What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2021-10-27 compared with 2021-07-28 · 165 added, 134 removed, 499 unchanged (37% of the section changed)

3 unchanged sentences

(in thousands)

June 30, 2021 December 31, 2020

September 30, 2021 December 31, 2020

Current assets:

27 unchanged sentences

81,670 and 80,890 shares issued and outstanding at

June 30, 2021 and December 31, 2020, respectively

September 30, 2021 and December 31, 2020, respectively

Additional paid-in capital 148,098 204,432

8 unchanged sentences

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 2021 2020

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

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

Pega Cloud $ 78,369 $ 54,776 $ 219,520 $ 147,080

Maintenance 83,188 74,670 237,531 220,587

Software license 38,295 39,784 272,148 187,023

Consulting 56,416 56,721 166,270 164,227

1 unchanged sentence

Cost of revenue

Software license 656 979 1,306 1,663

Maintenance 4,995 5,591 10,781 11,167

Pega Cloud 25,524 19,717 72,132 56,238

Maintenance 5,293 5,478 16,074 16,645

Software license 656 691 1,962 2,354

Consulting 52,749 51,913 161,032 158,781

6 unchanged sentences

Total operating expenses 237,383 209,984 706,813 622,496

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

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

(Loss) from operations ( 65,337 ) ( 61,832 ) ( 62,544 ) ( 137,597 )

Foreign currency transaction gain (loss) 518 4,236 ( 4,983 ) 2,545

Interest income 166 243 555 1,092

Interest expense ( 1,908 ) ( 5,956 ) ( 5,747 ) ( 13,791 )

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

(Loss) income on capped call transactions ( 14,735 ) 18,989 ( 7,543 ) 19,816

Other income, net 2 — 108 1,374

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

(Loss) before (benefit from) income taxes ( 81,294 ) ( 44,320 ) ( 80,154 ) ( 126,561 )

(Benefit from) income taxes ( 24,826 ) ( 25,053 ) ( 54,360 ) ( 61,182 )

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

Earnings (loss) per share

Net (loss) $ ( 56,468 ) $ ( 19,267 ) $ ( 25,794 ) $ ( 65,379 )

(Loss) per share

Basic $ ( 0.69 ) $ ( 0.24 ) $ ( 0.32 ) $ ( 0.82 )

5 unchanged sentences

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)

(in thousands)

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

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

Net (loss) $ ( 56,468 ) $ ( 19,267 ) $ ( 25,794 ) $ ( 65,379 )

Other comprehensive (loss) income, net of tax

Unrealized gain (loss) on available-for-sale securities 53 ( 166 ) 1,184 ( 66 )

Foreign currency translation adjustments ( 4,400 ) 113 ( 3,669 ) 1,627

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 )

Total other comprehensive (loss) income, net of tax $ ( 4,347 ) $ ( 53 ) $ ( 2,485 ) $ 1,561

Comprehensive (loss) $ ( 60,815 ) $ ( 19,320 ) $ ( 28,279 ) $ ( 63,818 )

See notes to unaudited condensed consolidated financial statements.

24 unchanged sentences

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

Repurchase of common stock ( 94 ) ( 1 ) ( 10,628 ) — — ( 10,629 )

Issuance of common stock for stock compensation plans 371 4 ( 22,524 ) — — ( 22,520 )

Stock-based compensation — — 27,931 — — 27,931

Cash dividends declared ($ 0.03 per share)

— — — ( 2,422 ) — ( 2,422 )

Other comprehensive (loss) — — — — ( 53 ) ( 53 )

Net (loss) — — — ( 19,267 ) — ( 19,267 )

September 30, 2020 80,697 $ 807 $ 201,882 $ 338,300 $ ( 11,667 ) $ 529,322

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except per share amounts)

Paid-In Capital Retained Earnings Accumulated Other Comprehensive (Loss)

Stockholders’ Equity

of Shares Amount

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

19 unchanged sentences

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

Repurchase of common stock ( 96 ) ( 1 ) ( 12,795 ) — — ( 12,796 )

Issuance of common stock for stock compensation plans 286 3 ( 18,117 ) — — ( 18,114 )

Issuance of common stock under the employee stock purchase plan 24 — 2,639 — — 2,639

Stock-based compensation — — 28,701 — — 28,701

Cash dividends declared ($ 0.03 per share)

— — — ( 2,451 ) — ( 2,451 )

Other comprehensive (loss) — — — — ( 4,347 ) ( 4,347 )

Net (loss) — — — ( 56,468 ) — ( 56,468 )

September 30, 2021 81,670 $ 817 $ 148,098 $ 316,150 $ ( 5,433 ) $ 459,632

See notes to unaudited condensed consolidated financial statements.

2 unchanged sentences

(in thousands)

Six Months Ended

Nine Months Ended

September 30,

Operating activities

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

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

Net (loss) $ ( 25,794 ) $ ( 65,379 )

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

Stock-based compensation 89,483 76,755

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

Loss (gain) on capped call transactions 7,543 ( 19,816 )

Deferred income taxes ( 53,638 ) ( 43,476 )

3 unchanged sentences

Amortization of investments 2,916 252

Foreign currency transaction loss 5,501 1,691

Foreign currency transaction loss (gain) 4,983 ( 2,545 )

Other non-cash ( 8,421 ) 10,623

Change in operating assets and liabilities, net ( 79,836 ) ( 33,675 )

Cash provided by (used in) operating activities 19,410 ( 21,199 )

Cash (used in) operating activities ( 5,321 ) ( 26,257 )

Investing activities

43 unchanged sentences

MARKETABLE SECURITIES

June 30, 2021 December 31, 2020

September 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

$ 235,556 $ 25 $ ( 144 ) $ 235,437 $ 293,341 $ 88 $ ( 160 ) $ 293,269

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.

As of September 30, 2021, marketable securities’ maturities ranged from October 2021 to September 2024, with a weighted-average remaining maturity of 1.2 years.

PEGASYSTEMS INC.

2 unchanged sentences

(in thousands)

June 30, 2021 December 31, 2020

September 30, 2021 December 31, 2020

Accounts receivable $ 143,445 $ 215,827

6 unchanged sentences

(Dollars in thousands)

June 30, 2021

September 30, 2021

1 year or less $ 239,774 64 %

4 unchanged sentences

(Dollars in thousands)

June 30, 2021

September 30, 2021

2021 $ 168,237 45 %

6 unchanged sentences

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

June 30, 2021 December 31, 2020

September 30, 2021 December 31, 2020

Client A 12 % *

3 unchanged sentences

(in thousands)

June 30, 2021 December 31, 2020

September 30, 2021 December 31, 2020

Contract assets (1)

7 unchanged sentences

(in thousands)

June 30, 2021 December 31, 2020

September 30, 2021 December 31, 2020

Deferred revenue $ 229,103 $ 232,865

2 unchanged sentences

(1) Included in other long-term liabilities.

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.

The change in deferred revenue in the nine months ended September 30, 2021 was primarily due to new billings in advance of revenue recognition, offset by $ 212.0 million of revenue recognized that was included in deferred revenue as of December 31, 2020.

PEGASYSTEMS INC.

2 unchanged sentences

(in thousands)

June 30, 2021 December 31, 2020

September 30, 2021 December 31, 2020

Deferred commissions (1)

2 unchanged sentences

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

(in thousands) 2021 2020 2021 2020

4 unchanged sentences

Change in goodwill:

Six Months Ended

Nine Months Ended

September 30,

(in thousands)

2 unchanged sentences

Currency translation adjustments 22

June 30, $ 82,173 $ 78,675

September 30, $ 81,954

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

June 30, 2021

September 30, 2021

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

19 unchanged sentences

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

(in thousands) 2021 2020 2021 2020

6 unchanged sentences

(in thousands)

June 30, 2021

September 30, 2021

2026 and thereafter 1,201

Headquarters lease

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, which is being amortized over the remaining lease term.

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

Corporate headquarters

In February 2021, the Company agreed to accelerate its exit from its corporate headquarters to October 1, 2021, in exchange for a one-time payment from our landlord of $ 18 million, which was amortized over the remaining lease term.

The accelerated exit from this lease reduced our future lease liabilities by $ 21.1 million and accelerated corporate headquarters-related depreciation.

On March 31, 2021 the Company leased office space at One Main Street, Cambridge, Massachusetts, to serve as its corporate headquarters.

The 4.5 year lease includes a base rent of $ 2 million per year.

New Waltham Office

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

The lease term of 11 years began on August 1, 2021.

The annual rent equals the base rent plus a portion of building operating costs and real estate taxes.

Rent first becomes payable on August 1, 2022.

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

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

This lease increased the Company’s lease liabilities and lease-related right of use assets by $ 42.1 million on August 1, 2021.

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

(in thousands) 2021 2020 2021 2020

4 unchanged sentences

$ ( 1,467 ) $ 6,853 $ ( 1,438 ) $ 19,687

(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.

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

Right of use assets and lease liabilities

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

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

Right of use assets (1)

$ 91,349 $ 67,651

Lease liabilities (2)

Operating lease liabilities (2)

$ 10,668 $ 18,541

Long-term lease liabilities $ 42,063 $ 59,053

Long-term operating lease liabilities $ 87,088 $ 59,053

(1) Represents the Company’s right to use the leased asset during the lease term.

1 unchanged sentence

(2) Included in other current liabilities.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

June 30, 2021 December 31, 2020

September 30, 2021 December 31, 2020

Weighted-average remaining lease term 7.8 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) June 30, 2021

(in thousands) September 30, 2021

Remainder of 2021 $ 961

4 unchanged sentences

Cash flow information

Six Months Ended

Nine Months Ended

September 30,

(in thousands) 2021 2020

4 unchanged sentences

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 required before maturity.

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.

5 unchanged sentences

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

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

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

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

As of June 30, 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.

As of September 30, 2021, the Notes were not eligible for conversion.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Repurchase rights

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.

11 unchanged sentences

Carrying value of the Notes:

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

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

Principal $ 600,000 $ 600,000

8 unchanged sentences

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

(in thousands) 2021 2020 2021 2020

9 unchanged sentences

The effective interest rate for the Notes:

Six Months Ended

Nine Months Ended

September 30,

Weighted-average effective interest rate 1.2 % 4.3 %

Future payments of principal and contractual interest:

June 30, 2021

September 30, 2021

(in thousands) Principal Interest Total

2021 $ — $ 2,250 $ 2,250

Remainder of 2021 $ — $ — $ —

2022 — 4,500 4,500

5 unchanged sentences

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 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 cover 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 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.

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 in accordance with the governing documents, may not represent a fair value measurement.

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 at the end of each reporting period, resulting in a non-operating gain or loss.

Change in capped call transactions:

Six Months Ended

Nine Months Ended

September 30,

(in thousands) 2021 2020

2 unchanged sentences

Fair value adjustment ( 7,543 ) 19,816

June 30, $ 90,789 $ 52,727

September 30, $ 76,054 $ 71,716

Credit facility

7 unchanged sentences

• 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.

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

PEGASYSTEMS INC.

15 unchanged sentences

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

June 30, 2021 December 31, 2020

September 30, 2021 December 31, 2020

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

8 unchanged sentences

Changes in venture investments:

Six Months Ended

Nine Months Ended

September 30,

(in thousands) 2021 2020

6 unchanged sentences

included in other comprehensive income 1,220 100

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.

September 30, $ 9,713 $ 7,927

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

Fair value of the Notes

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 Notes’ fair value (inclusive of the conversion feature embedded in the Notes) was $ 676.2 million as of September 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.

4 unchanged sentences

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

(Dollars in thousands)

8 unchanged sentences

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

(in thousands)

2021 2020 2021 2020

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

Term license 104,296 44,266 215,805 134,523

Revenue recognized at a point in time 116,892 53,323 233,853 147,239

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

Pega Cloud $ 78,369 $ 54,776 $ 219,520 $ 147,080

Maintenance 83,188 74,670 237,531 220,587

Consulting 56,416 56,721 166,270 164,227

Revenue recognized over time 217,973 186,167 623,321 531,894

Perpetual license 2,874 3,852 20,922 16,568

Term license 35,421 35,932 251,226 170,455

Revenue recognized at a point in time 38,295 39,784 272,148 187,023

$ 256,268 $ 225,951 $ 895,469 $ 718,917

(in thousands) Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 2021 2020

3 unchanged sentences

Term license 35,421 35,932 251,226 170,455

Subscription (1)

Cloud subscription (1)

196,978 165,378 708,277 538,122

4 unchanged sentences

Remaining performance obligations ("Backlog")

Expected future revenue on existing non-cancellable contracts:

June 30, 2021

(Dollars in thousands)

Perpetual license Term license Maintenance Pega Cloud Consulting Total

Expected future revenue from existing non-cancellable contracts:

As of September 30, 2021:

Pega Cloud Client Cloud Consulting Total

(Dollars in thousands) Maintenance Term license Perpetual license

1 year or less

5 unchanged sentences

$ 571,461 $ 327,696 $ 66,802 $ 22,971 $ 45,096 $ 1,034,026 100 %

June 30, 2020

(Dollars in thousands)

Perpetual license Term license Maintenance Pega Cloud Consulting Total

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

As of September 30, 2020:

Pega Cloud Client Cloud Consulting Total

(Dollars in thousands) Maintenance Term license Perpetual license

1 year or less

5 unchanged sentences

$ 506,807 $ 239,148 $ 63,185 $ 10,408 $ 18,442 $ 837,990 100 %

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

September 30, Nine Months Ended

September 30,

(in thousands) 2021 2020 2021 2020

10 unchanged sentences

$ ( 5,845 ) $ ( 5,604 ) $ ( 18,028 ) $ ( 15,293 )

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

As of September 30, 2021, the Company had $ 131.7 million of unrecognized stock-based compensation expense, net of estimated forfeitures, which is expected to be recognized over a weighted-average period of 2.1 years.

Nine Months Ended

September 30, 2021

(in thousands) Shares Total Fair Value

Restricted stock units

819 $ 106,286

Non-qualified stock options

2 unchanged sentences

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

(Dollars in thousands) 2021 2020 2021 2020

1 unchanged sentence

Effective income tax benefit rate 68 % 48 %

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 change in the effective income tax benefit rate was primarily due to the impact of discrete tax items on a proportionately larger (loss) before income taxes in the nine months ended September 30, 2020.

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.

As of September 30, 2021 and December 31, 2020, the Company’s deferred tax assets were $ 157.9 million and $ 88.1 million, respectively.

(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.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Calculation of earnings (loss) per share:

Calculation of (loss) per share:

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

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

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

Net (loss) $ ( 56,468 ) $ ( 19,267 ) $ ( 25,794 ) $ ( 65,379 )

Weighted-average common shares outstanding 81,526 80,537 81,284 80,191

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 —

(Loss) per share, basic $ ( 0.69 ) $ ( 0.24 ) $ ( 0.32 ) $ ( 0.82 )

Net (loss) $ ( 56,468 ) $ ( 19,267 ) $ ( 25,794 ) $ ( 65,379 )

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

81,526 80,537 81,284 80,191

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

(Loss) per share, diluted $ ( 0.69 ) $ ( 0.24 ) $ ( 0.32 ) $ ( 0.82 )

Outstanding anti-dilutive stock options and RSUs (4)

3 unchanged sentences

(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).

(3) The Company’s Capped Call Transactions convert to 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.

(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.

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