleration of liabilities under our Convertible Senior Notes and our Credit Facility. While we continue to believe that we have the financial strength to pay these amounts if it ever becomes necessary, it is possible that we may not be able to engage in these activities on desirable terms, which could have a material adverse effect on our business, financial condition, and operating results.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer purchases of equity securities(1)

Common stock repurchased in the three months ended ~~September 30, 2022:~~March 31, 2023:
(in thousands, except per share amounts)
Total Number of Shares Purchased (1) (2)
Average
Price Paid
per Share (1) (2)
Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Program (2)
Approximate Dollar Value of Shares That May Yet Be Purchased at Period End Under Publicly Announced Share Repurchase Programs (2)
July 1, 2022 - July 31, 2022 14 $ 48.98 — $ 58,075
August 1, 2022 - August 31, 2022 7 40.49 — $ 58,075
September 1, 2022 - September 30, 2022 121 36.81 — $ 58,075
142 $ 38.20 —


(in thousands, except per share amounts)	Total Number of Shares Purchased (2)	Average Price Paid per Share (2)		Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Program	Approximate Dollar Value of Shares That May Yet Be Purchased at Period End Under Publicly Announced Share Repurchased Programs
January 1, 2023 - January 31, 2023	23	$	36.52	—	$	58,075
February 1, 2023 - February 28, 2023	11	39.60		—	$	58,075
March 1, 2023 - March 31, 2023	9	46.49		—	$	58,075
	43	$	39.40	—

(1) See "Liquidity and Capital Resources" in Part I, Item 2 of this Quarterly Report for additional information.

(2) Shares withheld to cover the option exercise price and tax withholding obligations under the net settlement provisions of our stock compensation awards have been included in these amounts.

~~(2)~~

ITEM 5. OTHER INFORMATION

Credit Facility

On ~~June 2, 2022,~~April 21, 2023 and effective on March 31, 2023, we ~~announced that~~entered into an amendment (the “Amendment”) to our $100 million senior secured revolving credit agreement (the “Credit Agreement”) with PNC Bank, National Association (“PNC”), among other changes. The Amendment modifies the financial covenants as reflected in “Note 8. Debt” of Part I, Item 1 of this Quarterly Report on Form 10-Q.

The description contained herein is qualified in its entirety by reference to the Amendment, a copy of which is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q.

Share Repurchase Program

On April 25, 2023, our Board of Directors extended the ~~current stock repurchase program’s~~ expiration date of our current share repurchase program from June 30, 2023 to June 30, 2024, and the amount of stock we are authorized to repurchase has been increased to $60 million. Any actual repurchases under the current repurchase program will be disclosed in the Company’s annual reports on Form 10-K and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission for the annual and applicable quarterly periods ending between June 30, 2023 and ~~increased the remaining stock repurchase authority to $60 million. See "Liquidity and Capital Resources" in Part I, Item 2 of this Quarterly Report for additional information.~~December 31, 2024.

3029

ITEM 6. EXHIBITS

Exhibit No.

Description

Incorporation by Reference

Filed Herewith

Exhibit No.

Description

Incorporation by Reference

Filed Herewith

Form

Exhibit

Filing Date

Form

Exhibit

Filing Date

3.1

Restated Articles of Organization of the Registrant and Amendments thereto

10-Q

3.1

November 4, 2014

3.1

Restated Articles of Organization of the Registrant and Amendments thereto

10-Q

3.1

November 4, 2014

3.2

Amended and Restated Bylaws of Pegasystems Inc.

8-K

3.2

June 15, 2020

3.2

Amended and Restated Bylaws of Pegasystems Inc.

8-K

3.2

June 15, 2020

10.1

Sixth Amendment to Loan Documents, between Pegasystems Inc. and PNC Bank, National Association

10.2

Fee Letter for Senior Secured Credit Facility , dated Mar ch 31, 2023

10.3

Offer Letter between the Registrant and John Higgins executed December 13, 2020++**

31.1

Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Executive Officer.

31.1

Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Executive Officer.

31.2

Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Financial Officer.

31.2

Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Financial Officer.

32++

Certification pursuant to 18 U.S.C. Section 1350 of the Chief Executive Officer and the Chief Financial Officer.

101.INS

Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.INS

Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH

Inline XBRL Taxonomy Extension Schema Document.

101.SCH

Inline XBRL Taxonomy Extension Schema Document.

101.CAL

Inline XBRL Taxonomy Calculation Linkbase Document.

101.CAL

Inline XBRL Taxonomy Calculation Linkbase Document.

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

Inline XBRL Taxonomy Label Linkbase Document.

101.LAB

Inline XBRL Taxonomy Label Linkbase Document.

101.PRE

Inline XBRL Taxonomy Presentation Linkbase Document.

101.PRE

Inline XBRL Taxonomy Presentation Linkbase Document.

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

++ Indicates that the exhibit is being furnished with this report and is not filed as a part of it.

++ Management contracts and compensatory plans or arrangements required to be filed pursuant to Item 15(b) of Form 10-K.

** Certain portions of this exhibit are considered confidential and have been omitted as allowed under SEC rules and regulations

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		Pegasystems Inc.

Dated:	~~October~~April 26, ~~2022~~2023	By:	/s/ KENNETH STILLWELL
			Kenneth Stillwell
			Chief Operating Officer and Chief Financial Officer
			(Principal Financial Officer)


(in thousands, except per share amounts)	Total Number of Shares Purchased (1) (2)	Average Price Paid per Share (1) (2)		Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Program (2)	Approximate Dollar Value of Shares That May Yet Be Purchased at Period End Under Publicly Announced Share Repurchase Programs (2)
July 1, 2022 - July 31, 2022	14	$	48.98	—	$	58,075
August 1, 2022 - August 31, 2022	7	40.49		—	$	58,075
September 1, 2022 - September 30, 2022	121	36.81		—	$	58,075
	142	$	38.20	—