What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2021-07-28 compared with 2021-04-28 · 181 added, 103 removed, 452 unchanged (39% of the section changed)

3 unchanged sentences

(in thousands)

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

Current assets:

27 unchanged sentences

81,456 and 80,890 shares issued and outstanding at

March 31, 2021 and December 31, 2020, respectively

June 30, 2021 and December 31, 2020, respectively

Additional paid-in capital 147,670 204,432

8 unchanged sentences

Three Months Ended

June 30, Six Months Ended

2021 2020 2021 2020

Software license $ 116,892 $ 53,323 $ 233,853 $ 147,239

16 unchanged sentences

Income (loss) from operations 1,192 ( 51,447 ) 2,793 ( 75,765 )

Foreign currency transaction (loss) ( 5,098 ) ( 5,947 )

Foreign currency transaction (loss) gain ( 403 ) 4,256 ( 5,501 ) ( 1,691 )

Interest income 236 242 389 849

Interest expense ( 1,959 ) ( 5,529 ) ( 3,839 ) ( 7,835 )

(Loss) on capped call transactions ( 19,117 ) ( 18,592 )

Gain on capped call transactions 26,309 19,419 7,192 827

Other income, net — — 106 1,374

(Loss) before (benefit from) income taxes ( 24,235 ) ( 49,182 )

Income (loss) before (benefit from) income taxes 25,375 ( 33,059 ) 1,140 ( 82,241 )

(Benefit from) income taxes ( 11,916 ) ( 12,319 ) ( 29,534 ) ( 36,129 )

Net (loss) $ ( 6,617 ) $ ( 25,372 )

(Loss) per share

Net income (loss) $ 37,291 $ ( 20,740 ) $ 30,674 $ ( 46,112 )

Earnings (loss) per share

Basic $ 0.46 $ ( 0.26 ) $ 0.38 $ ( 0.58 )

5 unchanged sentences

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

Three Months Ended

Net (loss) $ ( 6,617 ) $ ( 25,372 )

Other comprehensive income (loss), net of tax

June 30, Six Months Ended

2021 2020 2021 2020

Net income (loss) $ 37,291 $ ( 20,740 ) $ 30,674 $ ( 46,112 )

Other comprehensive income, net of tax

Unrealized gain on available-for-sale securities 121 — 1,131 100

Foreign currency translation adjustments 1,461 2,028 731 1,514

Total other comprehensive income (loss), net of tax 280 ( 414 )

Comprehensive (loss) $ ( 6,337 ) $ ( 25,786 )

Total other comprehensive income, net of tax $ 1,582 $ 2,028 $ 1,862 $ 1,614

Comprehensive income (loss) $ 38,873 $ ( 18,712 ) $ 32,536 $ ( 44,498 )

See notes to unaudited condensed consolidated financial statements.

15 unchanged sentences

March 31, 2020 80,076 $ 801 $ 196,310 $ 383,142 $ ( 13,642 ) $ 566,611

Repurchase of common stock ( 23 ) — ( 2,199 ) — — ( 2,199 )

Issuance of common stock for stock compensation plans 349 3 ( 14,085 ) — — ( 14,082 )

Issuance of common stock under the employee stock purchase plan 18 — 1,403 — — 1,403

Stock-based compensation — — 25,674 — — 25,674

Cash dividends declared ($ 0.03 per share)

— — — ( 2,413 ) — ( 2,413 )

Other comprehensive income — — — — 2,028 2,028

Net (loss) — — — ( 20,740 ) — ( 20,740 )

June 30, 2020 80,420 $ 804 $ 207,103 $ 359,989 $ ( 11,614 ) $ 556,282

December 31, 2020 80,890 $ 809 $ 204,432 $ 339,879 $ ( 2,948 ) $ 542,172

10 unchanged sentences

March 31, 2021 81,246 $ 812 $ 140,558 $ 340,223 $ ( 2,668 ) $ 478,925

Repurchase of common stock ( 81 ) ( 1 ) ( 10,245 ) — — ( 10,246 )

Issuance of common stock for stock compensation plans 267 3 ( 16,199 ) — — ( 16,196 )

Issuance of common stock under the employee stock purchase plan 24 1 2,858 — — 2,859

Stock-based compensation — — 30,698 — — 30,698

Cash dividends declared ($ 0.03 per share)

— — — ( 2,445 ) — ( 2,445 )

Other comprehensive income — — — — 1,582 1,582

Net income — — — 37,291 — 37,291

June 30, 2021 81,456 $ 815 $ 147,670 $ 375,069 $ ( 1,086 ) $ 522,468

See notes to unaudited condensed consolidated financial statements.

2 unchanged sentences

(in thousands)

Three Months Ended

Six Months Ended

Operating activities

Net (loss) $ ( 6,617 ) $ ( 25,372 )

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

Net income (loss) $ 30,674 $ ( 46,112 )

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

Stock-based compensation 60,788 48,831

Loss on capped call transactions 19,117 18,592

(Gain) on capped call transactions ( 7,192 ) ( 827 )

Deferred income taxes ( 28,232 ) ( 18,399 )

23 unchanged sentences

Effect of exchange rate changes on cash and cash equivalents ( 1,207 ) ( 942 )

Net increase in cash and cash equivalents 809 469,779

Net (decrease) increase in cash and cash equivalents ( 32,021 ) 443,748

Cash and cash equivalents, beginning of period 171,899 68,363

8 unchanged sentences

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.

The financial statements 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, 2020.

These financial statements 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, 2020.

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.

7 unchanged sentences

As a result, after adoption, entities will no longer separately present in stockholders’ equity an embedded conversion feature for such debt.

Additionally, the debt discount resulting from the separation of the embedded conversion feature will no longer be amortized into income as interest expense over the instrument’s life.

Additionally, the debt discount resulting from separating the embedded conversion feature will no longer be amortized into income as interest expense over the instrument’s life.

Instead, entities will account for a convertible debt instrument wholly as debt unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC Topic 815, “Derivatives and Hedging”, or (2) a convertible debt instrument was issued at a substantial premium.

5 unchanged sentences

MARKETABLE SECURITIES

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

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

2 unchanged sentences

$ 271,649 $ 20 $ ( 210 ) $ 271,459 $ 293,341 $ 88 $ ( 160 ) $ 293,269

As of March 31, 2021, marketable securities’ maturities ranged from April 2021 to January 2024, with a weighted-average remaining maturity of approximately 1.4 years.

As of June 30, 2021, marketable securities’ maturities ranged from July 2021 to May 2024, with a weighted-average remaining maturity of approximately 1.3 years.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE

(in thousands)

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

Accounts receivable $ 166,226 $ 215,827

2 unchanged sentences

$ 546,742 $ 536,260

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Unbilled receivables

2 unchanged sentences

(Dollars in thousands)

March 31, 2021

June 30, 2021

1 year or less $ 236,451 62 %

4 unchanged sentences

(Dollars in thousands)

March 31, 2021

June 30, 2021

2021 $ 140,395 37 %

5 unchanged sentences

Major clients

No client represented 10% or more of the Company’s total receivables as of March 31, 2021 or December 31, 2020.

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

June 30, 2021 December 31, 2020

Client A 13 % *

* Client accounted for less than 10% of total receivables.

Contract assets

1 unchanged sentence

(in thousands)

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

Contract assets (1)

7 unchanged sentences

(in thousands)

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

Deferred revenue $ 242,194 $ 232,865

2 unchanged sentences

(1) Included in other long-term liabilities.

The change in deferred revenue in the three months ended March 31, 2021 was primarily due to new billings in advance of revenue recognition offset by $ 107.0 million of revenue recognized that was included in deferred revenue as of December 31, 2020.

The change in deferred revenue in the six months ended June 30, 2021 was primarily due to new billings in advance of revenue recognition, offset by $ 172.1 million of revenue recognized that was included in deferred revenue as of December 31, 2020.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

DEFERRED COMMISSIONS

(in thousands)

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

Deferred commissions (1)

2 unchanged sentences

Three Months Ended

June 30, Six Months Ended

(in thousands) 2021 2020 2021 2020

2 unchanged sentences

(1) Included in selling and marketing expense .

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

GOODWILL AND OTHER INTANGIBLES

Change in goodwill:

Three Months Ended

Six Months Ended

(in thousands)

2 unchanged sentences

Currency translation adjustments 241 ( 364 )

March 31, $ 82,037 $ 78,498

June 30, $ 82,173 $ 78,675

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

March 31, 2021

June 30, 2021

(in thousands) Useful Lives Cost Accumulated Amortization Net Book Value (1)

15 unchanged sentences

(1) Included in other long-term assets.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amortization of intangible assets:

Three Months Ended

June 30, Six Months Ended

(in thousands) 2021 2020 2021 2020

Cost of revenue

$ 629 $ 647 $ 1,258 $ 1,294

Selling and marketing

373 370 746 740

$ 1,002 $ 1,017 $ 2,004 $ 2,034

Future estimated intangibles assets amortization:

(in thousands)

March 31, 2021

June 30, 2021

2026 and thereafter 1,201

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Corporate headquarters

In February 2021, the Company agreed to accelerate its exit from its Cambridge, Massachusetts headquarters to October 1, 2021, in exchange for a one-time payment from the Company’s landlord of $ 18 million.

Upon modification, the Company reduced its lease liabilities by $ 21.1 million and accelerated depreciation of property, plant, and equipment related to the corporate headquarters.

Headquarters lease

Upon modification, the Company reduced its lease liabilities by $ 21.1 million and accelerated depreciation related to its corporate headquarters.

Three Months Ended

June 30, Six Months Ended

(in thousands) 2021 2020 2021 2020

Fixed lease costs (1)

$ ( 3,972 ) $ 4,943 $ ( 3,672 ) $ 9,761

Short-term lease costs 515 371 974 826

1 unchanged sentence

$ ( 2,117 ) $ 6,283 $ 29 $ 12,834

(1) The decrease in fixed lease costs in three and six months ended June 30, 2021 was due to the modification of the Headquarters Lease.

Right of use assets and lease liabilities

(in thousands) March 31, 2021 December 31, 2020

(in thousands) June 30, 2021 December 31, 2020

Right of use assets (1)

7 unchanged sentences

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

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

Weighted-average remaining lease term 4.9 years 4.7 years

3 unchanged sentences

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.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Maturities of lease liabilities:

(in thousands) March 31, 2021

1 year or less $ 13,216

1-2 years 11,538

2-3 years 10,896

3-4 years 7,571

Greater than 4 years 14,274

(in thousands) June 30, 2021

Remainder of 2021 $ 8,783

Thereafter 7,170

Total lease payments 62,728

2 unchanged sentences

Cash flow information

Three Months Ended

Six Months Ended

(in thousands) 2021 2020

1 unchanged sentence

Right of use assets recognized for new leases and amendments (non-cash) $ 10,160 $ 10,077

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Convertible senior notes and capped calls

12 unchanged sentences

• 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, 2021, the Notes were not eligible for conversion at the noteholders’ election.

As of June 30, 2021, the Notes were not eligible for conversion at the noteholders’ election.

Repurchase rights

On or after March 1, 2023 and on or before the 40th scheduled trading day immediately before the maturity date, the Company may redeem for cash all or part of the Notes at a repurchase price equal to 100 % of the principal amount, plus accrued and unpaid interest, if the last reported sale price of the Company’s common stock exceeded 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides a redemption notice.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

If certain corporate events that constitute a “Fundamental Change” occur, each noteholder will have the right to require the Company to repurchase for cash all of such noteholder’s Notes, or any portion of the principal thereof that is equal to $1,000 or a multiple of $1,000, at a repurchase price equal to 100 % of the principal amount thereof, plus accrued and unpaid interest.

8 unchanged sentences

• The equity component was recorded as an increase to additional paid-in capital and not remeasured.

Upon adoption of ASU 2020-06, the book value of the Company’s Convertible Senior Notes (the “Notes”) increased by $ 69.5 million to $ 587.7 million, and retained earnings increased by $ 9.4 million.

Upon adoption of ASU 2020-06, the book value of the Notes increased by $ 69.5 million to $ 587.7 million, and retained earnings increased by $ 9.4 million.

The retained earnings adjustment reflects the tax effected difference between the value of the Notes and the embedded conversion feature before adoption and the combined convertible instrument's amortized cost after adoption.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Carrying value of the Notes:

(in thousands) March 31, 2021 December 31, 2020

(in thousands) June 30, 2021 December 31, 2020

Principal $ 600,000 $ 600,000

8 unchanged sentences

Three Months Ended

June 30, Six Months Ended

(in thousands) 2021 2020 2021 2020

2 unchanged sentences

Amortization of debt discount

— 3,757 — 5,253

Amortization of issuance costs

675 558 1,348 780

$ 1,800 $ 5,440 $ 3,598 $ 7,608

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The effective interest rate for the Notes:

Six Months Ended

Weighted-average effective interest rate 1.2 % 4.3 %

Future payments of principal and contractual interest:

March 31, 2021

June 30, 2021

(in thousands) Principal Interest Total

6 unchanged sentences

Capped call transactions

In February 2020, the Company entered into privately negotiated capped call transactions (“Capped Call Transactions”) with certain financial institutions.

In February 2020, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”) with certain financial institutions.

The Capped Call Transactions cover approximately 4.4 million shares (representing the number of shares for which the Notes are initially convertible) of the Company’s common stock.

The Capped Call Transactions are generally expected to reduce common stock dilution and/or offset any potential cash payments the Company is required to 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 generally 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 the occurrence of specified extraordinary events affecting the Company, including mergers and tender offers.

1 unchanged sentence

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

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Change in capped call transactions:

Three Months Ended

Six Months Ended

(in thousands) 2021 2020

2 unchanged sentences

Fair value adjustment 7,192 827

March 31, $ 64,480 $ 33,308

June 30, $ 90,789 $ 52,727

Credit facility

In November 2019, and as amended as of February 2020, July 2020, and September 2020, the Company entered into a five-year $ 100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association (“PNC”).

The Company may use borrowings to finance working capital needs and for general corporate purposes.

3 unchanged sentences

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

• Beginning with the fiscal quarter ended on September 30, 2020 and ending with the fiscal quarter ended December 31, 2021 at least $ 200 million in cash and investments held by Pegasystems Inc.

• Beginning with the quarter ended on March 31, 2022 a maximum net consolidated leverage ratio of 3.5 to 1.0 (with a step-up in the event of certain acquisitions) and a minimum consolidated interest coverage ratio of 3.5 to 1.0.

As of March 31, 2021 and December 31, 2020, the Company had no outstanding borrowings under the Credit Facility.

• Beginning with the fiscal quarter ended September 30, 2020 and ending with the fiscal quarter ended December 31, 2021, at least $ 200 million in cash and investments held by Pegasystems Inc.

• Beginning with the quarter ended March 31, 2022, a maximum net consolidated leverage ratio of 3.5 to 1.0 (with a step-up in the event of certain acquisitions) and a minimum consolidated interest coverage ratio of 3.5 to 1.0.

As of June 30, 2021 and December 31, 2020, the Company had no outstanding borrowings under the Credit Facility.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

FAIR VALUE MEASUREMENTS

13 unchanged sentences

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

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

(in thousands) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total

7 unchanged sentences

(2) Investments in privately-held companies.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Change in venture investments:

Three Months Ended

Changes in venture investments:

Six Months Ended

(in thousands) 2021 2020

6 unchanged sentences

included in other comprehensive income 1,220 100

March 31, $ 9,756 $ 6,338

June 30, $ 9,779 $ 6,640

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

Fair value of the Notes

The Notes’ fair value (inclusive of the conversion feature embedded in the Notes) was $ 665.9 million as of March 31, 2021.

The Notes’ fair value (inclusive of the conversion feature embedded in the Notes) was $ 726.2 million as of June 30, 2021 and $ 706.5 million as of December 31, 2020.

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.

Debt" for additional information.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Geographic revenue

Three Months Ended

June 30, Six Months Ended

(Dollars in thousands)

2021 2020 2021 2020

$ 189,297 58 % $ 142,811 63 % $ 383,865 60 % $ 315,228 63 %

Other Americas 14,058 4 % 8,930 4 % 25,959 4 % 24,272 5 %

5 unchanged sentences

Three Months Ended

June 30, Six Months Ended

(in thousands)

2021 2020 2021 2020

Perpetual license $ 12,596 $ 9,057 $ 18,048 $ 12,716

6 unchanged sentences

$ 325,702 $ 227,375 $ 639,201 $ 492,966

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(in thousands) Three Months Ended

June 30, Six Months Ended

2021 2020 2021 2020

Pega Cloud $ 73,293 $ 48,838 $ 141,151 $ 92,304

Client Cloud $ 183,078 $ 116,488 $ 370,148 $ 280,440

Maintenance 78,782 72,222 154,343 145,917

8 unchanged sentences

Expected future revenue on existing non-cancellable contracts:

March 31, 2021

June 30, 2021

(Dollars in thousands)

1 unchanged sentence

1 year or less

1-2 years 629 9,874 52,366 187,456 914 251,239 26 %

2-3 years — 7,055 33,337 91,861 1,756 134,009 14 %

$ 6,707 $ 46,146 $ 214,645 $ 281,793 $ 17,863 $ 567,154 56 %

234 15,708 59,164 194,841 2,675 272,622 26 %

— 909 36,076 88,855 762 126,602 12 %

Greater than 3 years

— 255 26,564 37,246 693 64,758 6 %

March 31, 2020

$ 6,941 $ 63,018 $ 336,449 $ 602,735 $ 21,993 $ 1,031,136 100 %

June 30, 2020

(Dollars in thousands)

1 unchanged sentence

1 year or less

1-2 years 2,168 5,088 34,633 125,473 1,215 168,577 22 %

2-3 years — 6,504 19,411 81,187 107 107,209 14 %

$ 8,120 $ 53,550 $ 186,618 $ 191,187 $ 21,923 $ 461,398 57 %

1,700 6,187 40,153 140,860 1,986 190,886 23 %

— 6,460 20,671 88,273 631 116,035 14 %

Greater than 3 years

— 646 10,517 37,071 626 48,860 6 %

$ 9,820 $ 66,843 $ 257,959 $ 457,391 $ 25,166 $ 817,179 100 %

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Major clients

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

Three Months Ended

June 30, Six Months Ended

(Dollars in thousands) 2021 2020 2021 2020

Total revenue $ 325,702 $ 227,375 $ 639,201 $ 492,966

Client A 13 % * * *

*Client accounted for less than 10% of total revenue.

STOCK-BASED COMPENSATION

Three Months Ended

June 30, Six Months Ended

(in thousands) 2021 2020 2021 2020

2 unchanged sentences

Selling and marketing

14,748 11,592 28,468 21,310

Research and development

6,343 5,805 13,113 11,302

General and administrative

3,748 2,874 7,433 5,683

$ 30,688 $ 25,655 $ 60,788 $ 48,831

Income tax benefit

$ ( 6,192 ) $ ( 5,107 ) $ ( 12,183 ) $ ( 9,689 )

As of March 31, 2021, the Company had $ 183.4 million of unrecognized stock-based compensation expense, net of estimated forfeitures, which is expected to be recognized over a weighted-average period of 2.3 years.

Three Months Ended

March 31, 2021

As of June 30, 2021, the Company had $ 157.3 million of unrecognized stock-based compensation expense, net of estimated forfeitures, which is expected to be recognized over a weighted-average period of 2.2 years.

Six Months Ended

June 30, 2021

(in thousands) Shares Total Fair Value

1 unchanged sentence

1,368 $ 51,594

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Effective income tax rate

Three Months Ended

June 30, Six Months Ended

(Dollars in thousands) 2021 2020 2021 2020

1 unchanged sentence

Effective income tax benefit rate ( 2,591 ) % 44 %

The increase in the Company’s effective income tax benefit rate was primarily due to excess tax benefits from stock-based compensation and fair value adjustments for the capped call transactions, which were proportionally larger on a lower loss before income taxes.

(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:

The change in the effective income tax benefit rate was primarily due to the impact of discrete tax items on a proportionately larger income (loss) before income taxes in the prior period.

The most significant discrete items were excess tax benefits from stock-based compensation and the impact of changes in statutory tax rates applicable to our U.K.-based deferred tax assets.

EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is calculated using the weighted-average number of common shares outstanding during the period.

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

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Calculation of earnings (loss) per share:

Three Months Ended

June 30, Six Months Ended

(in thousands, except per share amounts) 2021 2020 2021 2020

Net (loss) $ ( 6,617 ) $ ( 25,372 )

Net income (loss) $ 37,291 $ ( 20,740 ) $ 30,674 $ ( 46,112 )

Weighted-average common shares outstanding 81,316 80,224 81,161 80,016

(Loss) per share, basic $ ( 0.08 ) $ ( 0.32 )

Net (loss) $ ( 6,617 ) $ ( 25,372 )

Earnings (loss) per share, basic $ 0.46 $ ( 0.26 ) $ 0.38 $ ( 0.58 )

Net income (loss) $ 37,291 $ ( 20,740 ) $ 30,674 $ ( 46,112 )

Interest expense associated with convertible debt instruments, net of tax 1,351 — — —

Numerator for diluted EPS $ 38,642 $ ( 20,740 ) $ 30,674 $ ( 46,112 )

Weighted-average effect of dilutive securities:

Convertible debt (1)

Stock options 3,266 — 3,416 —

RSUs 1,295 — 1,429 —

Effect of dilutive securities (2)

9,004 — 4,845 —

Weighted-average common shares outstanding, assuming dilution (1) (2) (3)

90,320 80,224 86,006 80,016

(Loss) per share, diluted $ ( 0.08 ) $ ( 0.32 )

Earnings (loss) per share, diluted $ 0.43 $ ( 0.26 ) $ 0.36 $ ( 0.58 )

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.

19 5,929 22 5,939

(1) The shares underlying the conversion options in the Company’s Notes are included using the if-converted method, if dilutive in the period.

If the outstanding conversion options were fully exercised, the Company would issue an additional 4.4 million shares.

(3) The Company’s Capped Call Transactions cover approximately 4.4 million shares of the Company’s common stock (representing the number of shares for which the Notes are initially convertible).

The Capped Call Transactions are excluded 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.

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

(3) The Company’s Capped Call Transactions convert to approximately 4.4 million shares of the Company’s common stock (representing the number of shares for which the Notes are initially convertible).

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 earnings (loss) per share.

These awards may be dilutive in the future.

SUBSEQUENT EVENTS

On July 6, 2021, the Company entered into an office space lease (the “Lease”) for 131 thousand square feet in Waltham, Massachusetts.

The lease term of approximately 11 years is expected to commence on August 1, 2021 (the “Lease Commencement Date”), subject to certain adjustments for the initial occupancy date.

The annual rent equals the base rent plus the Company’s portion of building operating costs and real estate taxes for the year.

Rent first becomes payable on August 1, 2022, subject to adjustment based on the Lease Commencement Date.

Base rent for the first year is $ 6 million and will increase by 3 % annually.

In addition, the Company will receive an improvement allowance from the landlord of $ 11.8 million.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements