Pegasystems Inc 10-Q for FY2023 Q1
Pegasystems Inc (PEGA)
10-Q
2023-04-26
For: 2023-03-31
View Original
Added on
April 11, 2026
About this 10-Q
Pegasystems Inc filed this 10-Q on April 26, 2023, covering the quarter ended March 31, 2023 (FY2023 Q1).
Headline figures
Quarter ended March 31, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $325.47M
- down 13.5% from $376.31M a year earlier
- Net loss
- $20.77M
- compared with a net loss of $379K a year earlier
- Diluted EPS
- -$0.25
- compared with $0.00 a year earlier
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 | |||||
OR
| Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |||||
Commission File Number: 1-11859
____________________________
(Exact name of Registrant as specified in its charter)
____________________________
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | ||||
(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 | ||||||
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.
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 82,961,204 shares of the Registrant’s common stock, $0.01 par value per share, outstanding on April 19, 2023.
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 March 31, 2023 and December 31, 2022 | |||||
Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2023 and 2022 | |||||
Unaudited Condensed Consolidated Statements of Comprehensive (Loss) for the three months ended March 31, 2023 and 2022 | |||||
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2023 and 2022 | |||||
Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022 | |||||
| Notes to Unaudited Condensed Consolidated Financial Statements | |||||
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | |||||
| Item 4. Controls and Procedures | |||||
| PART II - OTHER INFORMATION | |||||
| Item 1. Legal Proceedings | |||||
| Item 1A. Risk Factors | |||||
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | |||||
| Item 5. Other Information | |||||
| Item 6. Exhibits | |||||
| Signature | |||||
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) | |||||||||||
| March 31, 2023 | December 31, 2022 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Marketable securities | |||||||||||
| Total cash, cash equivalents, and marketable securities | |||||||||||
| Accounts receivable | |||||||||||
| Unbilled receivables | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
Unbilled receivables | |||||||||||
| Goodwill | |||||||||||
| Other long-term assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and stockholders’ equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses | |||||||||||
| Accrued compensation and related expenses | |||||||||||
| Deferred revenue | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Convertible senior notes, net | |||||||||||
| Operating lease liabilities | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 15) | |||||||||||
| Stockholders’ equity: | |||||||||||
Preferred stock, | |||||||||||
Common stock, March 31, 2023 and December 31, 2022, respectively | |||||||||||
| Additional paid-in capital | |||||||||||
Accumulated deficit | ( | ( | |||||||||
| Accumulated other comprehensive (loss) | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
See notes to unaudited condensed consolidated financial statements.
3
PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) | |||||||||||||||||||||||
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Revenue | |||||||||||||||||||||||
| Subscription services | $ | $ | |||||||||||||||||||||
| Subscription license | |||||||||||||||||||||||
| Consulting | |||||||||||||||||||||||
| Perpetual license | |||||||||||||||||||||||
| Total revenue | |||||||||||||||||||||||
| Cost of revenue | |||||||||||||||||||||||
| Subscription services | |||||||||||||||||||||||
| Subscription license | |||||||||||||||||||||||
| Consulting | |||||||||||||||||||||||
| Perpetual license | |||||||||||||||||||||||
| Total cost of revenue | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Selling and marketing | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Restructuring | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| (Loss) income from operations | ( | ||||||||||||||||||||||
| Foreign currency transaction (loss) gain | ( | ||||||||||||||||||||||
| Interest income | |||||||||||||||||||||||
| Interest expense | ( | ( | |||||||||||||||||||||
| Gain (loss) on capped call transactions | ( | ||||||||||||||||||||||
| Other income, net | |||||||||||||||||||||||
| (Loss) before provision for (benefit from) income taxes | ( | ( | |||||||||||||||||||||
| Provision for (benefit from) income taxes | ( | ||||||||||||||||||||||
| Net (loss) | $ | ( | $ | ( | |||||||||||||||||||
| (Loss) per share | |||||||||||||||||||||||
| Basic | $ | ( | $ | ||||||||||||||||||||
| Diluted | $ | ( | $ | ||||||||||||||||||||
| Weighted-average number of common shares outstanding | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
See notes to unaudited condensed consolidated financial statements.
4
PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) (in thousands) | |||||||||||||||||||||||
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Net (loss) | $ | ( | $ | ( | |||||||||||||||||||
| Other comprehensive income (loss), net of tax | |||||||||||||||||||||||
| Unrealized (loss) gain on available-for-sale securities | ( | ||||||||||||||||||||||
| Foreign currency translation adjustments | ( | ||||||||||||||||||||||
| Total other comprehensive income (loss), net of tax | ( | ||||||||||||||||||||||
| Comprehensive (loss) | $ | ( | $ | ( | |||||||||||||||||||
See notes to unaudited condensed consolidated financial statements.
5
| PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except per share amounts) | |||||||||||||||||||||||||||||||||||
Common Stock | Additional Paid-In Capital | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive (Loss) | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Number of Shares | Amount | ||||||||||||||||||||||||||||||||||
| December 31, 2021 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Repurchase of common stock | ( | ( | ( | — | — | ( | |||||||||||||||||||||||||||||
| Issuance of common stock for stock compensation plans | ( | — | — | ( | |||||||||||||||||||||||||||||||
| Issuance of common stock under the employee stock purchase plan | — | — | — | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
Cash dividends declared ($ | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Other comprehensive (loss) | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Net (loss) | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| March 31, 2022 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| December 31, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Issuance of common stock for stock compensation plans | — | — | |||||||||||||||||||||||||||||||||
| Issuance of common stock under the employee stock purchase plan | — | — | |||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
Cash dividends declared ($ | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| Net (loss) | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| March 31, 2023 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
See notes to unaudited condensed consolidated financial statements.
6
PEGASYSTEMS INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) | |||||||||||
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Operating activities | |||||||||||
| Net (loss) | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net (loss) to cash provided by operating activities | |||||||||||
| Stock-based compensation | |||||||||||
| Deferred income taxes | ( | ( | |||||||||
| (Gain) loss on capped call transactions | ( | ||||||||||
| Amortization of deferred commissions | |||||||||||
| Lease expense | |||||||||||
| Amortization of intangible assets and depreciation | |||||||||||
| Foreign currency transaction loss (gain) | ( | ||||||||||
| Other non-cash | ( | ( | |||||||||
| Change in operating assets and liabilities, net | ( | ||||||||||
| Cash provided by operating activities | |||||||||||
| Investing activities | |||||||||||
| Purchases of investments | ( | ( | |||||||||
| Proceeds from maturities and called investments | |||||||||||
| Sales of investments | |||||||||||
| Investment in property and equipment | ( | ( | |||||||||
| Cash (used in) investing activities | ( | ( | |||||||||
| Financing activities | |||||||||||
| Repurchases of convertible senior notes | ( | ||||||||||
| Proceeds from settlement of capped calls transactions | |||||||||||
| Dividend payments to stockholders | ( | ( | |||||||||
| Proceeds from employee stock purchase plan | |||||||||||
| Proceeds from stock option exercises | |||||||||||
| Common stock repurchases | ( | ( | |||||||||
| Cash (used in) financing activities | ( | ( | |||||||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | ( | ||||||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | ( | ||||||||||
| Cash, cash equivalents, and restricted cash, beginning of period | |||||||||||
| Cash, cash equivalents, and restricted cash, end of period | $ | $ | |||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash included in other long-term assets | |||||||||||
| Total cash, cash equivalents and restricted cash | $ | $ | |||||||||
See notes to unaudited condensed consolidated financial statements.
7
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, 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 2023.
NOTE 2. MARKETABLE SECURITIES
| March 31, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||||||||||||||||||||||||||||
| Government debt | $ | $ | $ | ( | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||
| Corporate debt | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| $ | $ | $ | ( | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
As of March 31, 2023, marketable securities’ maturities ranged from April 2023 to January 2026, with a weighted-average remaining maturity of 0.5 years.
NOTE 3. RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE
(in thousands) | March 31, 2023 | December 31, 2022 | |||||||||
| Accounts receivable | $ | $ | |||||||||
| Unbilled receivables | |||||||||||
| Long-term unbilled receivables | |||||||||||
| $ | $ | ||||||||||
Unbilled receivables
Unbilled receivables are client-committed amounts for which revenue recognition precedes billing, and billing is solely subject to the passage of time.
(Dollars in thousands) | March 31, 2023 | |||||||
| 1 year or less | $ | % | ||||||
| 1-2 years | % | |||||||
| 2-5 years | % | |||||||
| $ | % | |||||||
(Dollars in thousands) | March 31, 2023 | |||||||
| 2023 | $ | % | ||||||
| 2022 | % | |||||||
| 2021 | % | |||||||
| 2020 | % | |||||||
| 2019 and prior | % | |||||||
| $ | % | |||||||
8
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Contract assets
Contract assets are client-committed amounts for which revenue recognized exceeds the amount billed to the client, and billing is subject to conditions other than the passage of time, such as the completion of a related performance obligation.
(in thousands) | March 31, 2023 | December 31, 2022 | |||||||||
Contract assets (1) | $ | $ | |||||||||
Long-term contract assets (2) | |||||||||||
| $ | $ | ||||||||||
(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) | March 31, 2023 | December 31, 2022 | |||||||||
| Deferred revenue | $ | $ | |||||||||
Long-term deferred revenue (1) | |||||||||||
| $ | $ | ||||||||||
(1) Included in other long-term liabilities.
The increase in deferred revenue in the three months ended March 31, 2023 was primarily due to new billings in advance of revenue recognition exceeding the $139.7 million of revenue recognized during the period that was included in deferred revenue as of December 31, 2022.
NOTE 4. DEFERRED COMMISSIONS
(in thousands) | March 31, 2023 | December 31, 2022 | |||||||||
Deferred commissions (1) | $ | $ | |||||||||
| Three Months Ended March 31, | |||||||||||||||||||||||
| (in thousands) | 2023 | 2022 | |||||||||||||||||||||
Amortization of deferred commissions (1) | $ | $ | |||||||||||||||||||||
NOTE 5. GOODWILL AND OTHER INTANGIBLES
Goodwill
| Three Months Ended March 31, | |||||||||||
(in thousands) | 2023 | 2022 | |||||||||
| January 1, | $ | $ | |||||||||
| Currency translation adjustments | |||||||||||
| March 31, | $ | $ | |||||||||
Intangibles
Intangible assets are recorded at cost and amortized using the straight-line method over their estimated useful lives.
| March 31, 2023 | |||||||||||||||||||||||
| (in thousands) | Useful Lives | Cost | Accumulated Amortization | Net Book Value (1) | |||||||||||||||||||
Client-related | $ | $ | ( | $ | |||||||||||||||||||
Technology | ( | ||||||||||||||||||||||
Other | ( | ||||||||||||||||||||||
| $ | $ | ( | $ | ||||||||||||||||||||
(1) Included in other long-term assets.
9
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 | $ | $ | ( | $ | |||||||||||||||||||
| Technology | ( | ||||||||||||||||||||||
| Other | ( | ||||||||||||||||||||||
| $ | $ | ( | $ | ||||||||||||||||||||
(1) Included in other long-term assets.
(in thousands) | March 31, 2023 | ||||
| Remainder of 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| $ | |||||
| Three Months Ended March 31, | |||||||||||||||||||||||
| (in thousands) | 2023 | 2022 | |||||||||||||||||||||
Cost of revenue | $ | $ | |||||||||||||||||||||
Selling and marketing | |||||||||||||||||||||||
| $ | $ | ||||||||||||||||||||||
NOTE 6. OTHER ASSETS AND LIABILITIES
Other current assets
| (in thousands) | March 31, 2023 | December 31, 2022 | |||||||||
| Income tax receivables | $ | $ | |||||||||
| Contract assets | |||||||||||
| Other | |||||||||||
| $ | $ | ||||||||||
Other long-term assets
| (in thousands) | March 31, 2023 | December 31, 2022 | |||||||||
| Deferred commissions | $ | $ | |||||||||
| Right of use assets | |||||||||||
| Property and equipment | |||||||||||
| Venture investments | |||||||||||
| Contract assets | |||||||||||
| Intangible assets | |||||||||||
| Capped call transactions | |||||||||||
| Deferred income taxes | |||||||||||
| Restricted cash | |||||||||||
| Other | |||||||||||
| $ | $ | ||||||||||
Other current liabilities
| (in thousands) | March 31, 2023 | December 31, 2022 | |||||||||
| Operating lease liabilities | $ | $ | |||||||||
| Dividends payable | |||||||||||
| $ | $ | ||||||||||
10
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Other long-term liabilities
| (in thousands) | March 31, 2023 | December 31, 2022 | |||||||||
| Deferred revenue | $ | $ | |||||||||
| Income taxes payable | |||||||||||
| Other | |||||||||||
| $ | $ | ||||||||||
NOTE 7. LEASES
Expense
| Three Months Ended March 31, | |||||||||||||||||||||||
| (in thousands) | 2023 | 2022 | |||||||||||||||||||||
| Fixed lease costs | $ | $ | |||||||||||||||||||||
| Short-term lease costs | |||||||||||||||||||||||
| Variable lease costs | |||||||||||||||||||||||
| $ | $ | ||||||||||||||||||||||
Right of use assets and lease liabilities
| (in thousands) | March 31, 2023 | December 31, 2022 | |||||||||
| $ | $ | ||||||||||
| $ | $ | ||||||||||
| Long-term operating lease liabilities | $ | $ | |||||||||
(1) 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:
| March 31, 2023 | December 31, 2022 | ||||||||||
| Weighted-average remaining lease term | |||||||||||
Weighted-average discount rate (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) | March 31, 2023 | ||||
| Remainder of 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| Thereafter | |||||
| Total lease payments | |||||
Less: imputed interest (1) | ( | ||||
| $ | |||||
(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
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2023 | 2022 | |||||||||
| Cash paid for operating leases, net of tenant improvement allowances | $ | $ | |||||||||
| Right of use assets recognized for new leases and amendments (non-cash) | $ | $ | |||||||||
11
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.
•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 March 31, 2023, the Notes were not eligible for conversion.
Repurchase rights
On or after March 1, 2023 and on or before the 40 th scheduled trading day immediately before the maturity date, the Company may redeem for cash all or part of the Notes at a repurchase price equal to 100 % of the principal amount, plus accrued and unpaid interest, if the last reported sale price of the Company’s common stock exceeded 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides a redemption notice.
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) | March 31, 2023 | December 31, 2022 | |||||||||
| Principal | $ | $ | |||||||||
| Unamortized issuance costs | ( | ( | |||||||||
| Convertible senior notes, net | $ | $ | |||||||||
Interest expense related to the Notes:
| Three Months Ended March 31, | |||||||||||||||||||||||
| (in thousands) | 2023 | 2022 | |||||||||||||||||||||
Contractual interest expense ( | $ | $ | |||||||||||||||||||||
Amortization of issuance costs | |||||||||||||||||||||||
| $ | $ | ||||||||||||||||||||||
12
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The average interest rate on the Notes in the three months ended March 31, 2023 and 2022 was 1.2
| March 31, 2023 | |||||||||||||||||
| (in thousands) | Principal | Interest | Total | ||||||||||||||
| Remainder of 2023 | $ | $ | $ | ||||||||||||||
| 2024 | |||||||||||||||||
| 2025 | |||||||||||||||||
| $ | $ | $ | |||||||||||||||
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 covered approximately 4.4 million shares (representing the number of shares for which the Notes were initially convertible) of the Company’s common stock. In the three months ended March 31, 2023, Capped Call Transactions covering approximately 0.2 million shares were settled for proceeds of $0.2 million.
As of March 31, 2023, Capped Call Transactions representing approximately 4.2 million shares were outstanding.
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.
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2023 | 2022 | |||||||||
| January 1, | $ | $ | |||||||||
| Settlements | ( | ||||||||||
| Fair value adjustment | ( | ||||||||||
| March 31, | $ | $ | |||||||||
Credit facility
In November 2019, and as since amended, the Company entered into a five-year $100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association. The Company may use borrowings for general corporate purposes and to finance working capital needs. Subject to specific conditions and the agreement of the financial institutions lending the additional amount, the aggregate commitment may be increased to $200 million. The commitments 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, 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) | $ | $ | $ | $ | |||||||||||||||||||
•Beginning with the fiscal quarter ended March 31, 2024, a maximum net consolidated leverage ratio of 3.5 to 1.0 (with a step-up for certain acquisitions) and a minimum consolidated interest coverage ratio of 3.5 to 1.0.
As of March 31, 2023 and December 31, 2022, the Company had no
As of March 31, 2023, the Company had $27.3 million in outstanding letters of credit, which reduce the Company’s available borrowing capacity under the Credit Facility.
13
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, | $ | ||||
| Costs incurred | |||||
| Cash disbursements | ( | ||||
| Currency translation adjustments | |||||
| March 31, | $ | ||||
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 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 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:
| March 31, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||||||||||||||||
| Cash equivalents | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Marketable securities | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
Capped Call Transactions (1) | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
Venture investments (1) (2) | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
(1) Included in other long-term assets. (2) Investments in privately-held companies.
14
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2023 | 2022 | |||||||||
| January 1, | $ | $ | |||||||||
| New investments | |||||||||||
| Changes in foreign exchange rates | ( | ||||||||||
| Changes in fair value: | |||||||||||
included in other income, net | |||||||||||
included in other comprehensive (loss) | ( | ||||||||||
| March 31, | $ | $ | |||||||||
The carrying value of certain other financial instruments, including receivables and accounts payable, approximates fair value due to these items’ short maturities.
Fair value of the Notes
The fair value of the Notes outstanding (including the embedded conversion feature) was $507.8 million as of March 31, 2023 and $521.1 million as of December 31, 2022. In the three months ended March 31, 2023 the Company repurchased Notes representing $33 million in aggregate principal amount.
The fair value was determined based on the Notes’ quoted price in an over-the-counter market on the last trading day of the reporting period and classified within Level 2 in the fair value hierarchy.
NOTE 11. REVENUE
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2023 | 2022 | |||||||||||||||||||||||||||||||||
| U.S. | $ | % | $ | % | |||||||||||||||||||||||||||||||
| Other Americas | % | % | |||||||||||||||||||||||||||||||||
| United Kingdom (“U.K.”) | % | % | |||||||||||||||||||||||||||||||||
| Europe (excluding U.K.), Middle East, and Africa | % | % | |||||||||||||||||||||||||||||||||
| Asia-Pacific | % | % | |||||||||||||||||||||||||||||||||
| $ | % | $ | % | ||||||||||||||||||||||||||||||||
Revenue streams
| Three Months Ended March 31, | |||||||||||||||||||||||
(in thousands) | 2023 | 2022 | |||||||||||||||||||||
| Perpetual license | $ | $ | |||||||||||||||||||||
| Subscription license | |||||||||||||||||||||||
| Revenue recognized at a point in time | |||||||||||||||||||||||
| Maintenance | |||||||||||||||||||||||
| Pega Cloud | |||||||||||||||||||||||
| Consulting | |||||||||||||||||||||||
| Revenue recognized over time | |||||||||||||||||||||||
| Total revenue | $ | $ | |||||||||||||||||||||
15
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
| Three Months Ended March 31, | |||||||||||||||||||||||
| (in thousands) | 2023 | 2022 | |||||||||||||||||||||
| Pega Cloud | $ | $ | |||||||||||||||||||||
| Maintenance | |||||||||||||||||||||||
| Subscription services | |||||||||||||||||||||||
| Subscription license | |||||||||||||||||||||||
| Subscription | |||||||||||||||||||||||
| Perpetual license | |||||||||||||||||||||||
| Consulting | |||||||||||||||||||||||
| $ | $ | ||||||||||||||||||||||
Remaining performance obligations ("Backlog")
Expected future revenue from existing non-cancellable contracts:
As of March 31, 2023:
| (Dollars in thousands) | Subscription services | Subscription license | Perpetual license | Consulting | Total | |||||||||||||||||||||||||||||||||
| Maintenance | Pega Cloud | |||||||||||||||||||||||||||||||||||||
1 year or less | $ | $ | $ | $ | $ | $ | % | |||||||||||||||||||||||||||||||
1-2 years | % | |||||||||||||||||||||||||||||||||||||
2-3 years | % | |||||||||||||||||||||||||||||||||||||
Greater than 3 years | % | |||||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | % | ||||||||||||||||||||||||||||||||
As of March 31, 2022:
| (Dollars in thousands) | Subscription services | Subscription license | Perpetual license | Consulting | Total | |||||||||||||||||||||||||||||||||
| Maintenance | Pega Cloud | |||||||||||||||||||||||||||||||||||||
1 year or less | $ | $ | $ | $ | $ | $ | % | |||||||||||||||||||||||||||||||
1-2 years | % | |||||||||||||||||||||||||||||||||||||
2-3 years | % | |||||||||||||||||||||||||||||||||||||
Greater than 3 years | % | |||||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | % | ||||||||||||||||||||||||||||||||
NOTE 12. STOCK-BASED COMPENSATION
Expense
| Three Months Ended March 31, | |||||||||||||||||||||||
| (in thousands) | 2023 | 2022 | |||||||||||||||||||||
Cost of revenue | $ | $ | |||||||||||||||||||||
Selling and marketing | |||||||||||||||||||||||
Research and development | |||||||||||||||||||||||
General and administrative | |||||||||||||||||||||||
| $ | $ | ||||||||||||||||||||||
Income tax benefit | $ | ( | $ | ( | |||||||||||||||||||
As of March 31, 2023, the Company had $178.6 million of unrecognized stock-based compensation expense, net of estimated forfeitures, which is expected to be recognized over a weighted-average period of 2 years.
| Three Months Ended March 31, 2023 | |||||||||||
| (in thousands) | Shares | Total Fair Value | |||||||||
Restricted stock units | $ | ||||||||||
Non-qualified stock options | $ | ||||||||||
16
PEGASYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 13. INCOME TAXES
Effective income tax rate
| Three Months Ended March 31, | |||||||||||||||||||||||
| (Dollars in thousands) | 2023 | 2022 | |||||||||||||||||||||
| Provision for (benefit from) income taxes | $ | $ | ( | ||||||||||||||||||||
| Effective income tax rate | ( | % | % | ||||||||||||||||||||
The effective income tax rate in the three months ended March 31, 2023 was impacted by the valuation allowance on the Company’s U.S. and U.K. deferred tax assets and current taxes payable in the U.S. as a result of projecting taxable income that cannot be fully offset by net operating losses and available tax credits.
The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. Future realization of deferred tax assets ultimately depends on sufficient taxable income within the available carryback or carryforward periods. The Company’s deferred tax valuation allowance requires significant judgment and uncertainties, including assumptions about future taxable income based on historical and projected information. On a quarterly basis, the Company reassesses the need for a valuation allowance on its existing net deferred tax assets by tax-paying jurisdiction, weighing positive and negative evidence to assess its recoverability. In making such a determination, the Company considers all available and objectively verifiable negative and positive evidence, including future reversals of existing taxable temporary differences, committed contractual backlog (“Backlog”), projected future taxable income inclusive of the impact of enacted legislation, tax-planning strategies, and results of recent operations. The weight given to the potential effect of negative and positive evidence is commensurate with the extent to which it can be objectively verified.
The Company intends to continue maintaining a full valuation allowance on the Company’s U.S and U.K. deferred tax assets until there is sufficient evidence to support the realization of these deferred tax assets.
NOTE 14. (LOSS) PER SHARE
Basic (loss) per share is calculated using the weighted-average number of common shares outstanding during the period. Diluted (loss) per share is calculated using the weighted-average number of common shares outstanding during the period, plus the dilutive effect of outstanding stock options, RSUs, and convertible senior notes.
Calculation of (loss) per share:
| Three Months Ended March 31, | |||||||||||||||||||||||
| (in thousands, except per share amounts) | 2023 | 2022 | |||||||||||||||||||||
| Net (loss) | $ | ( | $ | ( | |||||||||||||||||||
| Weighted-average common shares outstanding | |||||||||||||||||||||||
| (Loss) per share, basic | $ | ( | $ | ||||||||||||||||||||
| Net (loss) | $ | ( | $ | ( | |||||||||||||||||||
Weighted-average common shares outstanding, assuming dilution (1) (2) (3) | |||||||||||||||||||||||
| (Loss) per share, diluted | $ | ( | $ | ||||||||||||||||||||
Outstanding anti-dilutive stock options and RSUs (4) | |||||||||||||||||||||||
(1) In periods of loss, all dilutive securities are excluded as their inclusion would be anti-dilutive.
(2) The shares underlying the conversion options in the Company’s Notes are included using the if-converted method, if dilutive in the period. If the outstanding conversion options were fully exercised, the Company would issue approximately 4.2 million shares as of March 31, 2023.
(3) The Company’s Capped Call Transactions represent the equivalent of approximately 4.2 million shares of the Company’s common stock (representing the number of shares for which the Notes are initially convertible) as of March 31, 2023. The Capped Call Transactions are expected to reduce common stock dilution and/or offset any potential cash payments the Company must make, other than for principal and interest, upon conversion of the Notes, with such reduction and/or offset subject to a cap of $196.44 . The Capped Call Transactions are excluded from weighted-average common shares outstanding, assuming dilution, in all periods as their effect would be anti-dilutive.
(4) Outstanding stock options and RSUs that were anti-dilutive under the treasury stock method in the period were excluded from the computation of diluted (loss) per share. These awards may be dilutive in the future.
NOTE 15. COMMITMENTS AND CONTINGENCIES
Commitments
See "Note 7. Leases" for additional information.
17
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 the Company’s estimates will change in the near term, and the effect may be material.
The Company had no accrued losses for litigation as of March 31, 2023 and December 31, 2022.
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 of $2,036,860,045 for trade secret misappropriation and $1.00 for violating the Virginia Computer Crimes Act. On September 15, 2022, the circuit court of Fairfax County entered judgment of $2,060,479,287 , consisting of the damages previously awarded by the jury plus attorneys’ fees and costs, and stating that the judgment is subject to post-judgment interest at a rate of 6.0 % per annum, from the date of the jury verdict (May 9, 2022) as to the amount of the jury verdict and from September 15, 2022 as to the amount of the award of attorneys’ fees and costs. On September 15, 2022, the Company filed a notice of appeal from the judgment. On September 29, 2022, the circuit court of Fairfax County approved a $25,000,000 letter of credit obtained by the Company to secure the judgment and entered an order suspending the judgment during the pendency of the Company’s appeal. 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.
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 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.
18
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.
19
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 impacts from 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, 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 April 26, 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 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 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 the specific industry 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, revenue mix, 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, 2022 for additional information.
20
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. ACV is a performance measure that we believe provides useful information to our management and investors.
In 2023, we changed our 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.
21
Remaining performance obligations (“Backlog”)
Reconciliation of GAAP Backlog and Constant Currency Backlog
| (in millions, except percentages) | Q1 2023 | 1 Year Growth Rate | |||||||||
| Backlog | $ | 1,308 | 11 | % | |||||||
| Impact of changes in foreign exchange rates | 28 | 3 | % | ||||||||
| Backlog - Constant Currency | $ | 1,336 | 14 | % | |||||||
Constant currency Backlog is calculated by applying the Q1 2022 foreign exchange rates to all 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.
22
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.
23
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. 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, 2022:
•“Critical Accounting Estimates and Significant Judgments” in Item 7; and
•“Note 2. Significant Accounting Policies” in Item 8.
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, 2022.
RESULTS OF OPERATIONS
Revenue
Subscription transition
We are transitioning our business to sell software primarily through subscription arrangements.
This transition has impacted 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) | Three Months Ended March 31, | Change | |||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pega Cloud | $ | 107,879 | 33 | % | $ | 90,317 | 24 | % | $ | 17,562 | 19 | % | |||||||||||||||||||||||||||||||||||||||||
| Maintenance | 79,630 | 25 | % | 79,716 | 21 | % | (86) | — | % | ||||||||||||||||||||||||||||||||||||||||||||
| Subscription services | 187,509 | 58 | % | 170,033 | 45 | % | 17,476 | 10 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Subscription license | 84,527 | 26 | % | 137,533 | 37 | % | (53,006) | (39) | % | ||||||||||||||||||||||||||||||||||||||||||||
| Subscription | 272,036 | 84 | % | 307,566 | 82 | % | (35,530) | (12) | % | ||||||||||||||||||||||||||||||||||||||||||||
| Perpetual license | 403 | — | % | 7,440 | 2 | % | (7,037) | (95) | % | ||||||||||||||||||||||||||||||||||||||||||||
| Consulting | 53,033 | 16 | % | 61,301 | 16 | % | (8,268) | (13) | % | ||||||||||||||||||||||||||||||||||||||||||||
| $ | 325,472 | 100 | % | $ | 376,307 | 100 | % | $ | (50,835) | (14) | % | ||||||||||||||||||||||||||||||||||||||||||
The revenue changes in the three months ended March 31, 2023 generally reflect the impact of our subscription transition. Other factors impacting our revenue include:
•The decrease in subscription license revenue in the three months ended March 31, 2023 was primarily due to several large software license contracts recognized in revenue in the three months ended March 31, 2022.
•The decrease in consulting revenue in the three months ended March 31, 2023 was primarily due to a decrease in billable hours and realization rates.
Gross profit
| (Dollars in thousands) | Three Months Ended March 31, | Change | |||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pega Cloud | $ | 77,629 | 72 | % | $ | 63,418 | 70 | % | $ | 14,211 | 22 | % | |||||||||||||||||||||||||||||||||||||||||
| Maintenance | 73,016 | 92 | % | 74,585 | 94 | % | (1,569) | (2) | % | ||||||||||||||||||||||||||||||||||||||||||||
| Subscription services | 150,645 | 80 | % | 138,003 | 81 | % | 12,642 | 9 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Subscription license | 83,808 | 99 | % | 136,911 | 100 | % | (53,103) | (39) | % | ||||||||||||||||||||||||||||||||||||||||||||
| Subscription | 234,453 | 86 | % | 274,914 | 89 | % | (40,461) | (15) | % | ||||||||||||||||||||||||||||||||||||||||||||
| Perpetual license | 400 | 99 | % | 7,406 | 100 | % | (7,006) | (95) | % | ||||||||||||||||||||||||||||||||||||||||||||
| Consulting | (7,315) | (14) | % | 5,790 | 9 | % | (13,105) | * | |||||||||||||||||||||||||||||||||||||||||||||
| $ | 227,538 | 70 | % | $ | 288,110 | 77 | % | $ | (60,572) | (21) | % | ||||||||||||||||||||||||||||||||||||||||||
* not meaningful
The gross profit percent changes in the three months ended March 31, 2023 were primarily due to a shift in the revenue mix.
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•The increase in Pega Cloud gross profit percent in the three months ended March 31, 2023 was primarily due to cost-efficiency gains as Pega Cloud continues to grow and scale.
•The decrease in maintenance gross profit percent in the three months ended March 31, 2023 was primarily due to an increase in compensation and benefits due to increased headcount.
•The decrease in consulting gross profit percent in the three months ended March 31, 2023 was due to a decrease in realization rates and consultant utilization.
Operating expenses
| (Dollars in thousands) | Three Months Ended March 31, | Change | |||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| % of Revenue | % of Revenue | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Selling and marketing | $ | 149,797 | 46 | % | $ | 162,236 | 43 | % | $ | (12,439) | (8) | % | |||||||||||||||||||||||||||||||||||||||||
| Research and development | $ | 75,376 | 23 | % | $ | 71,490 | 19 | % | $ | 3,886 | 5 | % | |||||||||||||||||||||||||||||||||||||||||
| General and administrative | $ | 23,110 | 7 | % | $ | 35,764 | 10 | % | $ | (12,654) | (35) | % | |||||||||||||||||||||||||||||||||||||||||
| 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 research and development in the three months ended March 31, 2023 was primarily due to an increase in compensation and benefits of $2.5 million, attributable to increases in headcount and incentive compensation. The increase in headcount reflects additional investments in developing our solutions.
•The decrease in general and administrative in the three months ended March 31, 2023 was primarily due to a decrease in legal fees and related expenses arising from litigation proceedings outside the ordinary course of business of $15.9 million. We expect to continue to incur additional costs for these proceedings. See "Note 15. Commitments and Contingencies" in Part I, Item 1 of this Quarterly Report and “Risk Factors” in Part I, Item 1A of our Annual Report for 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 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 decrease in foreign currency transaction (loss) gain in the three months ended 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 increase in interest income in the three months ended March 31, 2023 was primarily due to an increase in market interest rates.
•The change in gain (loss) on capped call transactions in the three months ended March 31, 2023 was due to fair value adjustments for our capped call transactions.
•The increase in other income, net in the three months ended March 31, 2023 was due to a gain from the repurchase of convertible senior notes and from our venture investments portfolio.
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Provision for (benefit from) income taxes
| Three Months Ended March 31, | |||||||||||||||||||||||
| (Dollars in thousands) | 2023 | 2022 | |||||||||||||||||||||
| Provision for (benefit from) income taxes | $ | 5,249 | $ | (7,683) | |||||||||||||||||||
| Effective income tax rate | (34) | % | 95 | % | |||||||||||||||||||
The effective income tax rate in the three months ended March 31, 2023 was impacted by the valuation allowance on our U.S. and U.K. deferred tax assets and current taxes payable in the U.S. as a result of projecting taxable income that cannot be fully offset by net operating losses and available tax credits.
LIQUIDITY AND CAPITAL RESOURCES
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2023 | 2022 | |||||||||
| Cash provided by (used in): | |||||||||||
| Operating activities | $ | 68,107 | $ | 15,116 | |||||||
| Investing activities | (14,413) | (6,082) | |||||||||
| 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) | |||||||
(in thousands) | March 31, 2023 | December 31, 2022 | |||||||||
Held by U.S. entities | $ | 229,214 | $ | 248,389 | |||||||
Held by foreign entities | 94,668 | 48,832 | |||||||||
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 external financing if we require additional capital resources.
If it becomes necessary or desirable to repatriate foreign funds, we may be required to pay 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. Subscription licenses and services are 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 provided by operating activities in the three months ended March 31, 2023 was primarily due to our subscription transition and improved client collections. In addition, in the three months ended March 31, 2023 and 2022, we paid $1.5 million and $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 costs for these proceedings. See "Note 15. Commitments and Contingencies" in Part I, Item 1 of this Quarterly Report for additional information.
Investing activities
The change in cash (used in) investing activities in the three months ended March 31, 2023 was primarily driven by an increase in office space-related capital expenditures.
26
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 March 31, 2023, we had no outstanding cash borrowings under the Credit Facility but had $27.3 million in outstanding letters of credit which 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) | Three Months Ended March 31, 2023 | ||||
| December 31, 2022 | $ | 58,075 | |||
Authorizations (1) | — | ||||
| March 31, 2023 | $ | 58,075 | |||
(1) On April 25, 2023, our Board of Directors extended the expiration date of our current share repurchase program to June 30, 2024, and the amount of stock we are authorized to repurchase has been increased to $60 million.
Common stock repurchases
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| (in thousands) | Shares | Amount | Shares | Amount | |||||||||||||||||||
| Repurchases paid | — | $ | — | 242 | $ | 22,583 | |||||||||||||||||
| Stock repurchase program | — | — | 242 | 22,583 | |||||||||||||||||||
| Tax withholdings for net settlement of equity awards | 27 | 1,107 | 141 | 12,128 | |||||||||||||||||||
| 27 | $ | 1,107 | 383 | $ | 34,711 | ||||||||||||||||||
In the three months ended March 31, 2023 and 2022, instead of receiving cash from the equity holders, we withheld shares with a value of $0.6 million and $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.
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2023 | 2022 | |||||||||
| Dividend payments to stockholders | $ | 2,474 | $ | 2,454 | |||||||
Contractual obligations
As of March 31, 2023, our contractual obligations were:
| Payments due by period | |||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | Remainder of 2023 | 2024 | 2025 | 2026 | 2027 | 2028 and after | Other | Total | |||||||||||||||||||||||||||||||||||||||
Convertible senior notes (1) | $ | 1,772 | $ | 4,253 | $ | 569,126 | $ | — | $ | — | $ | — | $ | — | $ | 575,151 | |||||||||||||||||||||||||||||||
Purchase obligations (2) | 98,303 | 117,729 | 127,367 | 131,146 | 133,500 | 14 | — | 608,059 | |||||||||||||||||||||||||||||||||||||||
| Operating lease obligations | 14,003 | 17,642 | 14,562 | 10,917 | 9,863 | 39,380 | — | 106,367 | |||||||||||||||||||||||||||||||||||||||
| Investment commitments | 1,000 | — | — | — | — | — | — | 1,000 | |||||||||||||||||||||||||||||||||||||||
Liability for uncertain tax positions (3) | — | — | — | — | — | — | 3,578 | 3,578 | |||||||||||||||||||||||||||||||||||||||
| $ | 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 cannot reasonably estimate the timing of this cash outflow due to uncertainties in the timing of the effective settlement of tax positions.
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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:
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (Decrease) increase in revenue | (4) | % | (3) | % | |||||||
| 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:
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2023 | 2022 | |||||||||
| 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 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 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 March 31, 2023 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth in “Note 15. Commitments and Contingencies”, in Part I, Item 1 of this Quarterly Report is incorporated herein by reference.
ITEM 1A. RISK FACTORS
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, 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.
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 March 31, 2023:
| (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.
ITEM 5. OTHER INFORMATION
Credit Facility
On April 21, 2023 and effective on March 31, 2023, we 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 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 December 31, 2024.
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ITEM 6. EXHIBITS
| Exhibit No. | Description | Incorporation by Reference | Filed Herewith | |||||||||||||||||||||||||||||
| Form | Exhibit | Filing Date | ||||||||||||||||||||||||||||||
| 3.1 | 10-Q | 3.1 | November 4, 2014 | |||||||||||||||||||||||||||||
| 3.2 | 8-K | 3.2 | June 15, 2020 | |||||||||||||||||||||||||||||
| 10.1 | X | |||||||||||||||||||||||||||||||
| 10.2 | X | |||||||||||||||||||||||||||||||
| 10.3 | X | |||||||||||||||||||||||||||||||
| 31.1 | X | |||||||||||||||||||||||||||||||
| 31.2 | X | |||||||||||||||||||||||||||||||
| 32 | + | |||||||||||||||||||||||||||||||
| 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. | X | ||||||||||||||||||||||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. | X | ||||||||||||||||||||||||||||||
| 101.CAL | Inline XBRL Taxonomy Calculation Linkbase Document. | X | ||||||||||||||||||||||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | X | ||||||||||||||||||||||||||||||
| 101.LAB | Inline XBRL Taxonomy Label Linkbase Document. | X | ||||||||||||||||||||||||||||||
| 101.PRE | Inline XBRL Taxonomy Presentation Linkbase Document. | X | ||||||||||||||||||||||||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | X | ||||||||||||||||||||||||||||||
+ 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
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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: | April 26, 2023 | By: | /s/ KENNETH STILLWELL | ||||||||
| Kenneth Stillwell | |||||||||||
| Chief Operating Officer and Chief Financial Officer | |||||||||||
| (Principal Financial Officer) | |||||||||||
EXHIBIT 10.1
Sixth Amendment to Loan Documents
THIS SIXTH AMENDMENT TO LOAN DOCUMENTS (this “Amendment”) is made as of March 31, 2023, by and among PEGASYSTEMS INC. (the “Borrower”), the Guarantors (as such term is defined in the Credit Agreement defined in Exhibit A attached hereto and made a part hereof (the “Loan Agreement”)) party hereto (the “Guarantors” and each, individually, a “Guarantor”; the Borrower and the Guarantors are collectively referred to herein as the “Loan Parties” and each, individually, a “Loan Party”), the Lenders (as such term is defined in the Loan Agreement) party hereto (the “Lenders”) and PNC BANK, NATIONAL ASSOCIATION (the “Agent”), in its capacity as “Agent” (as such term is defined in the Loan Agreement) for the Lenders.
BACKGROUND
A. The Loan Parties have executed and delivered to the Agent and/or the Lenders one or more promissory notes, letter agreements, loan agreements, security agreements, pledge agreements, collateral assignments, and other agreements, instruments, certificates and documents, some or all of which are more fully described on Exhibit A attached hereto, which is made a part of this Amendment (collectively, as amended from time to time, the “Loan Documents”) which evidence or secure some or all of the Borrower’s Obligations.
B. The Loan Parties, the Lenders and the Agent desire to amend the Loan Documents as provided for in this Amendment.
NOW, THEREFORE, in consideration of the mutual covenants herein contained and intending to be legally bound hereby, the parties hereto agree as follows:
1. Certain of the Loan Documents are amended as set forth in Exhibit A attached hereto and made a part hereof. Any and all references to any Loan Document which is amended hereby in any other Loan Document shall be deemed to refer to such Loan Document as amended by this Amendment. This Amendment is deemed incorporated into each of the Loan Documents being amended hereby. Any initially capitalized terms used in this Amendment without definition shall have the meanings assigned to those terms in the Loan Agreement. To the extent that any term or provision of this Amendment is or may be inconsistent with any term or provision in any Loan Document, the terms and provisions of this Amendment shall control.
2. The Borrower hereby certifies that (a) all of its representations and warranties in the Loan Documents, as amended by this Amendment, are, except as may otherwise be stated in this Amendment, (i) true and correct in all material respects (except for any representation or warranty which expressly relates to an earlier date, in which case such representation and warranty was true and correct as of such earlier date) as of the date of this Amendment, (ii) ratified and confirmed without condition as if made anew (except for any representation or warranty which expressly relates to an earlier date, in which case such representation and warranty shall be ratified and confirmed as of such earlier date), and (iii) incorporated into this Amendment by reference; (b) no Event of Default or event which, with the passage of time or the giving of notice or both, would constitute an Event of Default, exists under any Loan Document which will not be cured by the execution and effectiveness of this Amendment; (c) no consent, approval, order or authorization of, or registration or filing with, any third party is required in connection with the execution, delivery and carrying out of this Amendment or, if required, has been obtained; and (d) this Amendment has been duly authorized, executed and delivered so that it constitutes the legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms. The Borrower confirms that the Obligations remain outstanding without defense, set off, counterclaim, discount or charge of any kind as of the date of this Amendment.
3. The Borrower hereby confirms that any collateral for the Obligations, including liens, security interests, mortgages, and pledges granted by the Borrower or third parties (if applicable), shall continue unimpaired and in full force and effect, and shall cover and secure all of the Borrower’s existing and future Obligations to the Lenders, as modified by this Amendment.
4. As a condition precedent to the effectiveness of this Amendment, the Borrower shall comply with the terms and conditions specified in Exhibit A attached hereto and made a part hereof.
5. To induce the Agent and the Lenders to enter into this Amendment, each Loan Party reaffirms all of its indemnification obligations contained in the Loan Documents, including, without limitation, pursuant to Section 11.3.2 of the Loan Agreement.
6. This Amendment may be signed in any number of counterpart copies and by the parties to this Amendment on separate counterparts, but all such copies shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page to this Amendment by electronic or facsimile transmission shall be effective as delivery of a manually executed counterpart. Any party so executing this Amendment by electronic or facsimile transmission shall promptly deliver a manually executed counterpart, provided that any failure to do so shall not affect the validity of the counterpart executed by electronic or facsimile transmission, as applicable.
EXHIBIT 10.1
(continued)
7. Notwithstanding any other provision herein or in the other Loan Documents, each Loan Party agrees that this Amendment, the Note, the other Loan Documents, any other amendments thereto and any other information, notice, signature card, agreement or authorization related thereto (each, a “Communication”) may, at the Agent’s option, be in the form of an electronic record. Any Communication may, at the Agent’s option, be signed or executed using electronic signatures. For the avoidance of doubt, the authorization under this paragraph may include, without limitation, use or acceptance by the Agent of a manually signed paper Communication which has been converted into electronic form (such as scanned into PDF format) for transmission, delivery and/or retention. Each Loan Party, each Lender and the Agent acknowledge and agree that the methods for delivering Communications, including notices, under the Loan Documents include electronic transmittal to any electronic address provided by either party to the other party from time to time.
8. This Amendment will be binding upon and inure to the benefit of each Loan Party, the Agent, and the Lenders and their respective heirs, executors, administrators, successors and assigns.
9. This Amendment has been delivered to and accepted by the Agent and the Lenders and will be deemed to be made in the State of New York. This Amendment will be interpreted and the rights and liabilities of the parties hereto determined in accordance with the laws of the State of New York, excluding its conflict of laws rules, including without limitation the Electronic Signatures and Records Act (or equivalent) in such State (or, to the extent controlling, the laws of the United States of America, including without limitation the Electronic Signatures in Global and National Commerce Act).
10. Except as amended hereby, the terms and provisions of the Loan Documents remain unchanged, are and shall remain in full force and effect unless and until modified or amended in writing in accordance with their terms, and are hereby ratified, reaffirmed and confirmed. Except as expressly provided herein, this Amendment shall not constitute an amendment, waiver, consent or release with respect to any provision of any Loan Document, a waiver of any default or Event of Default under any Loan Document, or a waiver or release of any of the Agent’s or Lenders’ rights and remedies (all of which are hereby reserved). Each Loan Party, the Agent and the Lenders mutually expressly ratify and confirm the waiver of jury trial or arbitration provisions contained in the Loan Documents, all of which are incorporated herein by reference.
[signatures appear on following page]
2
EXHIBIT 10.1
(continued)
WITNESS the due execution of this Amendment as of the date first written above, with the intent to be legally bound hereby.
WITNESS: By: /s/ John Schiebel Name: John Schiebel Title: Compliance & Legal Admin Program Manager | BORROWER: PEGASYSTEMS INC. By: /s/ Kenneth Stillwell Name: Kenneth Stillwell Title: Chief Operating Officer and Chief Financial Officer | ||||
By: /s/ John Schiebel Name: John Schiebel Title: Compliance & Legal Admin Program Manager | GUARANTORS: PEGASYSTEMS WORLDWIDE INC. By: /s/ Kenneth Stillwell Name: Efstathios Kouninis, Title Director | ||||
By: /s/ John Schiebel Name: John Schiebel Title: Compliance & Legal Admin Program Manager | ANTENNA SOFTWARE, LLC By: PEGASYSTEMS INC., its sole member By: /s/ Kenneth Stillwell Name: Kenneth Stillwell Title: Chief Operating Officer and Chief Financial Officer | ||||
By: /s/ John Schiebel Name: John Schiebel Title: Compliance & Legal Admin Program Manager | PEGA GOVERNMENT LLC By: /s/ Efstathios Kouninis Name: Efstathios Kouninis, Title: Manager | ||||
Signature Page – Loan Parties – Sixth Amendment to Loan Documents
EXHIBIT 10.1
(continued)
PNC BANK, NATIONAL ASSOCIATION,
Individually and as Agent
By: /s/ Terence J. O’Malley_____________________
Name: Terence J. O’Malley
Title: Senior Vice President
Signature Page – PNC Bank – Sixth Amendment to Loan Documents
EXHIBIT 10.1
(continued)
EXHIBIT A
TO SIXTH AMENDMENT TO LOAN DOCUMENTS
DATED AS OF MARCH 31, 2023
A. The “Loan Documents” that are the subject of this Amendment include the following (as any of the foregoing have previously been amended, modified or otherwise supplemented):
1.Credit Agreement dated as of November 5, 2019 made by and among Pegasystems Inc., (the “Borrower”), each of the Guarantors, and the Agent (the “Loan Agreement”).
2.Amendment to Loan Documents dated as of February 18, 2020 made by and among the Borrower, each of the Guarantors, and the Agent (the “First Amendment”).
3.Second Amendment to Loan Documents dated as of July 22, 2020 made by and among the Borrower, each of the Guarantors, and the Agent (the “Second Amendment”).
4.Third Amendment to Loan Documents dated as of September 20, 2020 made by and among the Borrower, each of the Guarantors, and the Agent (the “Third Amendment”).
5.Fourth Amendment to Loan Documents dated as of March 31, 2022 made by and among the Borrower, each of the Guarantors, and the Agent (the “Fourth Amendment”).
6.Fifth Amendment to Loan Documents dated as of July 25, 2022 made by and among the Borrower, each of the Guarantors, and the Agent (the “Fifth Amendment”).
7.Guarantor Joinder and Assumption Agreement made as of August 24, 2020, by Pega Government LLC in favor of Agent and Lenders (the "Guarantor Joinder").
8.Revolving Credit Note in the principal amount of $100,000,000.00 dated as of November 5, 2019 executed by the Borrower in favor of the Agent (the “Note”).
9.Security Agreement dated as of November 5, 2019, by and between Borrower and Agent (the “Borrower Security Agreement”).
10.Security Agreement dated as of November 5, 2019, by and among Pegasystems Worldwide, Inc., Antenna Software, LLC and Agent (the “Guarantor Security Agreement”).
11.Continuing Agreement of Guaranty and Suretyship dated as of November 5, 2019, by and among Pegasystems Worldwide, Inc., Antenna Software, LLC and Agent (the “Guaranty Agreement”).
12.Pledge Agreement dated as of November 5, 2019, by and between Borrower and Agent (the “Borrower Pledge Agreement”).
13.First Amendment to Pledge Agreement dated as of August 24, 2020, by and between Borrower and Agent (the “First Amendment to Pledge Agreement”)
14.Pledge Agreement (Bank Deposits) dated as of November 5, 2019, by and among Borrower and Agent (the “Deposit Account Pledge Agreement”).
15.Deposit Account Control Agreement dated as of December 23, 2019, by and among Borrower, Agent and Bank of America, N.A. (as amended and in effect from time to time, the “Deposit Account Control Agreement”).
16.Patent, Trademark and Copyright Security Agreement dated as of November 5, 2019, by and between Borrower and Agent (the “Borrower PTC Agreement”).
17.Patent, Trademark and Copyright Security Agreement dated as of November 5, 2019, by and between Antenna Software, LLC and Agent (the “Guarantor PTC Agreement”).
18.All other documents, instruments, agreements, and certificates executed and delivered in connection with the Loan Documents listed in this Exhibit A.
Exhibit A - 1
EXHIBIT 10.1
(continued)
B. Amendments to Loan Documents. The Loan Documents are hereby amended and modified as follows:
1.Amendments to Loan Agreement.
1.01Reference is hereby made to the chart in the definition of “Applicable Margin” in Section 1.1 of the Loan Agreement. Said chart in the definition of “Applicable Margin” in Section 1.1 of the Loan Agreement is hereby amended and restated as follows:
Level | Net Leverage Ratio | Commitment Fee | Letter of Credit Fee | Revolving Credit Base Rate Spread | Revolving Credit Term SOFR Rate Spread | ||||||||||||
I | Less than 1.00 to 1.00 | 0.225% | 1.50% | 1.00% | 1.50% | ||||||||||||
II | Greater than or equal to 1.00 to 1.00 but less than 2.00 to 1.00 | 0.250% | 1.75% | 1.25% | 1.75% | ||||||||||||
III | Greater than or equal to 2.00 to 1.00 but less than 3.00 to 1.00 | 0.275% | 2.00% | 1.50% | 2.00% | ||||||||||||
IV | Greater than or equal to 3.00 to 1.00 | 0.300% | 2.25% | 1.75% | 2.25% | ||||||||||||
1.02 Reference is hereby made to Section 8.1 of the Loan Agreement. The following new Section 8.1.12 is hereby inserted as follows:
“8.1.12 Minimum Consolidated EBITDA. The Borrower and its Subsidiaries shall maintain a minimum Consolidated EBITDA as set forth in more detail in that certain Fee Letter dated as of March 31, 2023 (“Fee Letter”).”
1.03 Reference is hereby made to Section 8.2.15 of the Loan Agreement. Said Section 8.2.15 is hereby amended and restated as follows:
“8.2.15 Minimum Liquidity. To and including December 31, 2023, the Loan Parties shall not, at any time, permit the aggregate amount of cash and Permitted Investments plus the availability under the Revolving Credit Loan held by the Borrower to be less than Two Hundred Million Dollars ($200,000,000).”
1.04 Reference is hereby made to Section 8.2.16 of the Loan Agreement. Said Section 8.2.16 is hereby amended and restated as follows:
“8.2.16 Maximum Net Leverage Ratio. Commencing with the calculation date of March 31, 2024, the Loan Parties shall not permit the Net Leverage Ratio, calculated as of the end of each fiscal quarter for the four (4) fiscal quarters then ended, to be more than 3.50 to 1.00; provided, that at the Borrower’s option, the maximum Net Leverage Ratio may increase to 4.00:1.00 for four (4) consecutive fiscal quarters immediately following the consummation by the Borrower, any other Loan Party or any Subsidiary thereof, of a Permitted Acquisition with a purchase price in excess of $50,000,000 (a “Material Acquisition”); provided, further that (i) the Borrower’s ability to increase the Net Leverage Ratio as described in this Section 8.2.16 shall be limited to two (2) requests during the term of this Agreement, (ii) no more than one such increase shall be in effect at any time and (iii) the Net Leverage Ratio shall revert to the then permitted ratio (without giving effect to such increase) for at least two fiscal quarters before another increase may be invoked.”
1.05 Reference is hereby made to Section 8.2.17 of the Loan Agreement. Said Section 8.2.17 is hereby amended and restated as follows:
“8.2.17 Minimum Interest Coverage Ratio. Commencing with the calculation date of March 31, 2024, the Loan Parties shall not permit the ratio of Consolidated EBITDA to Consolidated Cash Interest Expense, calculated as of the end of each fiscal quarter for the four (4) fiscal quarters then ended, to be less than 3.50 to 1.00.”
C. Conditions to Effectiveness of Amendment: The Agent’s willingness to agree to the amendments set forth in this Amendment is subject to the prior satisfaction of the following conditions:
Exhibit A - 2
EXHIBIT 10.1
(continued)
1.Execution by all applicable parties and delivery to the Agent of this Amendment (including the attached Consent and Fee Letter).
2.Reimbursement by the Borrower to the Agent of the fees and expenses of the Agent and the Agent's outside counsel in connection with this Amendment.
3.Reimbursement by the Borrower to the Agent of the fees and expenses of the Agent provided for in that certain Fee Letter dated as of the date hereof in connection with this Amendment.
4.All representations and warranties contained in the Loan Documents are true and correct in all material respects on the date hereof (except for any representation or warranty which expressly relates to an earlier date, in which case such representation and warranty was true and correct as of such earlier date).
5.Immediately after giving effect to this Amendment, no default or Event of Default shall have occurred and be continuing under the Loan Agreement or any of the other Loan Documents.
Exhibit A - 3
EXHIBIT 10.1
(continued)
CONSENT OF GUARANTOR
Each of the undersigned guarantors (jointly and severally if more than one, the “Guarantors”) consent to the provisions of the foregoing Amendment, any and all documents executed in connection therewith, and all prior amendments (if any) and confirms and agrees that (a) the Guarantors’ obligations under the Guaranty shall be unimpaired by the Amendment; (b) as of the date hereof, the Guarantors have no defenses, set offs, counterclaims, discounts or charges of any kind against the Agent and/or the Lenders, their respective officers, directors, employees, agents or attorneys with respect to the Guaranty; (c) except as expressly modified by the foregoing Amendment, all of the terms, conditions and covenants in the Guaranty remain unaltered and in full force and effect and are hereby ratified and confirmed and apply to the Obligations, as modified by the Amendment; and (d) the Guarantors are bound by the terms and provisions of paragraph 5 of the Amendment. The Guarantors certify that all representations and warranties made in the Guaranty are true and correct in all material respects (except for any representation or warranty which expressly relates to an earlier date, in which case such representation and warranty was true and correct as of such earlier date).
By signing below, the Guarantors agree that this Consent, the Guaranty, the other Loan Documents, any amendments thereto and any other information, notice, signature card, agreement or authorization related thereto (each, a “Communication”) may, at the Agent’s option, be in the form of an electronic record. Any Communication may, at the Agent’s option, be signed or executed using electronic signatures. For the avoidance of doubt, the authorization under this paragraph may include, without limitation, use or acceptance by the Agent of a manually signed paper Communication which has been converted into electronic form (such as scanned into PDF format) for transmission, delivery and/or retention. The Guarantor acknowledges and agrees that the methods for delivering Communications, including notices, under the Guaranty and the other Loan Documents include electronic transmittal to any electronic address provided by any party to the other party from time to time.
The Guarantors hereby confirm that any collateral for the Obligations, including liens, security interests, mortgages, and pledges granted by the Guarantors, shall continue unimpaired and in full force and effect, shall cover and secure all of the Guarantors’ existing and future Obligations to the Lenders, as modified by this Amendment.
The Guarantor ratifies and confirms the indemnification (if any) and waiver of jury trial provisions contained in the Guaranty.
[signatures appear on following page]
EXHIBIT 10.1
(continued)
WITNESS the due execution of this Consent as of the date of the Amendment, intending to be legally bound hereby.
WITNESS: By: /s/ John Schiebel Name: John Schiebel Title: Compliance & Legal Admin Program Manager | GUARANTORS: PEGASYSTEMS WORLDWIDE INC. By: /s/ Efstathios Kouninis Name: Efstathios Kouninis, Title Director | ||||
By: /s/ John Schiebel Name: John Schiebel Title: Compliance & Legal Admin Program Manager | ANTENNA SOFTWARE, LLC By: PEGASYSTEMS INC., its sole member By: /s/ Kenneth Stillwell Name: Kenneth Stillwell Title: Chief Operating Officer and Chief Financial Officer | ||||
By: /s/ John Schiebel Name: John Schiebel Title: Compliance & Legal Admin Program Manager | PEGA GOVERNMENT LLC By: /s/ Efstathios Kouninis Name: Efstathios Kouninis, Title: Manager | ||||
Signature Page – Guarantors – Sixth Amendment to Loan Documents
EXHIBIT 10.2
March 31, 2023
PEGASYSTEMS INC.
One Main Street
Cambridge, Massachusetts 02142
Cambridge, Massachusetts 02142
Attention: Stathi Kouninis
Re: Fee Letter for Senior Secured Credit Facility on Behalf of
PEGASYSTEMS INC.:
Dear Mr. Kouninis:
Reference is made to the Credit Agreement dated November 5, 2019, as amended and supplemented from time to time including by the Sixth Amendment to Loan Documents (the “Sixth Amendment”), dated the date hereof (collectively, the “Loan Agreement”) by and among Pegasystems Inc., as the “Borrower”, the lending institutions party thereto (including us) as "Lenders", the "Guarantors" (as such term is defined therein) and PNC Bank, National Association, as administrative agent for the Lenders (in such capacity, the "Administrative Agent"). Capitalized terms used but not defined herein are used with the meanings assigned to them in the Loan Agreement.
1.Minimum Consolidated EBITDA
In Section 1.02 of the Sixth Amendment, the parties established a minimum Consolidated EBITDA covenant, which Section 1.02 also refers to this letter.
The Borrower and its Subsidiaries shall maintain a minimum Consolidated EBITDA, calculated as of the end of each fiscal quarter in 2023 in the amounts set forth below for the applicable periods set forth below. The Borrower and its Subsidiaries shall provide written confirmation to the Administrative Agent of their minimum Consolidated EBITDA compliance within forty-five (45) days as of the end of each fiscal quarter set forth below.
| Fiscal Quarter Ending | Minimum Consolidated EBITDA for the applicable period | ||||
| Fiscal quarter ended March 31, 2023 for the period of January 1, 2023 through March 31, 2023 | $38,862,000 | ||||
| Fiscal quarter ended June 30, 2023 for the period of January 1, 2023 through June 30, 2023 | $59,894,000 | ||||
| Fiscal quarter ended September 30, 2023 for the period of January 1, 2023 through September 30, 2023 | $95,597,000 | ||||
| Fiscal quarter ended December 31, 2023 for the period of January 1, 2023 through December 31, 2023 | $214,590,000 | ||||
2.Fees
As consideration for Sixth Amendment, you agree to pay or cause to be paid to the Administrative Agent the following amendment fee earned in an amount equal to $100,000 (subject to forgiveness as set forth below) (the “Amendment Fee”), which Amendment Fee shall be nonrefundable once paid and shall be due and payable as follows:
1
EXHIBIT 10.2
(continued)
(i) $50,000 on the date hereof;
(ii) $25,000 (the “September 2023 Portion”), if the Borrower and its Subsidiaries fail to maintain (i) a Net Leverage Ratio to be less than the applicable Net Leverage Ratio required under the Credit Agreement and (ii) a ratio of Consolidated EBITDA to Consolidated Cash Interest Expense to be more than 3.50 to 1.00 for the fiscal quarter ending September 30, 2023, which September 2023 Portion shall be due and payable in full within forty-five (45) days as of the end of such fiscal quarter if such ratios are not met for such period (provided, to the extent the Borrower and its Subsidiaries maintain such ratios for the fiscal quarter ending September 30, 2023, the September 2023 Portion of the Amendment Fee shall be automatically forgiven and no longer due and payable on such date); and
(iii) $25,000 (the “December 2023 Portion”), if the Borrower and its Subsidiaries fail to maintain (i) a Net Leverage Ratio to be less than the applicable Net Leverage Ratio required under the Credit Agreement and (ii) a ratio of Consolidated EBITDA to Consolidated Cash Interest Expense to be more than 3.50 to 1.00 for the fiscal quarter ending December 31, 2023, which December 2023 Portion shall be due and payable in full within forty-five (45) days as of the end of such fiscal quarter if such ratios are not met for such period (provided, to the extent the Borrower and its Subsidiaries maintain such ratios for the fiscal quarter ending December 31, 2023, the December 2023 Portion of the Amendment Fee shall be automatically forgiven and no longer due and payable on such date).
3.Miscellaneous
This Fee Letter may not be amended or waived except by an instrument in writing signed by Administrative Agent and you. This Fee Letter shall be governed by, and construed and interpreted in accordance with, the laws of the State of New York. This Fee Letter may be executed in any number of counterparts, each of which shall be an original, and all of which, when taken together, shall constitute one agreement. Delivery of an executed signature page of this letter agreement by facsimile transmission or electronic transmission (e.g., “pdf” or “tif”) shall be effective as delivery of a manually executed counterpart hereof.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
2
EXHIBIT 10.2
(continued)
[SIGNATURE PAGE TO FEE LETTER]
Please confirm that the foregoing is our mutual understanding by signing and returning to us an executed counterpart of this Fee Letter.
Very truly yours,
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Terence J. O’Malley
Name: Terence J. O’Malley
Title: Senior Vice President
Title: Senior Vice President
3
EXHIBIT 10.2
(continued)
[SIGNATURE PAGE TO FEE LETTER]
Accepted and agreed to as of the date
first above written:
first above written:
PEGASYSTEMS INC.
By:_ /Kenneth Stillwell
Name: Kenneth Stillwell
Title: Chief Operating Officer and
Chief Financial Officer
4
EXHIBIT 10.3
Pegasystems Ltd
3rd Floor
23 Forbury Road, Reading
Berkshire, RG1 3JH
United Kingdom
STRICTLY PRIVATE & CONFIDENTIAL
John Higgins
[***]
11 December 2020
Dear John,
Further to recent conversations, we are delighted to offer you the role outlined below.
This letter gives you a summary of the key terms of your employment ("Letter"), while the enclosed Statement of Terms and Conditions ("Statement") includes additional terms. Together, the Letter and the Statement form your contract of employment with the Company (the "Agreement"). Defined terms used in the Letter will have the same meaning as in the Statement and vice versa.
Summary of Key Terms:
Employer: Pegasystems Limited (the "Company").
Position Your role will be Senior Vice President of Global Professional Services & Client Success
Place of work: You will be based at home or elsewhere within the United Kingdom as the Company requires.
Start Date: Your employment with the Company will start on 8 February 2021, (the "Start Date"). This is the date on which your Agreement becomes effective.
No employment with a previous employer counts towards your continuous employment with us.
Normal Working Hours: Your normal working hours may vary from the usual Monday to Friday, from 9am to 5.30pm as are necessary for the performance of your role.
Holiday: 25 days each year in addition to public holidays.
Probationary Period: Your employment is subject to a probationary period of three months (the "Probationary Period"). During the Probationary Period either you or the Company can terminate your employment by giving the other party at least two week’s written notice. In the event Pegasystems terminates your employment without cause in your first year of employment, you will be entitled to a severance amount equal to six months base salary.
Notice Period: Following the successful completion of your Probationary Period, either you or the Company may terminate your employment by giving the other party at least three month’s written notice, subject to the minimum statutory notice requirements.
Salary: Your basic gross salary will be £350,000 per year (subject to tax and statutory deductions) (the "Salary").
Corporate Incentive Compensation Plan (“CICP”): You are eligible for a bonus for 2021 of up to 40% of your salary, on the successful achievement of company and personal objectives and subject to the CICP plan rules. Any bonus payment will be subject to tax and statutory deductions, will not be pensionable and will be prorated in the first year according to your start date of February 2021.
Individual Commission Plan (“ICP”)/Management Business Objectives (“MBOs”): In addition to your Salary, you may be eligible to earn commission/MBOs dependent on your performance against financial targets set by the Company and subject to the ICP plan rules. Your target for 2021 will be £70,000. Any commission payment will be subject to tax and statutory deductions and will not be pensionable.
Certain identified information contained in this document, identified by [***], has been excluded because it is both not material and is the type that Pegasystems treats as private or confidential.
EXHIBIT 10.3
(continued)
Pegasystems Ltd
3rd Floor
23 Forbury Road, Reading
Berkshire, RG1 3JH
United Kingdom
Sign on Bonus: You will be eligible to receive a sign-on bonus of £75,000 gross, which will be payable in two equal instalments. The first instalment will be executed 30 days after your start date, and the second instalment will be executed on your 90th day of employment provided you are an employee “in good standing.” If you voluntarily terminate your employment or Pegasystems terminates you with cause within 6 months of your start date, you agree to repay 100% of the Sign-on Bonus to the extent that it is not recouped by Pegasystems by withholding salary, variable remuneration, vacation pay, expense reimbursement or any other payments due to you upon such termination. If you voluntarily terminate your employment or Pegasystems terminates you with cause within 6-12 months of your start date, you agree to repay 50% of the Sign-on Bonus to the extent that it is not recouped by Pegasystems by withholding salary, variable remuneration, vacation pay, expense reimbursement or any other payments due to you upon such termination.
Retention Bonus: You will be eligible to receive a retention bonus of £75,000 gross, which will be payable in two equal instalments. The first instalment will be executed and payable in January 2022 and the second instalment in July 2022. These amounts are fully refundable to the Company if your employment terminates for any reason whatsoever within a twelve month period after each payment is made and the Company will be entitled to recover such amounts from you by offsetting against any wages, commissions, vacation, expenses or other payments due to you.
Pension: You can participate in the Pegasystems Limited Group Personal Pension Scheme made available to the Company's employees and subject to the rules of such scheme in place at the relevant time (the "Scheme").
Equity: As part of the Agreement with the Company, you will receive an equity grant of $2,500,000USD, subject to the approval of the Compensation Committee. The value of this grant will be comprised of 50% stock options and 50% Restricted Stock Units (RSUs) pursuant to our Long- Term Incentive Plan and is contingent on Compensation Committee approval at the meeting following your date of hire. The number of RSUs and Options granted will be determined based on the closing price of our common stock on the first business day of the month following Compensation Committee approval. The full terms of this grant will be conveyed to you in a separate document after you become a Pegasystems employee. As a special consideration, this equity grant will begin vesting on a quarterly basis following the approval of the grant date by the Compensation Committee. Additionally, in the event of a change of control resulting in termination of your employment – known as a double trigger - the remaining unvested value of this grant (and this grant only) will immediately vest.
Furthermore, in lieu of eligibility for an annual grant award in 2022, Pega will provide you with three separate equity grants for which Pega’s future financial statements will incur $1,500,000 of total expense to be awarded by the Compensation Committee at the meeting following your date of hire. The value of this grant will be comprised of 50% stock options and 50% Restricted Stock Units (RSUs). Each of these $500,000 grants will be awarded as separate acceleration opportunities based on the company achieving 100%+ ACV target as established by the Board and will be awarded in March of 2022 for the 2021 ACV target, March of 2023 for the 2022 ACV target, and March of 2024 for the 2023 target. The performance base vesting of these three grants will be governed as follows:
(A) immediately on grant date if ACV target which was set by the Board for previous year is achieved or (B) if ACV target not achieved, pursuant to our Long-Term Incentive Plan, 20% vest after first year and then evenly quarterly for the next four years (5% a quarter). Any and all subsequent grant awards will be governed by standard company vesting policies pursuant to our Long-Term Incentive Plan.
Benefits: Please refer to the UK benefit summary.
Confidential Information: Please refer to the Statement.
Restrictions after Employment: To protect the interests of the Company and/or each Group Company, you must comply with the post termination obligations set out in the Statement.
EXHIBIT 10.3
(continued)
Pegasystems Ltd
3rd Floor
23 Forbury Road, Reading
Berkshire, RG1 3JH
United Kingdom
Acceptance
Please sign and return a copy of this Letter to confirm your acceptance of the Agreement. The Agreement will become binding between you and the Company on signature.
In accepting the Agreement, you confirm that all the information you have provided to the Company in connection with this offer is true and not misleading, and you agree to notify the Company promptly of any change in that information.
We look forward to welcoming you to the Company shortly. In the meantime, if you have any queries, please do not hesitate to contact me.
Yours sincerely,
/s/ Lesley Law
Lesley Law
Senior People Business Leader, EMEA
Encl:
Statement of Terms and Conditions
Benefit Summary
I accept the terms of the Agreement with Pegasystems Limited and confirm receipt of the enclosed documents.
Signed: /s/ John Higgins Dated 13 December 2020
John Higgins
EXHIBIT 31.1
CERTIFICATION
I, Alan Trefler, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of Pegasystems Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Dated: April 26, 2023
| /s/ ALAN TREFLER | ||
| Alan Trefler | ||
| Chairman and Chief Executive Officer | ||
| (Principal Executive Officer) | ||
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EXHIBIT 31.2
CERTIFICATION
I, Kenneth Stillwell, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of Pegasystems Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Dated: April 26, 2023
| /s/ KENNETH STILLWELL | ||
| Kenneth Stillwell | ||
| Chief Operating Officer and Chief Financial Officer | ||
| (Principal Financial Officer) | ||
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EXHIBIT 32
CERTIFICATION PURSUANT TO SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Pegasystems Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Alan Trefler, Chairman and Chief Executive Officer of Pegasystems Inc., and Kenneth Stillwell, Chief Operating Officer and Chief Financial Officer of Pegasystems Inc., each certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: April 26, 2023
| /s/ ALAN TREFLER | ||
| Alan Trefler | ||
| Chairman and Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| /s/ KENNETH STILLWELL | ||
| Kenneth Stillwell | ||
| Chief Operating Officer and Chief Financial Officer | ||
| (Principal Financial Officer) | ||
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