What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2022-02-16 compared with 2021-02-17 · 323 added, 260 removed, 785 unchanged (43% of the section changed)

1 unchanged sentence

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm 35

Report of Independent Registered Public Accounting Firm (PCAOB ID No.

Consolidated Balance Sheets as of December 31, 2021 and 2020

Consolidated Statements of Operations for the years ended December 31, 2021, 2020, and 2019

Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2020, 2019, and 2018

Consolidated Statements of Comprehensive (Loss) for the years ended December 31, 2021, 2020, and 2019

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2021, 2020, and 2019

6 unchanged sentences

We have audited the accompanying consolidated balance sheets of Pegasystems Inc.

and subsidiaries (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive (loss) income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”).

and subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”).

We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) i ssued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

15 unchanged sentences

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles”).

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

3 unchanged sentences

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relates.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Revenue Recognition - Software License Arrangements — Refer to Note 2 to the financial statements

Critical Audit Matter Description

The Company generates revenue from multiple sources, including software license revenue primarily derived from license sales of the Company’s Pega Platform and other software applications, maintenance revenue from client support, and services revenue primarily derived from cloud sales of the Company’s hosted Pega Platform and other software applications and consulting services.

The Company’s license and cloud arrangements often contain multiple performance obligations.

The Company’s license and cloud contracts with clients (“arrangements”) often contain multiple performance obligations.

These performance obligations may be included in the same contract or negotiated separately.

Additionally, the Company enters into amendments to previously executed contracts which constitute contract modifications.

Certain new complex arrangements require a detailed analysis of the contractual terms and application of more complex accounting guidance, specifically for contracts with higher contract values.

Factors with potentially significant judgments include:

Certain complex arrangements require that management performs a detailed analysis of the contractual terms and the application of more complex accounting guidance.

Factors with potentially significant judgements include:

• Identification of the complete client arrangement

2 unchanged sentences

• Allocation of arrangement consideration to bundled fixed price work orders

Given the accounting complexity and the management judgment necessary to properly identify, classify, and account for performance obligations, auditing such estimates involved especially complex and subjective auditor judgment in relation to license and cloud arrangements.

Given the accounting complexity and the management judgment necessary to properly identify, classify, and account for performance obligations, auditing such estimates involved a high degree of auditor judgment when performing audit procedures and evaluating the license and cloud revenue arrangements.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to license and cloud revenue arrangements included the following, among others:

• We tested the effectiveness of controls over revenue recognition, including those over the identification of performance obligations included in the transaction, accounting treatment of contract modifications, identification of material rights, and allocation of arrangement consideration.

• We selected a sample of client contracts and performed the following:

• We tested the effectiveness of controls over revenue recognition, including those over the identification of performance obligations included in the transaction, accounting treatment of contract modifications, valuation and allocation of identified material rights, and allocation of arrangement consideration.

• We selected a sample of client arrangements, and performed the following:

◦ Evaluated whether the Company properly identified the terms of the arrangements and considered all arrangement terms that may have an impact on revenue recognition.

3 unchanged sentences

◦ Analyzed the proper accounting treatment for any contract modifications based on 1) whether the additional products and services are distinct from the products and services in the original arrangement, and 2) whether the amount of consideration expected for the added products and services reflects the stand-alone selling price of those products and services.

◦ Evaluated management’s determination of whether certain renewal clauses, additional product offers, or additional usage offers represented material rights included in the contract and whether they were properly valued based on the incremental discount provided and the probability of the right being exercised.

◦ Evaluated management’s determination of whether certain renewal clauses, additional product offers, or additional usage offers represent material rights included in the contract and whether they were properly valued based on the incremental discount provided and the probability of the right being exercised.

◦ For contracts with a performance obligation of bundled fixed price services, evaluated whether management reasonably estimated the number of hours that each project will require and independently recalculated the stand-alone selling price for each bundled fixed price service.

◦ Obtained evidence of delivery of the elements of the arrangement to the client.

Convertible senior notes and capped calls— Refer to Note 10 to the financial statements

In February 2020, the Company issued Convertible Senior Notes (the "Notes") with an aggregate principal amount of $600 million, due March 1, 2025, in a private placement.

In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components.

The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature.

The fair value was determined utilizing a discounted cash flow model that includes assumptions such as implied credit spread, expected volatility, and the risk-free rate for notes with a similar term.

The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the Notes.

The equity component is not remeasured as long as it continues to meet the conditions for equity classification.

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

The Capped Call Transactions are generally expected to reduce potential dilution to the common stock upon any conversion of Notes and/or offset any potential cash payments the Company is required to make in excess of the principal amount of converted Notes.

The Capped Call Transactions are accounted for as derivative instruments which are recorded at fair value at the end of each reporting period.

The fair value was determined utilizing a lattice model that includes inputs and assumptions such as stock price, expected term, volatility, risk-free rate and implied yield.

There is complexity in applying the accounting framework for the Notes and the related Capped Call Transactions.

In addition, the determination of the fair value of the liability component of the convertible notes and the Capped Call Transactions requires the Company to make significant estimates and assumptions relating to the implied credit spread, expected volatility, and the risk-free rate for the liability component of the Convertible Notes, and the expected term, volatility, risk-free rate and implied yield for the derivative value of the Capped Call Transactions.

Performing audit procedures to evaluate the appropriateness of the accounting framework and the reasonableness of the estimates and assumptions used in the fair value of the liability component of the Notes and the Capped Call Transactions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the accounting for the Notes and Capped Call Transactions, including the Company’s judgments and calculations related to the fair value of the liability component of the Notes and the derivative value of the Capped Call Transactions, included the following procedures, among others:

• We tested the effectiveness of controls over the Company’s accounting for the Notes and Capped Call Transactions, and over the determination of the fair value of the liability component of the Notes and fair value of the Capped Call Transaction derivative.

• With the assistance of professionals in our firm having expertise in debt issuance and derivative transaction accounting, we evaluated the Company’s conclusions regarding the accounting treatment applied to the Notes and Capped Call Transactions.

• With the assistance of fair value specialists, we evaluated the reasonableness of the valuation methodologies and the significant assumptions used to determine the respective fair values of the liability component of the Notes and the Capped Call Transaction derivative, by:

◦ Testing the source information underlying the respective fair values of the liability component of the Notes and the Capped Call Transaction derivative and the mathematical accuracy of the calculations.

◦ Developing estimates of the respective fair values of the liability component of the Notes and the Capped Call Transaction derivative using independent expectations of the significant assumptions, and comparing our estimates of fair value to the Company’s estimates.

/s/ Deloitte & Touche LLP

34 unchanged sentences

Common stock, $ 0.01 par value, 200,000 shares authorized;

80,890 and 79,599 shares issued and outstanding at December 31, 2020 and 2019, respectively

81,712 and 80,890 shares issued and outstanding as of December 31, 2021 and 2020, respectively

Additional paid-in capital 145,810 204,432

1 unchanged sentence

Accumulated other comprehensive (loss)

Net unrealized gain on available-for-sale marketable securities, net of tax 46 —

Net unrealized gain on available-for-sale securities, net of tax 686 46

Foreign currency translation adjustments ( 7,674 ) ( 2,994 )

5 unchanged sentences

(in thousands, except per share amounts)

Year Ended December 31,

2021 2020 2019

Software license $ 294,910 $ 279,448 $ 288,119

Maintenance 296,709 280,580 263,875

Pega Cloud 208,268 133,746 82,627

Subscription services $ 621,223 $ 504,977 $ 414,326

Subscription license 336,248 266,352 199,433

Perpetual license 32,172 28,558 80,015

Consulting 222,010 217,630 217,609

1 unchanged sentence

Cost of revenue

Software license 2,928 3,656 5,169

Maintenance 22,311 25,656 24,565

Pega Cloud 76,575 65,828 37,409

Subscription services 120,446 98,886 91,484

Subscription license 2,389 2,644 2,609

Perpetual license 229 284 1,047

Consulting 213,299 209,099 214,882

7 unchanged sentences

(Loss) from operations ( 94,732 ) ( 143,527 ) ( 134,878 )

Foreign currency transaction gain (loss) 3,704 ( 2,335 ) 2,421

Foreign currency transaction (loss) gain ( 6,459 ) 3,704 ( 2,335 )

Interest income 704 1,223 2,020

Interest expense ( 7,956 ) ( 19,356 ) ( 212 )

Gain on capped call transactions 31,697 — —

Other income (loss), net 1,370 559 363

(Loss) gain on capped call transactions ( 23,633 ) 31,697 —

Other income, net 89 1,370 559

(Loss) before (benefit from) income taxes ( 131,987 ) ( 124,889 ) ( 134,846 )

(Benefit from) income taxes ( 68,947 ) ( 63,516 ) ( 44,413 )

Net (loss) income $ ( 61,373 ) $ ( 90,433 ) $ 10,617

(Loss) earnings per share

Net (loss) $ ( 63,040 ) $ ( 61,373 ) $ ( 90,433 )

(Loss) per share

Basic $ ( 0.77 ) $ ( 0.76 ) $ ( 1.14 )

5 unchanged sentences

PEGASYSTEMS INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)

(in thousands)

Year Ended December 31,

2021 2020 2019

Net (loss) income $ ( 61,373 ) $ ( 90,433 ) $ 10,617

Other comprehensive income (loss), net of tax

Unrealized gain (loss) on available-for-sale securities 46 249 ( 17 )

Net (loss) $ ( 63,040 ) $ ( 61,373 ) $ ( 90,433 )

Other comprehensive (loss) income, net of tax

Unrealized gain on available-for-sale securities 640 46 249

Foreign currency translation adjustments ( 4,680 ) 10,234 ( 155 )

Total other comprehensive income (loss), net of tax 10,280 94 ( 6,617 )

Comprehensive (loss) income $ ( 51,093 ) $ ( 90,339 ) $ 4,000

Total other comprehensive (loss) income, net of tax ( 4,040 ) 10,280 94

Comprehensive (loss) $ ( 67,080 ) $ ( 51,093 ) $ ( 90,339 )

See notes to consolidated financial statements.

2 unchanged sentences

(in thousands, except per share amounts)

Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income Total

Common Stock Additional paid-In capital

Retained earnings

Accumulated other comprehensive (loss) Total

stockholders’ equity

of Shares Amount

Balance at January 1, 2018 78,081 $ 781 $ 152,097 $ 509,697 $ ( 6,705 ) $ 655,870

January 1, 2019 78,526 $ 785 $ 123,205 $ 510,863 $ ( 13,322 ) $ 621,531

Repurchase of common stock ( 333 ) ( 3 ) ( 21,133 ) — — ( 21,136 )

4 unchanged sentences

— — — ( 9,511 ) — ( 9,511 )

Other comprehensive (loss) — — — — ( 6,617 ) ( 6,617 )

Net income — $ — $ — $ 10,617 $ — $ 10,617

Other comprehensive income — — — — 94 94

Net (loss) — — — ( 90,433 ) — ( 90,433 )

December 31, 2019 79,599 $ 796 $ 140,523 $ 410,919 $ ( 13,228 ) $ 539,010

Equity component of convertible senior notes, net — — 61,604 — — 61,604

Repurchase of common stock ( 278 ) ( 3 ) ( 28,271 ) — — ( 28,274 )

7 unchanged sentences

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

Equity component of convertible senior notes, net — — 61,604 — — 61,604

Cumulative-effect adjustment from adoption of ASU 2020-06

— — ( 61,604 ) 9,399 — ( 52,205 )

Repurchase of common stock ( 432 ) ( 5 ) ( 53,605 ) — — ( 53,610 )

4 unchanged sentences

— — — ( 9,789 ) — ( 9,789 )

Other comprehensive income — — — — 10,280 10,280

Other comprehensive (loss) — — — — ( 4,040 ) ( 4,040 )

Net (loss) — — — ( 63,040 ) — ( 63,040 )

4 unchanged sentences

(in thousands)

Year Ended December 31,

2021 2020 2019

Operating activities

Net (loss) income $ ( 61,373 ) $ ( 90,433 ) $ 10,617

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

Net (loss) $ ( 63,040 ) $ ( 61,373 ) $ ( 90,433 )

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

Stock-based compensation 115,947 103,068 80,909

(Gain) loss on capped call transactions ( 31,697 ) — —

Deferred income taxes ( 75,336 ) ( 59,777 ) ( 49,317 )

Loss (gain) on capped call transactions 23,633 ( 31,697 ) —

Amortization of deferred commissions 41,387 33,302 29,152

3 unchanged sentences

Amortization of investments 3,721 1,073 800

Foreign currency transaction (gain) loss ( 3,704 ) 2,335 ( 2,421 )

Other non-cash ( 879 ) ( 521 ) ( 1,678 )

Foreign currency transaction loss (gain) 6,459 ( 3,704 ) 2,335

Other 1,032 ( 879 ) ( 521 )

Change in operating assets and liabilities:

1 unchanged sentence

Other current assets 17,209 ( 12,959 ) ( 6,344 )

Accounts payable, accrued compensation, and accrued expenses 37,945 25,670 20,798

Other current liabilities ( 18,726 ) 37,945 25,670

Deferred revenue 41,279 43,661 1,937

1 unchanged sentence

Other long-term assets and liabilities ( 15,886 ) ( 14,136 ) ( 23,588 )

Cash (used in) provided by operating activities ( 563 ) ( 42,165 ) 104,356

Cash provided by (used in) operating activities 39,118 ( 563 ) ( 42,165 )

Investing activities

4 unchanged sentences

Investment in property and equipment ( 10,456 ) ( 25,369 ) ( 10,608 )

Cash (used in) provided by investing activities ( 321,683 ) 70,074 ( 48,196 )

Cash provided by (used in) investing activities 72,503 ( 321,683 ) 70,074

Financing activities

2 unchanged sentences

Payment of debt issuance costs — ( 14,527 ) —

Proceeds from employee stock purchase plan 10,554 3,039 2,202

Dividend payments to stockholders ( 9,761 ) ( 9,628 ) ( 9,486 )

3 unchanged sentences

Common stock repurchases under stock repurchase program ( 52,711 ) ( 27,974 ) ( 22,135 )

Cash provided by (used in) financing activities 423,448 ( 74,258 ) ( 101,460 )

Cash (used in) provided by financing activities ( 121,843 ) 423,448 ( 74,258 )

Effect of exchange rate changes on cash and cash equivalents ( 1,712 ) 2,334 290

Net increase (decrease) in cash and cash equivalents 103,536 ( 46,059 ) ( 47,857 )

Net (decrease) increase in cash and cash equivalents ( 11,934 ) 103,536 ( 46,059 )

Cash and cash equivalents, beginning of period 171,899 68,363 114,422

2 unchanged sentences

Interest paid on convertible notes $ 4,500 $ 2,338 $ —

Income taxes paid $ 3,377 $ 4,745 $ 6,630

Income taxes (refunded) paid $ ( 4,552 ) $ 3,377 $ 4,745

Non-cash investing and financing activity:

14 unchanged sentences

All intercompany accounts and transactions were eliminated in consolidation.

Reclassifications

Certain prior period amounts reported in our consolidated financial statements and notes thereto have been reclassified to conform to the current year presentation.

Such reclassifications did not affect total revenues, operating income, or net income.

SIGNIFICANT ACCOUNTING POLICIES

The Company’s revenue is primarily derived from:

• software license revenue from sales of the Company’s Pega Platform and software applications.

Software licenses represent functional intellectual property and are delivered separately from maintenance and services.

• maintenance revenue from client support including software upgrades (on a when and if available basis), telephone support, and bug fixes or patches.

• Pega Cloud revenue, which is sales of the Company’s hosted Pega Platform and software applications.

• consulting revenue, which is primarily related to new software license implementations, training, and reimbursable costs.

• Subscription services, which is composed of revenue from Pega Cloud and maintenance.

Pega Cloud is the Company’s hosted Pega Platform and software applications.

Maintenance revenue is earned from providing client support, software upgrades, and bug fixes or patches.

• Subscription license, which is composed of revenue from term license arrangements for the Company’s Pega Platform and software applications.

Term licenses represent functional intellectual property and are delivered separately from maintenance and services.

• Perpetual license, which is composed of revenue under perpetual license arrangements for the Company’s Pega Platform and software applications.

Perpetual licenses represent functional intellectual property and are delivered separately from maintenance and services.

• Consulting, which is primarily related to new software license implementations, training, and reimbursable costs.

Performance obligations

5 unchanged sentences

The Company’s typical performance obligations are:

Performance Obligation How Standalone Selling Price is Typically Determined When Performance Obligation is Typically Satisfied When Payment is Typically Due

Perpetual license Residual approach Upon transfer of control to the client, defined when the client can use and benefit from the license (point in time) Effective date of the license

Term license Residual approach Upon transfer of control to the client, defined when the client can use and benefit from the license (point in time) Annually, or more frequently, over the term of the license

Performance obligation

How standalone selling price is typically determined

When performance obligation is typically satisfied

When payment is typically Due

Income statement line item

Perpetual license Residual approach Upon transfer of control to the client, defined as when the client can use and benefit from the license (point in time)

Effective date of the license Perpetual License

Term license Residual approach Upon transfer of control to the client, defined as when the client can use and benefit from the license (point in time)

Annually, or more frequently, over the term of the license Subscription license

Maintenance Consistent pricing relationship as a percentage of the related license and observable in stand-alone renewal transactions (1)

Ratably over the term of the maintenance (over time) Annually, or more frequently, over the term of the maintenance

Pega Cloud Residual approach Ratably over the term of the service (over time) Annually, or more frequently, over the term of the service

- time and materials Observable hourly rate for time and materials-based services in similar geographies for similar contract sizes Based on hours incurred to date Monthly

- fixed price Observable hourly rate for time and materials-based services in similar geographies for similar contract sizes multiplied by estimated hours for the project Based on hours incurred as a percentage of total estimated hours As contract milestones are achieved

Ratably over the term of the maintenance (over time) Annually, or more frequently, over the term of the maintenance Subscription services

Pega Cloud Residual approach Ratably over the term of the service (over time) Annually, or more frequently, over the term of the service Subscription services

- time and materials Observable hourly rate for time and materials-based services in similar geographies

Based on hours incurred to date (over time)

Monthly Consulting

- fixed price Observable hourly rate for time and materials-based services in similar geographies multiplied by estimated hours for the project

Based on hours incurred as a percentage of total estimated hours (over time)

As contract milestones are achieved Consulting

(1) Technical support and software updates are considered distinct services but accounted for as a single performance obligation, as they have the same pattern of transfer to the client.

The Company utilizes the residual approach for performance obligations since the selling price is highly variable and stand-alone selling price is not discernible from past transactions or other observable evidence.

The Company utilizes the residual approach for software license and Pega Cloud performance obligations since the selling price is highly variable and stand-alone selling price is not discernible from past transactions or other observable evidence.

Periodically, the Company reevaluates whether the residual approach remains appropriate.

As required, the Company evaluates its residual approach estimate compared to all available observable data in order to conclude the estimate is representative of its stand-alone selling price.

As required, the Company evaluates its residual approach estimate compared to all available observable data before concluding the estimate is representative of its stand-alone selling price.

If the contract grants the client the option to acquire additional products or services, the Company assesses whether the option represents a material right to the client that the client would not receive without entering into that contract.

42 unchanged sentences

Interest is recorded when earned.

All of the Company’s investments are classified as available-for-sale and are carried at fair value.

The Company’s investments are classified as available-for-sale and are carried at fair value.

Unrealized gains and losses considered temporary in nature are recorded as a component of accumulated other comprehensive (loss), net of related income taxes.

18 unchanged sentences

The Company’s leases do not contain any material residual value guarantees or restrictive covenants.

Loss contingencies and legal costs

The Company accrues loss contingencies when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.

Significant judgments are required for the determination of probability and the range of the outcomes, and the estimates are based only on the information available at the time.

Due to the inherent uncertainties involved in claims, legal proceedings, and in estimating the losses that may arise, actual outcomes may differ from the Company’s estimates.

Contingencies deemed not probable or for which losses were not estimable in one period may become probable, or losses may become estimable in later periods which may have a material impact on the Company’s results of operations and financial position.

As additional information becomes available, the Company reassesses the potential liability related to its pending claims and litigation and may revise its estimates.

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.

Legal costs are expensed as incurred.

Internal-use software

7 unchanged sentences

Intangible and long-lived assets

All of the Company’s intangible assets are amortized using the straight-line method over their estimated useful life.

The Company’s intangible assets are amortized using the straight-line method over their estimated useful life.

The Company evaluates its long-lived tangible and intangible assets for impairment whenever events or changes in circumstances indicate that such assets’ carrying amount may not be recoverable.

4 unchanged sentences

Business combinations

The Company uses its best estimates and assumptions to assign a fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date.

The Company uses its estimates and assumptions to assign a fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date.

The Company’s estimates are inherently uncertain and subject to refinement.

16 unchanged sentences

dollar are made at period-end exchange rates.

Revenue and expense accounts are translated at the average exchange rates during the period transactions occurred.

The resulting translation adjustments are reflected in accumulated other comprehensive income.

Revenue and expense accounts are translated at the average exchange rates during the period transactions occur.

The resulting translation adjustments are reflected in accumulated other comprehensive (loss).

Realized and unrealized exchange gains or losses from transactions and remeasurement adjustments are reflected in foreign currency transaction gain (loss) in the accompanying consolidated statements of operations.

4 unchanged sentences

Future realization of the Company’s deferred tax assets ultimately depends on sufficient taxable income within the available carryback or carryforward periods.

Taxable income sources include taxable income in prior carryback years, future reversals of existing taxable temporary differences, tax planning strategies, and future taxable income.

Taxable income sources include taxable income in prior carryback years, future reversals of existing taxable temporary differences, the Company’s firm contractual backlog, tax planning strategies, and projected future taxable income.

The Company records a valuation allowance to reduce its deferred tax assets to an amount it believes is more-likely-than-not to be realized.

Changes in the valuation allowance impacts income tax expense in the period of adjustment.

The Company’s deferred tax valuation allowance requires significant judgment and uncertainties, including assumptions about future taxable income that are based on historical and projected information.

Changes in the valuation allowance impact income tax expense in the period of adjustment.

The Company recognizes excess tax benefits when they are realized, as a reduction of the provision for income taxes.

4 unchanged sentences

The Company classifies interest and penalties on uncertain tax positions as income tax expense.

As a global company, the Company uses significant judgment to calculate and provide for income taxes in each of the tax jurisdictions in which it operates.

As a global company, significant judgment must be used to calculate and provide for income taxes in each of the tax jurisdictions in which it operates.

In the ordinary course of the Company’s business, there are transactions and calculations undertaken whose ultimate tax outcome cannot be certain.

Some of these uncertainties arise as a consequence of transfer pricing for transactions with the Company’s subsidiaries and nexus and tax credit estimates.

Some of these uncertainties arise because of transfer pricing for transactions with the Company’s subsidiaries and nexus and tax credit estimates.

In addition, the calculation of acquired tax attributes and the associated limitations are complex.

3 unchanged sentences

Advertising costs are expensed as incurred.

Advertising costs were $ 8.7 million, $ 6.7 million, and $ 6.9 million during 2020, 2019, and 2018, respectively.

New Accounting Standards

Convertible debt

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (ASU 2020-06), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity.

The standard eliminates the liability and equity separation model for convertible instruments with a cash conversion feature.

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

Additionally, 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.

Additionally, the standard requires applying the if-converted method to calculate convertible instruments’ impact on diluted earnings per share (“EPS”).

The standard is effective for fiscal years beginning after December 15, 2021, with early adoption permitted for fiscal years beginning after December 15, 2020.

It can be adopted on either a full retrospective or modified retrospective basis.

The Company is currently evaluating the effect this ASU will have on its consolidated financial statements and related disclosures.

The Company expects to elect to early adopt the new standard in the first quarter of 2021.

Advertising expenses were $ 11.8 million, $ 8.7 million, and $ 6.7 million during 2021 , 2020, and 2019, respectively.

MARKETABLE SECURITIES

December 31, 2020

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

December 31, 2021 December 31, 2020

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

Government debt $ 2,000 $ — $ ( 10 ) $ 1,990 $ 39,996 $ — $ ( 8 ) $ 39,988

1 unchanged sentence

$ 203,659 $ 2 $ ( 847 ) $ 202,814 $ 293,341 $ 88 $ ( 160 ) $ 293,269

As of December 31, 2020, marketable securities maturities ranged from January 2021 to December 2023, with a weighted-average remaining maturity of 1.5 years.

As of December 31, 2019, the Company did not hold any marketable securities.

As of December 31, 2021, marketable securities’ maturities ranged from January 2022 to September 2024, with a weighted-average remaining maturity of 1.2 years.

RECEIVABLES, CONTRACT ASSETS, AND DEFERRED REVENUE

5 unchanged sentences

$ 539,220 $ 536,260

Unbilled receivables

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

Unbilled receivables are expected to be billed in the future as follows:

Unbilled receivables by expected billing date:

(Dollars in thousands)

4 unchanged sentences

$ 356,503 100 %

Unbilled receivables based upon contract effective date:

Unbilled receivables by contract effective date:

(Dollars in thousands)

7 unchanged sentences

Major clients

No client represented 10% or more of the Company’s total accounts receivable and unbilled receivables as of December 31, 2020 or December 31, 2019.

Contract assets and deferred revenue

Clients that represented 10% or more of the Company’s total accounts receivable and unbilled receivables:

December 31, 2021 December 31, 2020

Client A 10 % *

* Client accounted for less than 10% of total accounts receivable and unbilled receivables.

Contract assets

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

(in thousands)

4 unchanged sentences

$ 23,173 $ 23,073

(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)

December 31, 2021 December 31, 2020

Deferred revenue $ 275,844 $ 232,865

Long-term deferred revenue (1)

$ 281,499 $ 241,856

(1) Included in other current assets.

(2) Included in other long-term assets.

(1) Included in other long-term liabilities.

Contract assets are client committed amounts for which revenue recognized exceeds the amount billed to the client where the right to payment is subject to conditions other than the passage of time, such as completing a related performance obligation.

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

Contract assets and deferred revenue are netted at the contract level for each reporting period.

The change in deferred revenue in the year ended December 31, 2020 was primarily due to new billings in advance of revenue recognition and $ 187.6 million of revenue recognized during the period that was included in deferred revenue on December 31, 2019.

The change in deferred revenue in 2021 was primarily due to new billings in advance of revenue recognition and $ 234.4 million of revenue recognized during the period included in deferred revenue as of December 31, 2020.

DEFERRED COMMISSIONS

31 unchanged sentences

December 31, $ 81,923 $ 79,231

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

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

December 31, 2021

22 unchanged sentences

$ 3,987 $ 3,970 $ 6,625

Future estimated amortization expense related to intangible assets:

Future estimated intangible assets amortization:

(in thousands)

December 31, 2021

2025 and after 2,725

2026 and thereafter 1,201

SEGMENT INFORMATION

5 unchanged sentences

and international operations were:

(Dollars in thousands) December 31,

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

$ 20,548 77 % $ 31,339 78 %

1 unchanged sentence

$ 26,837 100 % $ 40,398 100 %

OTHER ASSETS AND LIABILITIES

Other current assets

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

Income tax receivables $ 25,691 $ 44,148

Contract assets 12,530 15,296

Other 29,787 29,316

$ 68,008 $ 88,760

Other long-term assets

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

Deferred income taxes $ 180,656 $ 88,068

Deferred commissions 135,911 108,624

Right of use assets 87,521 67,651

Capped call transactions 59,964 83,597

Property and equipment 26,837 40,398

Intangible assets 14,063 15,748

Contract assets 10,643 7,777

Other 26,006 22,980

$ 541,601 434,843

Other current liabilities

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

Operating lease liabilities $ 6,989 $ 18,541

Dividends payable 2,454 2,428

$ 9,443 $ 20,969

Other long-term liabilities

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

Deferred revenue $ 5,655 $ 8,991

Other 7,844 15,708

$ 13,499 $ 24,699

Corporate headquarters

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

The exit accelerated depreciation on the related leasehold improvements and reduced the Company’s future lease liabilities by $ 21.1 million and right of use assets by $ 20.3 million.

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

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

New Waltham Office

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

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

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

Rent first becomes payable on August 1, 2022.

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

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

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

(in thousands) 2021 2020 2019

3 unchanged sentences

$ 5,030 $ 26,374 $ 25,095

Total rent expense under operating leases was $ 14.9 million for 2018.

Right of use assets and lease liabilities

2 unchanged sentences

$ 87,521 $ 67,651

Lease liabilities (2)

Operating lease liabilities (2)

$ 6,989 $ 18,541

Long-term lease liabilities $ 59,053 $ 52,610

Long-term operating lease liabilities $ 87,818 $ 59,053

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

8 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.

Maturities of lease liabilities are:

Maturities of lease liabilities:

(in thousands) December 31, 2021

1 year or less $ 22,164

1-2 years 21,747

2-3 years 21,599

3-4 years 7,683

> 4 years 14,431

Thereafter 48,458

Total lease payments 114,909

imputed interest (1)

Total short and long-term lease liabilities $ 77,594

(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.

3 unchanged sentences

Right of use assets recognized for new leases and amendments (non-cash) $ 55,068 $ 24,276

(1) In 2021, the Company received $ 18 million as a one-time payment for our accelerated exit from our then corporate headquarters in Cambridge, Massachusetts.

This payment has been excluded from the above table.

Convertible senior notes and capped calls

Convertible senior notes

In February 2020, the Company issued Convertible Senior Notes (the "Notes") with an aggregate principal amount of $ 600 million, due March 1, 2025, in a private placement.

The proceeds from the Notes were used or are anticipated to be used for the Capped Call Transactions (described below), working capital, and other general corporate purposes.

There are no required principal payments until the maturity of the 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.

Proceeds from the Notes and Capped Call Transactions:

(in thousands) Amount

Principal $ 600,000

issuance costs ( 14,527 )

Capped Call Transactions ( 51,900 )

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, as applicable, 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 the occurrence of certain events, including spin-offs, tender offers, exchange offers, and certain stockholder distributions.

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 commencing after the calendar quarter ending on June 30, 2020 (and only during such calendar quarter), if the last reported sale price per share of the Company’s common stock exceeds one hundred and thirty percent ( 130 %) of the conversion price for each of at least twenty ( 20 ) trading days (whether or not consecutive) during the thirty ( 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 the occurrence of certain corporate events or distributions, or if the Company calls all or any Notes for redemption, then the noteholder of any Note may convert such Note at any time 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 due on such redemption date in full, at any time until the Company pays such redemption price in full).

As of December 31, 2020, no Notes were eligible for conversion at the noteholders’ election.

• 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 December 31, 2021, the Notes were not eligible for conversion.

Repurchase rights

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

If certain corporate events that constitute a “Fundamental Change” (as described below) occur at any time, each noteholder will have the right, at such noteholder’s option, 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 an integral 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 events such as mergers, changes in control of the Company, liquidation/dissolution of the Company, or the delisting of the Company’s common stock.

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.

Impact of the Notes

In accounting for the transaction, the Notes have been separated into liability and equity components.

The Company adopted ASU 2020-06 using the modified retrospective approach on January 1, 2021.

The standard eliminates the liability and equity separation model for convertible instruments with a cash conversion feature.

Before January 1, 2021, the Notes were separated into liability and equity components.

• The initial carrying amount of the liability component was calculated by measuring a similar debt instrument’s fair value that does not have an associated conversion feature.

The excess of the Notes’ principal amount over the initial carrying amount of the liability component, the debt discount, is amortized as interest expense over the Notes’ contractual term.

• The equity component was recorded as an increase to additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equity classification.

The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the Convertible Senior Notes.

The Company incurred issuance costs of $ 14.5 million related to the Notes, allocated between the Notes’ liability and equity components proportionate to the initial carrying amount of the liability and equity components.

• Issuance costs attributable to the liability component are recorded as an offset to the Notes’ principal balance.

They are amortized as interest expense using the effective interest method over the contractual term of the Notes.

• Issuance costs attributable to the equity component are recorded as an offset to the equity component in additional paid-in capital and are not amortized.

Net carrying amount of the liability component:

(in thousands) December 31, 2020

The excess of the Notes’ principal amount over the initial carrying amount of the liability component, the debt discount, was amortized as interest expense over the Notes’ contractual term.

• 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 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.

Carrying value of the Notes:

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

Principal $ 600,000 $ 600,000

1 unchanged sentence

Unamortized issuance costs ( 9,278 ) ( 10,575 )

Net carrying amount of the equity component, included in additional paid-in capital:

(in thousands) December 31, 2020

Convertible senior notes, net $ 590,722 $ 518,203

Conversion options $ — $ 84,120

(1) Net of issuance costs and taxes.

Issuance costs — ( 2,037 )

Deferred taxes — ( 20,479 )

Additional paid-in capital $ — $ 61,604

Interest expense related to the Notes:

1 unchanged sentence

Contractual interest expense ( 0.75 % coupon)

$ 4,500 $ 3,825

Amortization of debt discount

Amortization of issuance costs

(1) Amortized based upon an effective interest rate of 4.31 %.

$ 7,477 $ 18,638

The effective interest rate for the Notes:

Weighted-average effective interest rate 1.3 % 4.3 %

Future payments of principal and contractual interest:

6 unchanged sentences

$ 600,000 $ 15,750 $ 615,750

$ 600,000 $ 19,488 $ 619,488

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 4.4 million shares (representing the number of shares for which the Notes are initially convertible) of the Company’s common stock.

They are generally expected to reduce potential dilution to the common stock upon any conversion of Notes and/or offset any potential cash payments the Company is required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap.

The cap price of the Capped Call Transactions is $ 196.44 , subject to adjustment upon the occurrence of specified extraordinary events affecting the Company, including merger events and tender offers.

The Capped Call Transactions are accounted for as derivative instruments.

The Capped Call Transactions 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 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 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 value of Capped Call Transactions:

(in thousands) Year Ended

December 31, 2020

Value at issuance $ 51,900

Change in capped call transactions:

(in thousands) 2021 2020

January 1, $ 83,597 $ —

Issuance — 51,900

Fair value adjustment ( 23,633 ) 31,697

Balance as of December 31, $ 83,597

December 31, $ 59,964 $ 83,597

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”).

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.

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.

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

1 unchanged sentence

Preferred stock

The Company has 1 million authorized shares of preferred stock, $ 0.01 par value per share, of which none were issued and outstanding at December 31, 2020.

The Company has 1 million authorized shares of preferred stock, $ 0.01 par value per share, of which none were issued and outstanding as of December 31, 2021.

The Board of Directors has the authority to issue the shares of preferred stock in one or more series, to establish the number of shares to be included in each series, and to determine the designation, powers, preferences, and rights of the shares of each series and the qualifications, limitations, or restrictions thereof, without any further vote or action by the stockholders.

1 unchanged sentence

The Company had no t issued any shares of preferred stock through December 31, 2021.

The Company has 200 million authorized shares of common stock, $ 0.01 par value per share, of which 80.9 million shares were issued and outstanding at December 31, 2020.

The Company has 200 million authorized shares of common stock, $ 0.01 par value per share, of which 81.7 million shares were issued and outstanding as of December 31, 2021.

Dividends declared

2 unchanged sentences

Dividend payments to stockholders (in thousands) $ 9,761 $ 9,628 $ 9,486

The Company’s paid a quarterly cash dividend of $ 0.03 per share in 2020, 2019, and 2018, however, the Board of Directors may terminate or modify the dividend program at any time without prior notice.

The Company paid a quarterly cash dividend of $ 0.03 per share in 2021 , 2020, and 2019, however, the Board of Directors may terminate or modify the dividend program at any time without prior notice.

Stock repurchases

19 unchanged sentences

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 models use various market-based inputs, including stock price, remaining contractual term, expected volatility, risk-free interest rate, and expected dividend yield, as applicable.

The Company applies judgment in its determination of expected volatility.

The Company considers both historical and implied volatility levels of the underlying equity security and, to a lesser extent, historical peer group volatility levels.

The valuation models use various market-based inputs, including stock price, remaining contractual term, expected volatility, risk-free interest rate, and expected dividend yield.

The Company applies judgment when determining expected volatility.

The Company considers both historical and implied volatility levels of the underlying equity security.

The Company’s venture investments are recorded at fair value based on valuation methods using the observable transaction price and other unobservable inputs, including the volatility, rights, and obligations of the securities the Company holds.

18 unchanged sentences

Changes in foreign exchange rates ( 68 ) 118

Fair value adjustment 1,474 —

Changes in fair value:

included in other income 100 1,374

included in other comprehensive income 1,220 100

December 31, $ 7,648 $ 8,345

1 unchanged sentence

Fair value of the Notes

The fair value of the Company’s Notes was recorded at $ 515.9 million upon issuance, which reflected the principal amount of the Notes less the fair value of the conversion feature.

The fair value of the debt component was determined based on a discounted cash flow model.

The discount rate used reflected both the time value of money and credit risk inherent in the Notes.

The carrying value of the Notes will be accreted, over the remaining term to maturity, to their principal value of $ 600 million.

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

The Notes’ fair value (inclusive of the conversion feature embedded in the Notes) was $ 642.0 million as of December 31, 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.

15 unchanged sentences

Perpetual license $ 32,172 $ 28,558 $ 80,015

Term license 266,352 199,433 178,256

Subscription license 336,248 266,352 199,433

Revenue recognized at a point in time 368,420 294,910 279,448

7 unchanged sentences

Maintenance 320,257 296,709 280,580

Term license $ 266,352 $ 199,433 $ 178,256

Subscription services 621,223 504,977 414,326

Subscription license 336,248 266,352 199,433

Subscription 957,471 771,329 613,759

771,329 613,759 524,758

Perpetual license 32,172 28,558 80,015

Consulting 222,010 217,630 217,609

Total revenue $ 1,017,517 $ 911,383 $ 891,581

(1) Reflects client arrangements subject to renewal (Pega Cloud, maintenance, and term license).

1,211,653 1,017,517 911,383

Remaining performance obligations ("Backlog")

Expected future revenue on existing contracts:

December 31, 2020

(Dollars in thousands) Perpetual license Term license Maintenance Pega Cloud Consulting Total

Expected future revenue from existing non-cancellable contracts:

As of December 31, 2021:

(Dollars in thousands) Subscription services Subscription

products Perpetual

license Consulting Total

Maintenance Pega Cloud

1 year or less

1-2 years 395 7,962 54,509 193,064 346 256,276 24 %

2-3 years — 4,928 28,320 104,542 851 138,641 13 %

$ 234,917 $ 330,426 $ 153,467 $ 10,952 $ 41,411 $ 771,173 58 %

65,502 220,231 14,968 4,505 8,917 314,123 23 %

38,432 124,969 1,955 2,252 5,512 173,120 13 %

Greater than 3 years

28,157 55,937 1,765 — 619 86,478 6 %

December 31, 2019

(Dollars in thousands) Perpetual license Term license Maintenance Pega Cloud Consulting Total

$ 367,008 $ 731,563 $ 172,155 $ 17,709 $ 56,459 $ 1,344,894 100 %

As of December 31, 2020:

(Dollars in thousands) Subscription services Subscription

products Perpetual

license Consulting Total

Maintenance Pega Cloud

1 year or less

1-2 years 2,179 12,014 30,291 128,109 1,439 174,032 21 %

2-3 years — 3,132 17,844 84,788 132 105,896 13 %

$ 227,803 $ 248,223 $ 105,920 $ 11,514 $ 19,226 $ 612,686 57 %

54,509 193,064 7,962 395 346 256,276 24 %

28,320 104,542 4,928 — 851 138,641 13 %

Greater than 3 years

19,283 44,308 4 — 1,189 64,784 6 %

$ 329,915 $ 590,137 $ 118,814 $ 11,909 $ 21,612 $ 1,072,387 100 %

STOCK-BASED COMPENSATION

The following table presents the stock-based compensation expense included in the Company’s consolidated statements of operations:

(in thousands) 2021 2020 2019

5 unchanged sentences

Income tax benefit $ ( 23,410 ) $ ( 20,464 ) $ ( 16,392 )

The Company periodically grants stock options and restricted stock units (“RSUs”) for a fixed number of shares upon vesting to employees and non-employee Directors.

Beginning in 2019, the Company granted Directors awards in the form of common stock and stock options.

The Company periodically grants employees stock options and restricted stock units (“RSUs”) and non-employee Directors common stock and stock options.

Most of the Company’s stock-based compensation arrangements vest over five years , with 20 % vesting after one year and the remaining 80 % vesting in equal quarterly installments over the remaining four years .

1 unchanged sentence

The Company recognizes stock-based compensation using the accelerated attribution method, treating each vesting tranche as if it were an individual grant.

The stock-based compensation expense recognized during a period is based on the value of the awards that are ultimately expected to vest.

The stock-based compensation expense recognized during a period is based on the value of the awards that are expected to vest.

Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

10 unchanged sentences

Instead, the Company withholds the number of shares to cover the exercise price (in the case of stock options) and the minimum statutory tax withholding obligations (in the case of stock options and RSUs) from the shares that would otherwise be issued upon exercise or settlement.

The exercise of stock options and settlement of RSUs on a net share basis results in fewer shares issued by the Company.

Share-based compensation plans

The exercise of stock options and settlement of RSUs on a net share basis results in fewer shares being issued by the Company.

Stock-based compensation plans

2004 Long-Term Incentive Plan (as amended and restated)

3 unchanged sentences

2006 Employee Stock Purchase Plan

In 2006, the Company adopted the 2006 Employee Stock Purchase Plan (the “2006 ESPP”) under which the Company’s employees are entitled to purchase up to an aggregate of one million shares of common stock, at a price equal to at least 85 % of the fair market value of the Company’s common stock on the lesser of the commencement date or completion date for offerings under the plan, or such higher price as the Company’s Board of Directors may establish from time to time.

Until the Company’s Board of Directors determines otherwise, the Board has set the purchase price at 95 % of the fair market value on the completion date of the offering period.

As a result, the 2006 ESPP is non-compensatory and is tax-qualified.

Therefore, as of December 31, 2020, no compensation expense related to the plan had been recognized.

In October 2012, the Company’s Board of Directors amended the term of the 2006 ESPP such that it will continue until there are no shares remaining under the plan or until the plan is terminated by the Board of Directors, whichever occurs first.

As of December 31, 2020, 0.5 million shares had been issued thereunder.

In 2006, the Company adopted the 2006 Employee Stock Purchase Plan (the “2006 ESPP”) under which employees may purchase up to an aggregate of one million shares of common stock, at a price equal to at least 85 % of the fair market value of the Company’s common stock on the lesser of the commencement date or completion date for offerings under the plan, or such higher price as the Company’s Board of Directors may establish from time to time.

In October 2012, the Company’s Board of Directors amended the 2006 ESPP to continue until no shares remain.

Before January 1, 2021, the 2006 ESPP was non-compensatory as the Company’s Board of Directors set the purchase price at 95 % of the fair market value on the completion date of the offering period.

Commencing on January 1, 2021, the Company’s Board of Directors set the purchase price at 85 % of the fair market value on the completion date of the offering period.

(in thousands) 2021

Compensation expense from 2006 ESPP $ 1,860

As of December 31, 2021, 0.6 million shares had been issued under the plan.

Shares issued and available for issuance

During 2020, the Company issued 1.6 million shares to its employees and directors under the Company’s share-based compensation plans.

During 2021 , the Company issued 1.3 million shares to its employees and directors under the Company’s stock-based compensation plans.

As of December 31, 2021, there were 10.4 million shares available for issuance for future equity grants under the Company’s stock plans, consisting of 10.0 million shares under the 2004 Plan and 0.4 million shares under the 2006 ESPP.

47 unchanged sentences

The fair value of RSUs vested in 2021 , 2020, and 2019 was $ 122.5 million, $ 108.4 million, and $ 77.0 million, respectively.

The aggregate intrinsic value of RSUs outstanding and expected to vest as of December 31, 2020 is based on the closing price of the Company’s stock of $ 133.26 on December 31, 2020.

The aggregate intrinsic value of RSUs outstanding and expected to vest as of December 31, 2021 is based on the closing price of the Company’s stock of $ 111.82 as of December 31, 2021.

As of December 31, 2021, the Company had $ 73.1 million of unrecognized stock-based compensation expense related to all unvested RSUs that is expected to be recognized as expense over a weighted-average period of 2.1 years.

2 unchanged sentences

The Company sponsors defined contribution plans for qualifying employees, including a 401(k) plan in the United States to which the Company makes discretionary matching contributions.

The following expenses related to defined contribution plans were recorded in the Company’s consolidated statements of operations:

Employee benefit plan expenses:

(in thousands) 2021 2020 2019

12 unchanged sentences

Foreign 4,105 7,113 3,449

Total current (benefit from) provision for ( 3,739 ) 4,904 8,738

Total current provision for (benefit from) 6,389 ( 3,739 ) 4,904

Federal ( 42,214 ) ( 34,573 ) ( 25,356 )

3 unchanged sentences

$ ( 68,947 ) $ ( 63,516 ) $ ( 44,413 )

A reconciliation of the U.S federal statutory tax rate and the Company’s effective tax rate, is as follows:

A reconciliation of the U.S federal statutory tax rate and the Company’s effective tax rate:

(in thousands) 2021 2020 2019

3 unchanged sentences

Permanent differences 541 1,773 2,606

GILTI, FDII, and BEAT (1)

Federal research and experimentation credits ( 6,380 ) ( 5,716 ) ( 4,295 )

4 unchanged sentences

Expiration of statutes and changes in estimates ( 2,250 ) 55 2,420

Excess tax benefits related to share-based compensation ( 25,797 ) ( 14,291 ) ( 13,541 )

Excess tax benefits related to stock-based compensation ( 20,697 ) ( 25,797 ) ( 14,291 )

Cares Act — ( 10,576 ) —

2 unchanged sentences

$ ( 68,947 ) $ ( 63,516 ) $ ( 44,413 )

(1) Global Intangible Low Taxed Income (“GILTI”), Foreign-Derived Intangible Income (“FDII”), and Base Erosion and Anti-abuse Tax (“BEAT”)

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“Cares Act”) was enacted to address the economic impact of the COVID-19 pandemic in the United States.

Among other things, the Cares Act allows a five-year carryback period for tax losses generated in 2019 through 2021.

The Company carried back net operating losses generated in 2019, resulting in an income tax benefit of $ 5.7 million.

The $ 5.7 million income tax benefit represents the Federal rate differential between 35% and 21%.

In addition, the Company applied the carryback provisions of the Cares Act to its net operating losses generated in 2020, which resulted in the reclassification of $ 4.8 million net operating losses from a deferred income tax asset to refundable income taxes.

The Company does not expect the other income tax provisions of the Cares Act to have a material impact on its financial statements.

Deferred income taxes

5 unchanged sentences

Interest expense carryforward 7,759 3,464

Software revenue 336 —

Convertible senior notes 8,362 —

Depreciation 3,764 4,795

14 unchanged sentences

This determination requires significant judgment, including assumptions about future taxable income based on historical and projected information.

In 2020, the change in valuation allowances was primarily due to the expiration of $ 5.9 million in acquisition-related net operating losses.

There were no material changes in valuation allowances in 2019.

There were no material changes in the valuation allowance in 2021.

In 2020, the change was $ 6 million due to expiring acquisition net operating losses with a valuation allowance.

As of December 31, 2021, the Company’s net operating losses and credit carryforwards are:

10 unchanged sentences

(2) Excludes federal and state tax credits of $ 0.1 million and $ 9.1 million, respectively, that the Company expects will expire unutilized.

Carryforward losses and credits expire between 2021 and 2038, except for the 2020 federal net operating loss of $ 47.3 million and $ 1.2 million of state credits, which both have unlimited carryforward periods.

Carryforward losses and credits expire between 2022 and 2039, except for the 2020 and 2021 federal net operating loss of $ 139.0 million and $ 1.0 million of state credits, which both have unlimited carryforward periods.

The Company’s India subsidiary is primarily located in Special Economic Zones (“SEZs”) and is entitled to a tax holiday in India.

1 unchanged sentence

The tax holiday in the Hyderabad SEZ is scheduled to expire in 2024.

The tax holiday in the Bangalore SEZ is scheduled to expire in 2022.

For 2020, 2019, and 2018, the income tax holiday reduced the Company’s provision for income taxes by $ 1.7 million, $ 1.9 million, and $ 1.3 million, respectively.

The tax holiday in the Bengaluru SEZ is scheduled to expire in 2022.

Uncertain tax benefits

10 unchanged sentences

As of December 31, 2021, the Company had $ 17.6 million of total unrecognized tax benefits, which would decrease the Company’s effective tax rate if recognized.

As of December 31, 2020 and December 31, 2019, the Company’s income tax receivable was $ 44.1 million and $ 25.9 million, respectively.

Tax examinations

7 unchanged sentences

With few exceptions, the statute of limitations remains open in all jurisdictions for the tax years 2016 to the present.

(LOSS) EARNINGS PER SHARE

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

Diluted earnings per share is calculated using the weighted-average number of common shares outstanding during the applicable period, plus the dilutive effect of outstanding stock options and RSUs, using the treasury stock method.

In periods of loss, all stock options and RSUs are excluded from the weighted-average number of common shares, as their inclusion would be anti-dilutive.

(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:

(in thousands, except per share amounts) 2021 2020 2019

Net (loss) income $ ( 61,373 ) $ ( 90,433 ) $ 10,617

Net (loss) $ ( 63,040 ) $ ( 61,373 ) $ ( 90,433 )

Weighted-average common shares outstanding 81,387 80,336 79,055

(Loss) earnings per share, basic $ ( 0.76 ) $ ( 1.14 ) $ 0.14

Net (loss) income $ ( 61,373 ) $ ( 90,433 ) $ 10,617

(Loss) per share, basic $ ( 0.77 ) $ ( 0.76 ) $ ( 1.14 )

Net (loss) $ ( 63,040 ) $ ( 61,373 ) $ ( 90,433 )

Stock options — — —

RSUs — — 1,609

Effect of dilutive securities — — —

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

(Loss) earnings per share, diluted $ ( 0.76 ) $ ( 1.14 ) $ 0.13

81,387 80,336 79,055

(Loss) per share, diluted $ ( 0.77 ) $ ( 0.76 ) $ ( 1.14 )

Outstanding anti-dilutive stock options and RSUs (4)

5,862 6,278 5,911

(1) Certain outstanding stock options and RSUs were excluded from the computation of diluted earnings per share because they were anti-dilutive in the period presented.

(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.

(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 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 (loss) per share.

These awards may be dilutive in the future.

COMMITMENTS AND CONTINGENCIES

See "Note 10.

Leases" for additional information.

Contingencies

The Company is a party in various contractual disputes, litigation, and potential claims arising in the ordinary course of business.

The Company does not believe that the resolution of these matters will have a material adverse effect on its financial position or results of operations.

SUBSEQUENT EVENTS

Relocation of Corporate Headquarters

On February 12, 2021, the Company executed the Lease Termination Agreement with Charles Park Owner LLC to accelerate the lease termination date for the Company’s corporate headquarters in Cambridge, Massachusetts to October 1, 2021.

Under the terms of the Lease Termination Agreement, the Company will receive a payment of $ 18 million.

The Company is obligated to make rent payments outlined in the existing lease agreements until October 1, 2021, the new lease termination date.

Qurious.io acquisition

In January 2021, the Company acquired Qurious.io, Inc., a cloud-based real time speech analytics solution for customer service teams.

The acquisition was immaterial.

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 with respect to contracts, intellectual property, employment, benefits, and securities matters.

Regardless of the outcome, legal disputes can have a material effect on the Company because of defense and settlement costs, diversion of management resources, and other factors.

In addition, as the Company is a party to ongoing litigation it is at least reasonably possible that our estimates will change in the near term and the effect may be material.

As of December 31, 2021, the Company has not accrued a loss with respect to any litigation matter.

Pegasystems Inc.

& Business Process Management Inc.

On July 3, 2019, the Company filed suit in Massachusetts federal court against Appian Corp.

(“Appian”) and Business Process Management, Inc.

(“BPM”) relating to a BPM “Market Report” that Appian had used to promote itself against the Company.

Pegasystems Inc.

& Business Process Management Inc.

1:19-cv-11461 (D.

The Company’s complaint alleges that the report and Appian’s marketing of it include false and misleading statements about the Company.

The Company asked the court to order Appian to stop using the report, and Appian subsequently agreed to stop using the report.

The Company also asked the court to award damages for false advertising, deceptive business practices, and commercial disparagement.

On December 17, 2019, Appian asserted counterclaims against the Company seeking unspecified monetary damages and alleging certain of the Company’s past marketing materials included false and misleading statements, one of the marketing reports failed to disclose that the report’s author was paid by the Company, and that the Company defamed Appian in a LinkedIn post.

On May 22, 2020, the court allowed in part the Company’s motion to dismiss the counterclaims brought by Appian, but denied the motion as to the third party report and the defamation count.

As described below, on May 29, 2020, Appian then sued the Company in Virginia.

On June 17, 2021, Appian asserted additional counterclaims against the Company seeking unspecified monetary damages and alleging that certain additional marketing materials used by the Company contained false or misleading statements.

The Company believes the counterclaims brought by Appian against the Company are without merit, and the Company intends to vigorously pursue its claims against Appian and defend against the counterclaims brought against the Company in this matter.

The Company is unable to reasonably estimate possible damages or a range of possible damages in this matter given the Company’s belief that the damages claimed by Appian fail to satisfy the required legal standard, the status of the proceeding, and due to the uncertainty as to how a jury may rule if this ultimately proceeds to trial.

Pegasystems Inc.

& Youyong Zou

On May 29, 2020, Appian sued the Company and an individual, Youyong Zou, in the Circuit Court of Fairfax County, Virginia in a matter titled Appian Corp.

Pegasystems Inc.

& Youyong Zou , No.

2020-07216 (Fairfax Cty.

Appian’s complaint alleges a relationship between the Company and a consultant in approximately 2013 and sets forth claims for misappropriation of trade secrets under the Virginia Uniform Trade Secrets Act, violation of the Virginia Computer Crimes Act, tortious interference with contract and business expectancy, and statutory and common law conspiracy.

The court allowed Appian to file an amended complaint on November 4, 2021, alleging that, in the 2019 time frame, employees of the Company accessed free Appian product trials under false pretenses.

The amended complaint withdrew the claim for tortious interference with contract.

After Appian filed the amended complaint, the Company successfully moved to dismiss Appian’s conspiracy claims, which are no longer a part of the case.

A jury trial with respect to the merits of the dispute is scheduled to begin on March 21, 2022.

The Company believes the claims brought by Appian against the Company are without merit, that the Company has strong defenses to these claims and that, among other things, even were the jury to find that the Company misappropriated Appian’s alleged trade secrets, any alleged damages claimed by Appian are not supported by the necessary legal standard of proximate cause.

The Company is unable to reasonably estimate possible damages or a range of possible damages given the Company’s belief that the damages claimed by Appian fail to satisfy the required legal standard and due to the uncertainty as to how a jury may rule.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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-K

Item 8. Financial Statements and Supplementary Data