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

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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

x

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 83,247,963 shares of the Registrant’s common stock, $0.01 par value per share, outstanding on July 19, 2023.

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, 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 2023.

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

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

Unbilled receivables by expected billing date:

(Dollars in thousands)			June 30, 2023
1 year or less			$	182,257		72		%
1-2 years			58,025			23		%
2-5 years			12,461			5		%
			$	252,743		100		%

Unbilled receivables by contract effective date:

(Dollars in thousands)			June 30, 2023
2023			$	62,243		25		%
2022			88,337			35		%
2021			67,852			27		%
2020			23,157			9		%
2019 and prior			11,154			4		%
			$	252,743		100		%

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)			June 30, 2023						December 31, 2022
Contract assets (1)			$	13,850					$	17,546
Long-term contract assets (2)			11,126						16,470
			$	24,976					$	34,016

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

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

(in thousands)			June 30, 2023						December 31, 2022
Deferred revenue			$	311,330					$	325,212
Long-term deferred revenue (1)			3,020						3,552
			$	314,350					$	328,764

(1) Included in other long-term liabilities.

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

(1) Included in selling and marketing.

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

									June 30, 2023
(in thousands)			Useful Lives						Cost						Accumulated Amortization						Net Book Value (1)
Client-related			4-10 years						$	63,111					$	(59,344)					$	3,767
Technology			2-10 years						68,137						(62,972)						5,165
Other			1-5 years						5,361						(5,361)						—
									$	136,609					$	(127,677)					$	8,932

Future estimated intangibles assets amortization:

(in thousands)			June 30, 2023
Remainder of 2023			$	1,932
2024			3,180
2025			2,619
2026			874
2027			327
			$	8,932

Amortization of intangible assets:

(2) Included in other current liabilities.

(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.

(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.

In February 2020, the Company issued Convertible Senior Notes (the "Notes") with an aggregate principal of $600 million, due March 1, 2025, in a private placement. No principal payments are due before maturity. The Notes accrue interest at an annual rate of 0.75%, payable semi-annually in arrears on March 1 and September 1, beginning September 1, 2020.

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

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.

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

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)			June 30, 2023						December 31, 2022
Principal			$	502,270					$	600,000
Unamortized issuance costs			(4,130)						(6,391)
Convertible senior notes, net			$	498,140					$	593,609

Interest expense related to the Notes:

			Three Months Ended June 30,												Six Months Ended June 30,
(in thousands)			2023						2022						2023						2022
Contractual interest expense (0.75% coupon)			$	997					$	1,125					$	2,122					$	2,250
Amortization of issuance costs			647						720						1,375						1,439
			$	1,644					$	1,845					$	3,497					$	3,689

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

Future payments:

			June 30, 2023
(in thousands)			Principal						Interest						Total
Remainder of 2023			$	—					$	1,998					$	1,998
2024			—						3,767						3,767
2025			502,270						1,884						504,154
			$	502,270					$	7,649					$	509,919

In February 2020, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”) with certain financial institutions. The Capped Call Transactions covered approximately 4.4 million shares (representing the number of shares for which the Notes were initially convertible) of the Company’s common stock.

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

As of June 30, 2023, Capped Call Transactions representing approximately 3.7 million shares were outstanding.

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

The Capped Call Transactions are accounted for as derivative instruments and do not qualify for the Company’s own equity scope exception in ASC 815 since, in some cases of early settlement, the settlement value 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:

			Six Months Ended June 30,
(in thousands)			2023						2022
January 1,			$	2,582					$	59,964
Settlements			(341)						—
Fair value adjustment			1,845						(49,505)
June 30,			$	4,086					$	10,459

In November 2019, and as since amended, the Company entered into a five-year $100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association. The Company may use borrowings for general corporate purposes and to finance working capital needs. Subject to specific conditions and the agreement of the financial institutions lending the additional amount, the aggregate commitment may be increased to $200 million. The commitments expire on November 4, 2024, and any outstanding loans will be payable on such date. The Credit Facility, as amended, contains customary covenants, including, but not limited to, those relating to additional indebtedness, liens, asset divestitures, and affiliate transactions.

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

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

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

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

Change for all restructuring actions:

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 with little or no market data, which require the Company to develop its own assumptions.

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

The fair value of the Capped Call Transactions at the end of each reporting period is determined using a Black-Scholes option-pricing model. The valuation model uses various market-based inputs, including stock price, remaining contractual term, expected volatility, risk-free interest rate, and expected dividend yield. The Company applies judgment when determining expected volatility. The Company considers the underlying equity security’s historical and implied volatility levels. The Company’s venture investments are recorded at fair value based on multiple valuation methods, including observable public companies and transaction prices and unobservable inputs, including the volatility, rights, and obligations of the securities the Company holds.

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

			June 30, 2023																								December 31, 2022
(in thousands)			Level 1						Level 2						Level 3						Total						Level 1						Level 2						Level 3						Total
Cash equivalents			$	16,733					$	—					$	—					$	16,733					$	2,526					$	—					$	—					$	2,526
Marketable securities			$	—					$	125,939					$	—					$	125,939					$	—					$	152,167					$	—					$	152,167
Capped Call Transactions (1)			$	—					$	4,086					$	—					$	4,086					$	—					$	2,582					$	—					$	2,582
Venture investments (1) (2)			$	—					$	—					$	13,382					$	13,382					$	—					$	—					$	13,069					$	13,069

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

Changes in venture investments:

			Six Months Ended June 30,
(in thousands)			2023						2022
January 1,			$	13,069					$	7,648
New investments			400						400
Sales of investments			(2,773)						(165)
Changes in foreign exchange rates			119						(290)
Changes in fair value:
included in other income, net			4,475						5,978
included in other comprehensive (loss)			(1,908)						2,502
June 30,			$	13,382					$	16,073

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

The fair value of the Notes outstanding (including the embedded conversion feature) was $460.8 million as of June 30, 2023 and $521.1 million as of December 31, 2022. In the six months ended June 30, 2023 the Company repurchased Notes representing $97.7 million in aggregate principal amount.

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

Expected future revenue from existing non-cancellable contracts: